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requirements, and the industry trade organization, the Mortgage Bankers Association, does not purport to represent all practitioners.

However, the numbers available from the different organizations which work with mortgage bankers give us a general estimate of the number of firms. HUD, the only government agency with any direct responsibility for mortgage banking activities, has on its rolls some 1,600 mortgage bankers. Since HUD approval requires little more than submission of a simple application, it is reasonable to assume that most mortgage bankers have obtained HUD approval, and that the HUD figure of 1,600 includes virtually all such firms. It also appears likely that many of these firms are now defunct. The MBA has about 750 members and it estimates that these represent about 95 percent of the active HUD-approved lenders.

Illinois' experience in beginning to require that mortgage bankers disclose where they place their loans (under the Illinois mortgage disclosure legislation) furnishes a dramatic illustration of the peculiar nature of the industry. Stymied in efforts to find a comprehensive list of mortgage bankers doing business in Illinois, Department of Real Estate employees were reduced to going through the Yellow Pages in each city in an attempt to find such firms.

It is even more difficult to obtain accurate figures on the scale of mortgage bankers' business. One source is the MBA annual survey of business trends, but this survey includes no verification procedures and thus no way to gauge the accuracy of its data. The 1976 survey had 388 responses, representing about 75 percent of the total industry volume, according to the Association. Those figures show a portfolio of outstanding mortgages equal to $142 billion. If accurate, this figure means that mortgage bankers collect monthly payments on one-fifth of all outstanding mortgages in the United States. In addition, the MBA figures show that the industry originated

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$22.1 billion in new mortgages in 1976, up from 1975 despite overall real estate decline. About 70 percent of this volume was related to the purchase of singlefamily homes, the traditional mainstay of mortgage bankers, but the industry is steadily increasing its involvement in the commercial and multi-family housing markets. Last year mortgage bankers were responsible for one-fourth of the net national increase in those markets.

Mortgage bankers have all but cornered the market on government guaranteed mortgages. For 1976, they originated almost 75 percent of all FHA and VA loans. By contrast, their closest competition, the savings and loan associations, had only 15 percent of the FHA/VA market.

In the conventional mortgage market the figures reverse dramatically, with savings and loans, savings banks, and commercial banks totally dominant, originating almost 85 percent of that year's conventional mortgages. The mortgage bankers' share of that market was a nominal 5.2 percent.

How Mortgage Bankers Operate

Mortgage bankers' operations are relatively simple and straight forward, but they are not well known. It may be useful to describe their activities so that the reader has a working knowledge of their operations before looking into the primary issues and problems. This section describes each of the major functions a mortgage banker undertakes in relation to a home mortgage, pointing out how he makes income at each stage.

The first step in originating a mortgage is, of course, to locate potential homebuyers and sellers. Mortgage bankers accomplish this by maintaining close contact with real estate agents. A loan solicitor at a mortgage company loan production office will keep in contact with many brokers, informing them of the discount rate his company is offering on FHA, VA, and conventional mortgages. When a broker locates a buyer who seems

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qualified for FHA/VA insurance and who has a suitable property for purchase, he will contact the mortgage company which offers him the best rate. At this point, the mortgage bank will apply to FHA/VA for an appraisal of the property and will submit credit, employment, and asset information about the potential buyer with a request that the agency find the buyer to be eligible for a loan. If FHA approves both the property and the borrower, it issues a "firm commitment" to approve the loan insurance. Then the mortgage bank undertakes a title search, and offers the buyer title insurance and, often, hazard and life insurance policies. For the sake of convenience, all these transactions are usually handled by the mortgage company. When all the proper papers are completed, the loan is closed and the funds are disbursed.

A mortgage company will probably then "warehouse", or hold the loan until it has enough packaged together to attract a large investor. It is cheaper and easier for these investors to buy large blocks of mortgages than to purchase mortgages one at a time. Each GNMA mortgagebacked security, for example, covers a minimum of $2 million in individual mortgages. However, while the mortgage bank must hold the mortgages for a while, the seller wants to be paid at the moment of sale, not five or six weeks later when an institutional investor purchases the package of mortgages. Because most mortgage bankers have little capital of their own, they must turn to interim sources for short-term credit to finance this "warehousing." The credit usually comes from a commercial bank loan which is repaid once the package is sold to the secondary market investors.

After selling the mortgages to long-term investors, the mortgage bank usually continues to "service" them. The firm collects the monthly payments and passes them on to the investor. It also sees that escrow accounts for the payment of yearly property taxes and insurance premiums are maintained. If the buyer misses a payment and enters into default, it is the mortgage company's responsibility either to work out a revised payment

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schedule or to foreclose, file a claim with FHA for full payment of the amount still due under the loan, and pass the full reimbursement on to the investor.

How Mortgage Bankers Earn Their Income

Mortgage bankers earn the bulk of their income from mortgage origination, with the rest coming from servicing the loan. When a mortgage is originated, the mortgage bank receives several lump sum cash amounts. First, it charges the buyer one percent of the original mortgage amount as an origination fee. Secondly, the lender is allowed to charge the seller "discount points" on FHA and VA homes, because FHA and VA often set a maximum interest rate for their

insured mortgages. This rate is lower than competitive investment opportunities, making it difficult to attract capital into insured housing unless the lender is allowed to charge the seller a cash fee, or "discount", in addition to the interest. The fee varies according to other competitive rates. It is measured by "discount points", each of which equals one percentage point of the amount of the mortgage loan. The charging of points increases the effective rate of return to the lender while theoretically not increasing the cost of the interest to the buyer. * Thirdly, at origination, lenders often also earn income from commissions from conducting a title search and issuing hazard, life, and title insurance policies.

While the mortgage is warehoused, the mortgage bank can earn income if it can borrow funds from a commercial bank for the short-term at an interest rate which is

* The amount of income earned by the mortgage company from points is largely a function of how well the company does when it sells the mortgage package on the secondary market. For an explanation of this process, see footnote 15.

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If

lower than the long-term mortgage interest rate. interest rates rise during this short period, the mortgage company will also be able to realize a gain on the sale.

After a mortgage bank has sold the paper to an investor, it continues to service the mortgage and receive a servicing fee equal to a small percentage of the outstanding mortgage balance. It also continues to receive indirect income through its placement of interest-free escrow accounts. (FHA regulations require that insurance and property tax payments be placed in demand deposit accounts at banks. While this bars a direct return to the mortgage bank, it allows the institution to nurture the bank's goodwill and increase its access to easy credit.)