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Posted On January 17, 2013

Mortgage Makers

Mortgages are made by a variety of financial institutions including banks, savings and loans, insurance companies, and private individuals. Each of these categories is broken down below:

Depository Institutions

The word “bank” used in general conversation probably means an institution that accepts deposits in exchange for a small amount of interest paid to the depositor. Banks pool money from their depositors and purchase a variety of assets such as mortgages, stocks, bonds, etc. They make their profit from the difference between the interest and dividends that they earn minus the interest they pay to depositors and creditors.

This kind of entity is actually what is known as a commercial bank and is only one of many types of depository institutions that you might approach for a mortgage.

Commercial Banks are those banks that operate retail branches nearly everywhere and provide checking and savings accounts, mortgages, loans, and a variety of other financial services for individuals and small businesses. Commercial banks vary in size and may be regional brands with only a few branches or large nationwide organizations.

Savings and Loans historically served a different purpose from commercial banks by providing services mostly to businesses. Today however, they operate in much the same way as commercial banks. The principle difference is that savings and loans tend to lend a higher ratio of residential mortgages than do commercial banks. Compared to commercial banks, savings and loans are far less numerous and control a lot less capital.

Credit Unions are nonprofit organizations that are owned by their depositors. The depositor/owners of a credit union must all have a common affiliation or occupation (e.g. a credit union for teachers or for firefighters). The deposits of a credit union are pooled to make loans to members. These loans typically take the form of smaller consumer loans rather than mortgages (e.g. auto loans or credit cards). The income of credit unions isn’t taxed and consequently the extra money is used to increase the interest paid to depositors or to lower the interest on the loans made to borrowers.

Insurance Funds

Life Insurance companies offer a lump sum payout in the event of the death of an insured individual. In exchange, that individual must make regular payments to the insurance company in the form of premiums while he or she is alive. The company makes its profit from the spread between the flow of premiums, which are invested, and the eventual payout required at some future date. Insurance companies make comparatively few mortgages and instead favor investing in bonds and stocks.

Direct or Indirect Source?

All of the above organizations may choose to invest in mortgages in two different ways. First, they may choose to directly make mortgage loans to borrowers. Second, they may decide to invest in what are known as mortgage backed securities. These are pools of mortgages made by an originator (such as a mortgage banker, bank, or mortgage broker) that are bundled and sold individually for investment. Each share has no claim to the full profits of any one mortgage, but rather to a percentage of the income of the whole pool.

Put another way, for companies who want to invest in the mortgage market, they can either hold full mortgages, or fractional ownership of many mortgages. The latter option is becoming more and more popular with financial institutions in general, even despite the financial crisis. The result for borrowers is that the company that made their mortgage may not be company that they owe money to.