The Mortgage Industry
Industry Overview:
At the end of 1997, there were $4.0 trillion in single-family mortgages outstanding and another $0.3 trillion in multifamily mortgages, for a total mortgage market of $4.3 trillion. ( larger than the $3.8 trillion in US Treasury securities that were outstanding.) About one-half of all single-family mortgages have been securitized compared to 2 percent in 1970.
With very low mortgage rates near 7 percent for 30-year, fixed-rate mortgages, the year1998 witnessed record mortgage lending. The mortgage industry originated approximately $1.5 trillion in mortgages in 1998 as compared to $834 billion in 1997. The Mortgage Bankers Association of America estimates that another $1.1 trillion in mortgages will be funded in 1999. With the introduction of computer-based mortgage origination in the 1990s and, more recently, Internet-based mortgage origination, technology is becoming the central market driver for both consumers and financial service organizations on every front.
Internet has become one of the easiest, fastest and most cost-effective mechanism for consumers to investigate, apply for and fund a mortgage - drastically changing the face of the financial services industry. The online mortgage mechanism enables the consumers to save as much as $1500 in application and closing fees. According to Forrester Research, by 2003, around $ 91 billion, 10% of the projected mortgage market will be conducted online.
At the same time, the Internet gives banks, lending institutions, realtors and other organizations the opportunity to expand and streamline their traditional mortgage processes in order to broaden consumer reach, offer better customer service and increase productivity and profitability. The Internet also enables these organizations to transact business with customers in a more efficient and low-cost manner, and gives them the flexibility to adjust features, presentations and prices in response to competition.
The ultimate benefactor of the major transitions in the mortgage industry will be the
consumer with overall convenience, low-cost access to information regarding available
products and services, ease of use, numerous choices and more competitive pricing.
Graphical Portrayal of Current and Future Mortgage Business
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Broad Industry Structure
The mortgage market can be broadly classified into two segments:
1) Primary Mortgage Market: The primary mortgage market consists of lenders making mortgages to consumers or homebuyers. The key lenders in the primary mortgage market are the commercial banks, mortgage bankers, savings institutions and credit unions. Another important player in the primary mortgage market is the mortgage broker, who acts as the key intermediary between the consumer and the lender.
2) Secondary Mortgage Market: The secondary mortgage market consists of banks that originate mortgages and banks that buy them. Mortgage originators can either hold onto loans or sell them in on the market. Generally, banks do not originate loans unless the y can secure a buyer for those loans; roughly 62 percent of the mortgages originated are sold on the secondary market. Once these secondary institutions secured the purchase of these mortgages, they package them into securities, guarantee the payments on the securities and sell them on Wall Street. The lenders use the proceeds from the sell of the mortgages to originate new mortgages, which constantly replenishes their supply of funds and enables the cyclical activity of the mortgage market to continue without interruptions.
The cyclical nature of mortgages industry makes it a vibrant market with regular flow
of activity among the major players in the market namely, the consumer, mortgage broker,
lender and secondary market institutions. The flow of activity in the mortgage industry
starts with the consumer approaching the mortgage broker for mortgage advise and mortgage
financing. The mortgage broker deals with various lenders to procure mortgage financing
depending on consumer's credit profile and financing requirements. The lender after
providing the mortgage finance sells the mortgages to secondary mortgage financial
institutions like Fannie Mae and Freddie Mac. The secondary mortgage institutions then
securities the various loan pools and sell them as securities to various investors across
the world. So the flow of activity in mortgage industry may start with consumer requiring
a mortgage and finally end with the same consumer buying securitized mortgage securities
as an investment.
Mortgage Industry Players and Users
The major players and users in the mortgage industry are detailed as below:
a) Consumers or Homebuyers:
The homebuyer is typically a person who wishes to own a house and requires financing for the same. Homebuyer is the person who is on look out for mortgage financing for the purchase of home.
b) Mortgage Brokers
A mortgage broker is an independent real estate financing professional who specializes in the origination of residential and/or commercial mortgages. A mortgage broker is also an independent contractor working, on average, with 40 wholesale lenders at any one time. By combining professional expertise with direct access to hundreds of loan products, a broker provides consumers the most efficient and cost-effective method of offering suitable financing options tailored to the consumer's specific financial goals. There are approximately 20,000 mortgage brokerage operations across the nation that originate over half of all residential loans in the US.
c) Lenders
Lenders are the commercial banks, mortgage bankers, savings institutions and credit unions which extend finance to the consumers for home buying. These are the companies that originate, close, and service mortgage loans.
d) Secondary Market Institutions
Sandler O' Neill in NYC
These major players of the secondary mortgage market, along with other secondary institutions, ensure that funds are continually available for residential mortgages by financing the lenders in the primary mortgage market. This is accomplished by guaranteeing to buy the loans from the lenders so that they will originate those loans to the consumers. When these secondary mortgage institutions buy the loans, they package them into securities, guarantee the payments on the securities, and sell those securities through security dealers all over the world.
Mortgage Industry Products:
The mortgage financing can be of several types and also each type of mortgage financing can be done depending on consumers specific requirements. The mortgage financing can take the form of financing the first home buy, refinancing and also borrowing against equity in a mortgage. The various types of mortgages and mortgage finance products are detailed below:
Conventional Mortgage Programs:
Government Mortgage Programs:
Fixed-Rate Mortgages
Adjustable-rate mortgage products.
Second Mortgage Loans
Home Equity Loans
Mortgage Backed Securities