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Defining a Mortgage Company
A mortgage company is a specialized financial firm that originates and sometimes funds mortgages for residential or commercial property. While commonly referred to as lenders, these firms often function as intermediaries, connecting potential borrowers with various financial institutions that provide the capital for the mortgage itself.
Role of a Mortgage Company
Primarily, a mortgage company plays the role of a loan originator, pairing customers with suitable mortgage loans that align with their financial circumstances. Unlike traditional banks that offer a range of services, mortgage companies specialize in mortgage products and do not typically offer other banking services like checking accounts or investment opportunities. Their product offerings often include a spectrum of mortgage types, including fixed-rate, adjustable-rate (ARM), FHA, VA, military, jumbo, refinance, and home equity lines of credit (HELOCs).
Mortgage companies operate within a dynamic marketplace, aiding consumers in navigating through a multitude of options and guiding them through the intricate process of acquiring a mortgage. As they lack a pre-existing client base like conventional banks, they rely heavily on customer service, referrals, and marketing strategies to drive their business.
How Mortgage Companies Operate
Although many mortgage companies commence the loan process, not all provide the funds themselves. In the industry, such companies are known as brokerages. These brokerages help to find the most competitive loans for customers but do not fund the loans directly.
On the other hand, some mortgage companies function as direct lenders, underwriting and issuing their own mortgages to homebuyers using their capital. However, these companies often don't keep the loan on their balance sheet for long. They typically sell the loan, either individually or bundled with others, to a third-party mortgage servicing institution, like an investment bank, hedge fund, or agencies like Fannie Mae or Freddie Mac.
Impact of the 2008 Crisis on Mortgage Companies
The subprime mortgage crisis in 2008 left an indelible mark on the mortgage industry, particularly affecting smaller mortgage companies. Many such firms, which did not fund most of the loans and hence held few assets of their own, declared bankruptcy when the housing markets dried up and their cash flows evaporated.
Modern Mortgage Companies and Digitalization
Many mortgage companies today operate online, reducing face-to-face interaction but potentially lowering operational costs. The modern, digitalized approach allows for an efficient, streamlined mortgage application process. Yet, despite this growing trend, some customers still prefer traditional, in-person meetings with a loan officer.
Most mortgage companies today are brokerages that do not underwrite or fund the loans themselves. They help to place customers with the most competitive loans that make sense for their situation and personal finances.
Many small mortgage companies went bankrupt in the housing bubble of 2008. Mortgage companies are known as loan originators since they pair customers with loans that suit them and get the process started. Some companies also fund mortgage loans, but most are basically brokerage services that do not lend the money themselves.
Federal programs such as Fannie Mae and Freddie Mac help loans find funding and favorable interest rates, and mortgage companies help consumers navigate the large number of options on the marketplace and walk them through the process. Mortgage companies depend on customer service, referrals, and marketing to drive their production since they do not have a client base already doing business with them in some way, as banks do.
The subprime mortgage crisis in 2008 wreaked havoc on small mortgage companies, and many of them went bankrupt. A mortgage company will usually have a few mortgage brokers working in them.
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