Topic 13.7: Primary Mortgage Market >

Learning Objective

After successfully completing this topic, you will be able to distinguish among the sources of home financing in the primary lending market.

Depository Lenders

A depository mortgage lender originates loans for borrowers in the primary market. They are called depository lenders because they accept checking and savings accounts. They are primary lenders because they approve or reject loans, and use their own funds. Examples of depository lenders include savings associations, commercial banks, and credit unions.

Savings Associations

Savings associations invest primarily in residential loans and home equity loans.

Commercial banks

Commercial banks make construction loans for commercial and residential loans, and make commercial loans for inventories, etc.

Credit unions

Credit unions make residential loans, home equity loans, and home improvement loans.

Most depository lenders sell the fixed-rate mortgages to the secondary mortgage market soon after the mortgage is originated. If the lender holds the mortgage and the interest rates rise, the value of the mortgages will decline and the lender will suffer a loss. This was a major reason for the huge bank failures of Silicon Valley Bank and First Republic Bank in May of 2022.

For example,
Assume a savings association originates and holds a 30-year,  4 percent $300,000 loan in its portfolio with monthly payments of $1,432.25. If interest rates on mortgages rise to 6 percent and the lender wants to sell it, buyers would require a monthly payment of $1,798.65. The loan is worth 80% of its face amount, or $240,000. (Divide $1,432.25 by $1,798.65.) The lender who holds the mortgage in its portfolio would take a loss of $60,000. 

Non-Depository Primary Lenders

Non-depository mortgage lenders originate loans with their own funds or with borrowed money. When the mortgage transaction closes, the lender packages it with a group of other mortgages and sells the bundle in the secondary mortgage market (described in the next section). The lender usually services the loans it sells. The proceeds of the sale provide funds to originate new mortgages.

Mortgage brokers

Mortgage brokers don’t make loans or service loans. They work as intermediaries between borrowers and lenders and are paid by fee.

Mortgage loan originators

Mortgage loan originators (MLO) are persons who solicit or process mortgage loans. The MLO must complete state prelicense courses, pass an exam and take continuing education. The loan originator normally earns a loan origination fee. MLOs are not considered primary lenders. Their activities are limited to acting as agents.

The Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act) sets a minimum standard for licensing and registering mortgage loan originators. Employees of banks, savings associations, and credit unions must register with the Nationwide Mortgage Licensing System, and undergo a criminal background check. These originators are also regulated by the state.

Seller Financing

Many sellers agree to finance the purchase of their properties. The seller is considered a primary lender. If there are no existing mortgages on the property, the seller’s mortgage will have first priority. If there is an existing mortgage, the seller’s mortgage will have a lower priority.

Contract for deed (land contract)

Sometimes, sellers who sell vacant land will sell using a contract for deed as a financing device. Contracts for deed are discussed in detail in Unit 12.5.

Government Programs

Mortgage bond financing 

Florida’s first-time home buyer programs (defined as anyone who has not owned a home within the last three years) can be in the form of loans, tax credits, and grants. First time home buyer programs are for owner-occupant buyers only, not for investment properties.

The Florida Bond program is provided through the Florida Housing Finance Corporation and is offered to borrowers through approved lenders. Loan originators must be certified before they can offer the program. The loans are sold after origination to the Florida Housing Finance Corporation. The program includes USDA, VA, FHA, and Conventional loans.