Mortgage Banking Explained: How, Why, Who Make Loans

Mortgage banking services can be offered by banks, savings institutions and private financial service companies.

Mortgage bankers make loans on residential and commercial real estate, package groups of loans and sell them in the secondary market. That market usually consists of quasi-governmental agencies such as the Federal Home Loan Mortgage Corp., often known as Freddie Mac. The agencies then sell to the public securities, backed by the pool of mortgages the agencies have bought.

By selling the loans, mortgage bankers get most of their money back to lend out again. They also pass along to the purchasers the risk that the loans will go bad--along with the rewards of monthly interest and principal payments.

Mortgage bankers make their money from loan fees or “points”--cash payments based on a percentage of the loan amount--as well as from servicing fees charged to collect monthly payments on the loans.

Retail mortgage bankers make loans directly to home buyers and home builders, while wholesale mortgage bankers make loans only through mortgage brokers, sharing some of the fees with the brokers. Brokers typically charge slightly higher points than banks and savings institutions do, but they offer a greater variety of loans from different companies and institutions.