Depository institutions have traditionally originated residential mortgage loans to hold in their loan portfolios, and mortgagebanking is a natural extension of this traditional origination process. Although it can include loan origination, mortgagebanking goes beyond this basic activity. A bank that only originates and holds mortgage loans in its loan portfolio has notengaged in mortgage banking as defined here. Those activities are discussed elsewhere in the
.Mortgage banking generally involves loan originations, purchases, and sales through the secondary mortgage market. A mortgage bank can retain or sell loans it originates and retain or sell the servicing on those loans. Through mortgagebanking, national banks can and do participate in any or a combination of these activities. Banks can also participate inmortgage banking activities by purchasing rather than originating loans.The mortgage banking industry is highly competitive and involves many firms and intense competition. Firms engagedin mortgage banking vary in size from very small, local firms to exceptionally large, nationwide operations. Commercialbanks and their subsidiaries and affiliates make up a large and growing proportion of the mortgage banking industry.Mortgage banking activities generate fee income and provide cross-selling opportunities that enhance a bank’s retailbanking franchise. The general shift from traditional lending to mortgage banking activities has taken place in the contextof a more recent general shift by commercial banks from interest income activities to non-interest, fee generatingactivities.
Primary and Secondary Mortgage Markets
The key economic function of a mortgage lender is to provide funds for the purchase or refinancing of residentialproperties. This function takes place in the
mortgage market where mortgage lenders originate mortgages bylending funds directly to homeowners. This market contrasts with the
mortgage market. In the secondarymortgage market, lenders and investors buy and sell loans that were originated directly by lenders in the primarymortgage market. Lenders and investors also sell and purchase securities in the secondary market that arecollateralized by groups of pooled mortgage loans.Banks that use the secondary market to sell loans they originate do so to gain flexibility in managing their long-terminterest rate exposures. They also use it to increase their liquidity and expand their opportunities to earn fee-generatedincome.The secondary mortgage market came about largely because of various public policy measures and programs aimedat promoting more widespread home ownership. Those efforts go as far back as the 1930s. Several government-runand government-sponsored programs have played an important part in fostering home ownership, and are still importantin the market today. The Federal Housing Administration (FHA), for example, encourages private mortgage lending byproviding insurance against default. The Federal National Mortgage Association (FNMA or Fannie Mae) supportsconventional, FHA and Veteran’s Administration (VA) mortgages by operating programs to purchase loans and turnthem into securities to sell to investors. (For a more complete description of government-run and government-sponsored programs, see Appendix.)Most of the loans mortgage banks sell are originated under government-sponsored programs. These loans can besold directly or converted into securities collateralized by mortgages. Mortgage banks also sell mortgages and