SIC 6163 Loan Brokers
SIC 6163
This category covers establishments primarily engaged in arranging loans for others. These establishments operate mostly on a commission or fee basis and do not ordinarily have any continuing relationship with either borrower or lender.
522310
Mortgage and Other Loan Brokers
The loan brokers industry is comprised of firms principally engaged in arranging loans between borrowers and lenders. Such enterprises commonly earn a fee or commission for their services. Mortgage brokers dominate the industry, although loan agents also arrange miscellaneous business, farm, and personal loans.
Loan agents and brokers have existed for centuries, but the industry received little respect or attention before the 1980s. In fact, as late as the mid-1980s, brokers were relatively insignificant players in the multi-billion dollar mortgage lending business. In the late 1980s and early 1990s, however, several factors combined to propel the industry to unprecedented stature. Low interest rates, a trend toward outsourcing and contracting by financial institutions, and a shift in the structure of U.S. financial markets were the most prominent forces boosting industry success.
Interest rates reached near record lows during the first half of the 2000s, pushing total U.S. mortgage originations over the $2 trillion mark for the first time ever in 2001, and reaching $3.8 trillion in 2003, before falling off to $2.653 trillion in 2004. In 2001, mortgage brokers were originating more than $1 trillion in loans annually, or roughly 55 percent of all mortgages originated in the United States, compared to just 20 percent in 1987. In 2004, the mortgage broker industry was responsible for more than $1.8 trillion, or 68 percent, of all mortgage originations. Roughly 44,000 mortgage brokerage firms operated in the United States in the mid-2000s, compared to none in the 1970s.
Mortgage loan brokers in the late 1990s began offering a variety of mortgage options for customers, including the adjustable rate (ARM) mortgage (designed to help customers take advantage of low rates, but placing the risk on the customers' shoulders should rates suddenly climb) and hybrid or two-step mortgages. Two-step mortgages offered customers an initially low five- to seven-year rate, with the rate then climbing above the market rate. These loans served to let customers borrow with a lower outlay and the hybrid mortgage qualified buyers for more money than under traditional mortgage qualifying means. During the early 2000s, however, many of these options had become less popular due to falling interest rates, but by the mid-2000s, as interest rates began to edge upward, ARMs once again were increasing consumers' loan choice. In 2004, 33 percent of all mortgage originations were ARMs.
Although loan agents and brokers serve other markets, mortgage loans comprise the vast majority of industry sales. The four-step mortgage lending process includes: originating the loan, which entails approving and selling a mortgage to a customer; funding or underwriting the loan; selling the mortgage in the secondary mortgage market, which supplies lenders with cash to make new loans; and servicing the loan, which involves collection, reporting, and administrative management duties. Most mortgage brokers are concerned only with the first step of the process, mortgage origination. However, some brokers facilitate the buying and selling of mortgages in the secondary market.
Brokers, by definition, act as an intermediary between a buyer and a seller in a transaction. They may represent either party and do not take possession of goods or property or deal on their own account. Brokers receive a fee or commission from one or both of the parties that is usually based on a percentage of the value of the transaction. Brokers differ from dealers in that dealers are transacting on their own account and may have a vested interest in the transaction. Brokers fill an important marketing need by bringing buyers and sellers together. They also facilitate transactions by providing expertise and advice to buyers and sellers.
The two basic types of mortgage brokers are retail and wholesale. A retail broker, or third party originator (TPO), takes a loan application from a potential buyer and submits it to a lender. The lender reviews the application to determine whether to grant the loan. If the lender makes the loan to the applicant, the broker secures a commission, usually between 1 percent and 2 percent of the loan amount. Some lenders also pay a fee to the broker for rejected applications.
Wholesale mortgage brokers represent a smaller segment of the industry. They arrange the purchase and sale of mortgages that have already been originally funded. They help bankers find investors for their mortgages, so that the bank will have money to make new loans, for example. They also solicit retail brokers and mortgage originators that are seeking the most beneficial mortgage terms for their clients.
Mortgage brokers can deliver many benefits to lenders and borrowers. For instance, because brokers are able to search efficiently several institutions to find the best terms, they save time for consumers and help them get the lowest rates and closing costs. In addition, brokers often act as their customers' advocate, walking them through the application process and helping them to avoid delays caused by minor technicalities. Sometimes they are even able to reduce closing costs or waive special fees. Brokers commonly speed up the mortgage process by providing a candid preliminary assessment of what a buyer can afford before the consumer applies for a loan. Brokers are also able to offer several different mortgage options to buyers, whereas individual lenders usually have a more limited selection of lending instruments.
Mortgage brokers benefit the lending industry by providing a more flexible and less costly channel for originating mortgages. Brokers can alleviate a bank's or saving and loan's need to hire and support a sales staff, for instance. By outsourcing their origination activities, banks are able to eliminate many management and administrative costs, education and training expenses, facility expenditures, and salaries and benefits required by an in-house mortgage origination staff. Brokers also allow lenders to diversify geographically their lending operations and to enter and exit different markets very quickly.
Most mortgage brokers can be classified into one of four different categories, though "full-service" firms may participate in two or more areas of the business. Traditional mortgage brokers are typically lenders of last resort. Consumers sometimes turn to this type of broker when they are unable to secure a market rate loan through a lending institution. As a result, these agents usually deal with high-risk, high-interest loans, and often participate in the fractionalization of mortgages, meaning that more than one investor is involved with a single mortgage.
Conventional residential mortgage brokers represent 70 to 90 percent of the industry. These professionals work with consumers to secure the best possible loan terms for their particular needs. They represent products offered by the largest financial institutions that are indirectly supported by government sponsored secondary market institutions, such as Fannie Mae and Freddie Mac. Wholesale brokers are also included in this group.
Commercial mortgage brokers arrange loans for nonresidential or multifamily properties. This market differs in that it is not supported by secondary market agencies, and it is not subject to the state and federal regulation imposed to protect residential consumers. Commercial brokerage...
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