SIC 6162 Mortgage Bankers and Loan Correspondents

Encyclopedia of American Industries | 2005 | Copyright

SIC 6162
MORTGAGE BANKERS AND LOAN CORRESPONDENTS

This industry covers establishments primarily engaged in originating mortgage loans, selling mortgage loans to permanent investors, and servicing these loans. They may also provide real estate construction loans.

NAICS Code(s)

522292 (Real Estate Credit)

522390 (Other Activities Related to Credit Intermediation)

Industry Snapshot

The mortgage loan industry differs from other industries in its passivity: whereas new products and services can create new markets in other industries, the mortgage industry remains at the mercy of homeowners and buyers, who almost never buy on impulse. Instead of creating new markets, mortgage bankers must respond to existing markets and anticipate marketplace changes, transforming their services in reaction to larger societal forces, such as population demographics and interest rates. This passivity forces the industry to be dynamic, constantly shifting to meet new demands, such as rising rates of first-time homebuyers, and take advantage of new opportunities, such as e-commerce. At its core, the mortgage industry remains solid because home ownership represents an enduring aspect of American life.

The mortgage financing industry experienced record-high results for combined purchase and refinancing transactions of $1 trillion in 1993; 1998 results surpassed this watershed mark, and a new record of $2.3 trillion was set in 2001. Double-digit interest rates still existed in 1993, thus refinancing fueled that year's record transactions. In 1998, refinancing still accounted for some transactions, as borrowers took advantage of low interest rates to decrease their mortgage payments from above 8 percent to below 7 percent. When average interest rates dipped below 7 percent in 2001 and below 6 percent in 2002, the industry saw an unprecedented spike in refinancing activity, which fueled a record volume of mortgage originations in both years. These low interest rates also sparked growth in new transactions, particularly by the growing segments of first-time homebuyers, low-income buyers, minorities, and immigrants. Lenders realized that fair and affordable lending not only made ethical sense, but also made very good business sense.

Organization and Structure

As liaisons, mortgage bankers are more than just loan brokers, because they maintain a responsible presence from the time mortgage loans are created until they are paid in full. The mortgage banker functions in a continuum extending from the seller/builder of the property to the seller's agent, to the mortgage borrower, to the mortgagee (the mortgage banker), and to the mortgage investor. Mortgage bankers specialize in the origination or production of mortgage loans for sale to the secondary mortgage market. Many mortgage lenders make or buy loans, while some sell loans, and others service loans. Mortgage bankers link the three functions.

The housing finance system in the United States includes many private and public institutions and several levels of market activity. The mortgage lending/investment process involves the provision of housing credit to borrowers by institutions and individuals who hold housing loans in their portfolios. However, a number of institutions may come between the ultimate investors, and the characteristics of the mortgage asset may be transformed along the way as insurance and guarantees are attached and as securities replace the original mortgage loans.

Residential mortgage loans are made (originated) in primary markets where lenders and borrowers conduct business. Borrowers get mortgage credit in these markets mainly from depository institutions or mortgage banking companies. Since the 1930s, mortgage loans made in primary markets typically have been long-term, fixed-rate instruments with level payments that pay off (amortize) the principal balance over the term of the loan. However, new types of mortgage instruments emerged recently to serve the various needs of borrowers and investors. Most of the new mortgage instruments provide for adjustable interest rates, graduated payment schedules, or some combination of these features.

Institutions operating in primary mortgage markets may hold the mortgages they originate, adding them to their asset portfolios. In many cases, however, originators sell their loan production on secondary markets, thereby replenishing their supplies of loanable money. Transfers of outstanding mortgages among mortgage investors also take place in secondary markets.

Sales of mortgage loans from originators to investors inevitably involve some cost, but such transfers are often necessary for the effective functioning of the housing finance system. Secondary market transactions may be needed to correct...

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