About Mortgage Banking

Mortgage banking involves origination, sales and purchase of the loans for the purchase and refinancing of the properties. A mortgage bank provides loans to the individuals so that they can purchase or refinance their homes. The banks involved in mortgage financing operate through the primary and secondary mortgage markets.

They directly lend the loan to the individuals for the purchase or refinance of the property through the primary market. The lenders give loan to the individuals with home as collateral. In contrast to this, the investors and the lenders buy and sell the loans and the collateralized loan property in the secondary market.

The loans that the banks originate are exposed to the long term interest rates risks. To minimize this risk the banks trade the loans and the associated securities in the secondary market. There are many buyers that operate commonly in the secondary market and actively buy home mortgage. Two large buyers among them are Fannie Mae and Freddie Mac.

The mortgage banks mainly perform three functions- loan origination, servicing and underwriting. Besides loans the banks create mortgage backed securities also called as the collateralized securities and trade them in the secondary market. The process is called as securitization.

Loan origination or purchase is the sale of the loan directly to the individuals to make them purchase or refinance the residential properties. The individuals can apply for the loan by directly approaching the bank or through the bank website online. The banks charge fees for processing and lend the loan at specific interest rate prevailing in the market. The rate of interest can be fixed as well as variable.

The servicing of loan involves sending the bills, reminding the client about the installments. The servicing also involves the foreclosure procedures. By underwriting, the bank determines the risk associated with a loan. For this they appoint an underwriter who accesses the creditworthiness of the borrower by analyzing the credit score.

The banks use both the technology and system to improve their efficiency in originating and servicing of the mortgage loans. They thus rely heavily on the computer technology and information systems so that they can manage the vast data of different clients and individuals.

There are different types of risks associated with mortgage banking. Some of them are interest rate risk, price risk, transaction risk, strategy risk and liquidity risks. Banks take different measures to lower such risks.

The different industries associated with mortgage banking are the real estate and construction lending, mortgage insurance industry, home owner insurance and residential brokerage industry.