RateWatch #385 – Kinds of Lenders

December 6, 2003 by Dick Lepre

What's Happening

The economic news keeps looking good... mostly. Worker Productivity was up a whopping 9.4% in the 3rdQ. This is a true sign of economic strength. The implications for the jobs market remain
uncertain. While higher productivity may implicitly mean fewer jobs it likely indicates that present staffing is stretched and more workers need to be hired.

The ISM index of manufacturing activity rose to its highest level in almost 20 years.  Construction Spending was up in October.  Business is now spending and the economy expanding.


The big item this week was Friday's BLS Employment Situation report.  Expectation was 150,000 new jobs.  Reality was 57,000.  Treasuries benefited on a day that they could have sold off three points had the report been very strong.  The connection between higher productivity and a weaker than expected jobs report seems intuitive.  Productivity cannot keep increasing like this.  People will start getting hired.

Different Kinds of Lenders

Since this is the weekend of the RPM Christmas Party, I thought that it would be appropriate to describe what RPM is and what other kinds of mortgage lenders there are.

Three are, essentially, three kinds of entities in the mortgage business:

- direct lenders
- mortgage bankers
- mortgage brokers

Direct lenders are entities such as banks and S&L's. InCalifornia, Washington Mutual has come to dominate the S&L business.  Commercial banks, such as BofA and Wells Fargo are large players in the mortgage business.  There are also "specialty lenders." These are banks that handle large loans in certain relatively small geographic areas.

In dealing with a direct lender a borrower should have the confidence of dealing with a "name brand." From my experience, the only problem with these large lenders is that they do not perform well where there are "refi booms."  Their business models do not allow for the hiring and firing
that goes with these cycles.

Mortgage bankers (such as RPM) are companies with a healthy balance sheet and well-heeled owners who get credit lines from large banks, fund loans with those credit lines, sell those funded loans to other, larger financial entities and pay back the credit lines so that they can be recycled.

Most mortgage bankers use mortgage brokers (covered below) to do their retailing.  They have account executives who call on brokers, fax rate sheets and try to answer their questions and solve their problems.  The key to the success of mortgage bankers is having great AE's who can call on brokers and get their business.  The main issues that the brokers have are price and service.

RPM is an atypical business because it has a wholesale mortgage operation (called Najarian
Loans) but that operation is only available to retail RPM agents.  For someone such as myself
this is important because it gives me access to the people who are going to underwrite your loan. 

RPM's business may also be described as "net branching."  It has expanded to 15 branch offices.  Each office (apart from the main office in Alamo) is owned by a group of principals who run the office, provide the capital and management, and take a piece of the commission.

Mortgage brokers employ loan officers and processors but do not fund their loans.  They send them to a mortgage bank or to a direct lender and that party underwrites and funds the loan.
Mortgage brokers enjoy a wide variety of lending choices but they have two problems that mortgage banking operations do not have: 1) there is more distance between the loan officer and the person making the ultimate decision.  This matters in the case of a purchase where the
income or other aspects of the file are subject to interpretation and 2) they do not have the
"clout" to get files expedited as readily as mortgage banking operations do.  Like the
direct lending situation mentioned above, this matters most during those refi booms
when rates are low.

Realtors sometimes try to steer clients away from buyers using mortgage brokers
because they are more prone to "last minute surprises."

When all is said and done, the fact is that a good relationship between you - the borrower -
and the loan officer is more important than what type of company he works for.  

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