Lenders Come in Many Forms
Investopedia: Thanks for agreeing to speak with us, Elena. Perhaps we could start with the basics. What is a mortgage lender?
Loutskina: The question is simple and complex at the same time. We have different actors implementing different parts of the value chain in the mortgage market. Some interact with borrowers directly—such as a bank, mortgage broker, mortgage company, or an online portal like LendingTree.
Others originate mortgages, and it could be the same or a different entity. For example, mortgage brokers do not originate mortgages. Different actors finance mortgages or provide the money that flows to the borrower.
Then there are actors that hold mortgages on their balance sheet for the duration or the maturity of that debt, up to 30 years.
A bank, for example, could fill all these roles. It could interact with the borrower, originate the loan, finance the loan, and hold the mortgage ’til maturity. Or there could be a different entity for each role. For example, the process can start with a mortgage broker, then go to a bank that originates the loan. This is the original lender. The bank may keep the loan on its balance sheet or sell it, say to Fannie Mae or Freddie Mac. Instead of a bank, the originator could be a financial or mortgage company that borrows money in a wholesale market or from other financial institutions and originates the mortgage.
This is where the notion of who the lender is becomes very fuzzy. Who is it? Is it someone you interact with to get your loan? Is it someone who underwrites it? Is it someone who initially funds it? This is where the fuzziness begins.
Investopedia: OK, it can be confusing for sure. I understand there can be different actors for each step. How can the consumer sort it all out?
Loutskina: It is not clear to me why borrowers need to sort out all steps in a mortgage origination process. My mortgage, for example, was transferred between financial companies multiple times, yet it did not change my financial obligations. Borrowers need to focus on identifying credible agents, meaning banks or mortgage brokers, that will offer them a quote and then focus on the best terms available to them.
Problems with Poor Enforcement and Shadow Banks$
Investopedia: In 2015, you wrote about the financial crisis of 2009 and mentioned the history, before the crisis, of inconsistent enforcement of existing regulations. So, two questions. What is the status of inconsistent enforcement, and how does that compare to the problem of shadow banks? It seems both of these could impact consumers and how they shop for a lender.
Loutskina: We definitely observed differences in regulatory exposure and enforcement between banks and financial corporations. Financial corporations do not carry deposits. And since they do not carry deposits and are not insured by Federal Deposit Insurance Corporation (FDIC), they are not subject to the same level of regulation. We call them shadow banking institutions or non-depository financial intermediaries that implement the same functions as banks do.
