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If you are a normal mortgage consumer, you would probably think a mortgage lender, mortgage banker, and mortgage broker are all the same thing simply because they all provide mortgages to home buyers and refinancers. However, if so, you would be incorrect and this mistake could end up costing you a ton of money.

Definitions of Mortgage Companies

Let's start by defining each specific term and then compare the differences. We will start with the term, Mortgage Banker.

Investopedia states the definition of a Mortgage Banker as:

"A company, individual or institution that originates mortgages. Mortgage bankers use their own funds, or funds borrowed from a warehouse lender, to fund mortgages. After a mortgage is originated, a mortgage banker might retain the mortgage in portfolio, or they might sell the mortgage to an investor. Additionally, after a mortgage is originated, a mortgage banker might service the mortgage, or they might sell the servicing rights to another financial institution. A mortgage banker's primary business is to earn the fees associated with loan origination. Most mortgage bankers do not retain the mortgage in portfolio. "

An example of what I call a "pure" mortgage banker is Bank of America. As a bank, Bank of America can retail mortgages to consumers, close in their own name and fund all their loans with their own money. They don’t need a warehouse lender source...they have the cash. This is the most common version of the mortgage banker, but there is another version I call the "hybrid" mortgage banker. This type of banker differs only in size (much smaller) and the fact they use a short term line of credit from a warehouse lender to fund their loans which they close in their own name.

(Note: Remember that all mortgage bankers "close in their own name". It becomes very important in just a minute!)

It is important to note both types of banker end up selling their closed loans to Wall Street passing the risk on the final investors.

Now let's address the term "Mortgage Lender". Other than the purely generic definition of "a company that lends mortgage money", there is another more specific "industry use" definition.

Inside the industry mortgage brokers refer to their wholesale lenders simply as "mortgage lenders". So what is a wholesale lender? It is easier to understand with an example.

A good example of a wholesale lender is the old Countrywide Home Loans before they went under. Brokers all over the country used their money to fund originations and close those loans in Countrywide's name. It was indeed Countrywide's money used at the closing table, not the brokers.

Investopedia refers to the differences between mortgage brokers and bankers in the following way,

"The distinguishing feature between a mortgage banker and a mortgage broker is that mortgage bankers close mortgages in their own names, using their own funds, while mortgage brokers facilitate originations for other financial institutions. Mortgage brokers do not close mortgages in their own names."

This brings us to the definition of "Mortgage Broker". To quote Investopedia once again,

"An intermediary who brings mortgage borrowers and mortgage lenders together, but does not use its own funds to originate mortgages. A mortgage broker gathers paperwork from a borrower, and passes that paperwork along to a mortgage lender for underwriting and approval. The mortgage funds are then lent in the name of the mortgage lender."

How These Differences Can Cost You Money

I promised you earlier a discussion of why it is important to note the "close the loan in their own name" banker difference and here it is.

This is important because a mortgage banker does not have the same disclosure rules simply because they close loans in their own name. This is a legal technicality, but it makes mortgage bankers billions of dollars without the consumer knowing....but let's back up a minute.

Consumers should know a big chunk of the profit on any originated mortgage comes from the spread between the rate consumers pay and the rate Wall Street expects. Since both banker and broker loans end up on Wall Street, they both have this profit potential. This profit legally has two names: Service Release Premium if the loan is a banker loan or Yield Spread Premium if the loan is a broker loan. Federal law requires this profit from broker loans to be disclosed on the application documents as well as the closing documents.

However, even though this rate spread profit may be equal to or greater on a banker loan, NO consumer disclosure is required at application or closing!

In my experience, mortgage banks are not the low cost provider for retail mortgage money. They have huge over-head requirement, costly advertising campaigns and hungry stock holders all forcing their hand to maximize profit on each and every loan. With their ability to hide rate-bumped profits like service release premiums, do you really stand a chance of getting the lowest rate with a bank?

Probably not.

Does that mean a mortgage brokers automatically provide better deals?

Absolutely not.

However, if you know how to shop to spot and reduce their disclosed rate-bump profits, specifically yield spread premium, you at least have a fighting chance.

There are hundreds of banks advertising their benefits, but now you know there are other options and many times these new options are the better deal.

About the Author:

Rob K. Blake, mortgage expert and author, educates mortgage shoppers on finding local providers by state like New York Mortgage Brokers and Lenders and provides reviews of national companies like ABN AMRO Mortgage.