The Name Is The Game

The operations of the financial world change over time along with everything else, but many labels for financial practices are “sticky” — still in use, but with long-lost descriptive relevance.

Mortgage lending, tied inextricably to real estate and Middle English (deed, fee simple, encroachment, foreclose), is especially vulnerable to obsolete terminology. Dated terms are confusing to consumers, and handy tools for marketers seeking not-so-fair advantage.

In the mortgage world the most misleading single term is the oldest: “lender”. Today, that antique usage is about as relevant to mortgage consumers as “slide rule” is to senior high school math students.

A mortgage lender is an institution which loans money in exchange for a promise of re-payment, the promise secured by a claim on real estate. A true lender sets the terms of its loan, retains the promissory note until paid, and then releases its claim on the real estate.

In the case of large “first” mortgages, there may be fewer true lenders of mortgage money today than slide rules still in use.

The last of the old mortgage lenders were the Savings and Loan Associations, which could not survive in the modern world of de-regulated interest rates, and disappeared (painfully) fifteen years ago. No modern financial institution can afford the risk of holding long term mortgage notes in its vault; effectively all mortgages are instantly re-sold in the general direction of the global financial markets.

When a consumer “locks in” the rate on a mortgage loan a month before closing, that loan is committed for inclusion in a mortgage-backed security which in turn is committed for sale to a Wall Street firm at a price established upon lock-in, and to be assembled and delivered a few weeks after closing. No institution in that chain is a lender interested in holding the promissory note any longer than a few days.

The terms of modern mortgage loans — underwriting requirements, payment structure, and approximate interest rates — are determined by the eligibility requirements and hour-by-hour market values of mortgage-backed securities.

The only substantial exceptions in the mortgage world: second mortgages and lines of credit, which are the shorter term, higher risk, higher rate loans granted by banks and credit unions in traditional real estate lending behavior, and a few kinds of adjustable-rate first mortgage loans.

Yet today, many mortgage market analysts and market surveyors persist in the notion of the old-style lender, aided by advertisers. HSH Associates claims to survey “2,000 lenders” each week, while E-loan purports to offer loans from “Over seventy lenders.” Many commentators advise consumers to pick mortgage lenders over “brokers”, though the distinction is meaningless. And, heaven knows, many sources of mortgage credit try to sell consumers on the advantage of their particular institutional setup, or size, large or small.

We need some new terms… good, basic terms which are consistent with the rest of the world of commerce.

The place you go to get your mortgage, whether self-described bank, mortgage bank, broker, or website is a “retailer,” pure and simple.

The bundler of mortgages into large blocks headed toward global financial markets, the securitizer, is a separate operator whether contained in the same corporation as the retailer or independent, and should be called the “wholesaler”.

While awkward, the industry term “servicer” accurately describes the outfit to which we send our monthly payments post-closing. The servicer may be a part of the same corporation as the retailer or wholesaler, but it is not a lender and does not own the loan: it is a contractor-for-fee forwarding the monthly payment to the holder of the mortgage-backed security.

Retail is retail: you can no more get a better price for a pair of Nikes by contacting Nike wholesale headquarters in Washington than you can get a better mortgage deal from Chase Correspondent Lending in Florida. They may answer the phone, but they won’t give you a wholesale price.

It is commonplace for a small, independent mortgage retailer selling loans through a wholesaler to deliver better prices and services than the wholesaler’s own retail arm in the same town.

Loans from websites are cheap right now (though not arranged and closed with great skill), but those cheap prices are “loss-leaders” — market-building concessions — not some electronic breakthrough. E-loan’s back office looks like the typical one at a “brick” retailer, and costs as much.

Most consumers begin to get the correct idea after making a dozen phone calls and visiting a few websites, but ancient terminology, bad advice, and slippery marketing conspire to make consumer shopping much harder than it needs to be.

While mortgage products are uniform, the prices do vary from retailer to retailer, and there is great value to consumers in shopping among different levels of retailer skill, reliability, knowledge, and communication.

The particular corporate shell surrounding the mortgage retailer isn’t worth a nickel.