Mortgage Ecosystem: Direct Lender
My mortgage refinance was completed on June 3. I made my first payment to my new lender today.
I did the refi through National Mortgage Alliance (NMA), which is a division of a bank Georgia Banking Company (GBC). The name on my loan paperwork was "Georgia Banking Company dba National Mortgage Alliance." Officially, I borrowed money from GBC. But at the time I locked my rate in April, six weeks before the refi was closed, I already knew that my loan would be sold to another bank right after it closed. Let's call this other bank Bank B. When I locked my rate with NMA, NMA also paired my loan with Bank B. The money, for all practical purpose, really came from Bank B. It was only routed through GBC/NMA temporarily. NMA earned the difference between what Bank B offered and what it offered to me. This business model is actually very similar to that of a mortgage broker, with the exception that NMA's name showed up on my loan paperwork, whereas a loan through a mortgage broker would have Bank B's name on the loan paperwork.
I learned that this business model is called correspondent lending. The bank that deals with the borrowers on the front line is called a correspondent lender. They sometimes advertise themselves as a direct lender although they only make a loan if someone else buys it. A bank that provides short-term financing to the correspondent lender is called a warehouse lender. The short-term financing given to the correspondent lender is called a warehouse line. The bank that ultimately takes over the loan is called an investor.
This 30-minute video by Morgan at Blown Mortgage blog explains thoroughly what happens behind the scenes in correspondent lending:
It matched my experience perfectly. If you don't have 30 minutes, here's the presentation in PDF. Morgan also wrote an excellent post The Mortgage Broker vs. Mortgage Banker Argument which clears up many myths about mortgage brokers versus direct lenders.
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Pay Another Person Electronically for Free
A couple of friends owe me some money. How can they pay me?
Mail a check. This is the old fashioned way. We all know how it works. The stamps are not free, but pretty close. As the recipient, I have to make a trip to the bank or I put the check in a postage-paid envelope provided by Fidelity mySmart Cash account.
Online Bill Pay. They can set me up as a payee in their bank's online bill payment system. Their bank will send me a check. I deposit the check. For a one-off, it's an overkill. If it's recurring, it's easier for the sender than to remember to write and mail that check every month.
Is there a way to do it electronically? Because mailing a check and online bill pay are free to close to being free, paying electronically between friends and family also has to be free, or else it doesn't make much sense to do it.
If I were selling something to a stranger, it makes sense to use a third party and pay fees because that stranger wants to use a credit card and earn rewards. I will just factor the expected fees into my price. Between friends and family though, it's hard to imagine anyone is interested in paying fees. This article only covers options that are free.
Based on comments from indexfundfan and my own research online, I see four ways right now:
1. Intra-bank Transfer. Some banks allow their customers to transfer money to other customers of the same bank. It usually falls under the Transfer function in online banking.
Four of the top 10 banks in the U.S., Bank of America, Wells Fargo, Citibank and Regions, offer this service. As far as I can tell, they don't charge any fee to either the sender or the recipient.
Figure 1: Intra-bank transfer at Wells Fargo
2. ING Electric Orange. ING Electric Orange is a checking account by online bank ING Direct. If the sender uses ING Electric Orange, he/she can pay the recipient with an Electric Check. See Electric Check demo.
The recipient does not have to use ING. The recipient just needs to give the sender his/her bank account number and the routing number. I don't see an option to schedule the payment in advance or make it automatic. The recipient has to trust the sender enough to give the sender his/her bank account information.
3. PayPal. If the two options above don't work, the sender and the recipient can both join PayPal and link their bank account to their respective PayPal accounts. The sender only needs to know the recipient's e-mail address used with PayPal.
There is no fee to either party as long as (a) the sender uses existing balance in PayPal or a bank account as the source for the payment, and (b) the sender selects "Personal" not "Purchase" as the reason for the payment.
The sender cannot schedule the payment in advance or make it happen automatically every month. The recipient also has to manually transfer the received money from the PayPal account back to the linked bank account.
Figure 2: Send Money in PayPal
4. Revolution MoneyExchange. Revolution MoneyExchange (RME) works similarly to PayPal. Both the sender and the recipient must join RME and link their bank account to their RME account.
I don't have a RME account, but from what RME describes on its website, it looks like the sender must log in to RME twice: first add money from the bank account to the RME account; log in again after the transfer clears, and then pay the recipient using the money in the RME account. If that's the case, this two-step process is more cumbersome than PayPal's one-step process.
I don't see any scheduling or automatic options in the RME write-up either. The recipient also has to manually transfer the money back to the linked bank account.
Summary
| Requirement | Pay Now | Scheduling | Automatic | |
| Intra-Bank Transfer | Both parties use the same bank. | Yes | Maybe | Maybe |
| ING Electric Orange | Sender uses ING Electric Orange. | Yes | No | No |
| PayPal | Both parties use PayPal. Sender uses bank account to pay and selects "Personal" tab. | Yes | No | No |
| Revolution MoneyExchange | Both parties use RME. | Yes | No | No |
The requirement for both parties using the same bank makes intra-bank transfer not widely applicable. The ING Electric Orange's Electric Check feature looks great, but signing up with ING Electric Orange just for the sake of paying another person electronically is unrealistic. Requiring that the recipient trusts the sender with the bank account info can also be problematic. We are left with either online bill payment with paper checks or PayPal.
Isn't it amazing it's so difficult to pay another person electronically in the 21st century?
I speculated that the regulations on Know Your Customer (KYC) and Anti-Money Laundering (AML) are a contributing factor. Also, because the service has to compete with mailing paper checks, which is close to being free, the fact that banks can't make much money from the service is probably another reason.
A financial service software vendor CashEdge recently announced a new service called POPMoney, which enables electronic payments to another person inside online banking. It still has to be offered through the banks, because CashEdge does not deal with consumers directly.
It remains to be seen which banks will offer the POPMoney service and how much the banks will charge for it. If the service receives wide adoption by the banks and most banks don't charge for it, we will finally have a service that I think should've been available a long time ago. But there is no guarantee that it will be free. For example Bank of America already charges $3 today for each outgoing ACH transfer initiated from BofA. So does Chase (fee schedule, p. 2).
For more information about POPMoney, please read Money In The Bank? A look at CashEdge's POPmoney at Payments Views by Carol Coye Benson of Glenbrook Partners.
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