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 explains thoroughly what happens behind the scenes in correspondent lending:

Understanding Flow-based Correspondent Lending

It matched my experience perfectly. Morgan also wrote an excellent post The Mortgage Broker vs. Mortgage Banker Argument which clears up many myths about mortgage brokers versus direct lenders.