Borrowers and originators shouldn’t fool themselves – FDIC insured depository banks are always preferred to traditional mortgage brokers and shadow banks.
The benefits of being and working with a depository bank far outweigh any perceived benefits of shadow banks, which operate outside of established banking regulations, for many reasons. Here are 3 reasons why you should always work with and for an FDIC insured depository bank.
1. Mortgage Licensed Originators
The most painfully obvious difference between the two is the licensing requirement for Mortgage Licensed Originators (MLOs). MLOs work for correspondents and brokers to get individually licensed in each state in which they intend to do business. Can you imagine the cost of this? While it’s expensive for the individual, the company often picks up the tab, and there are other costs like time for continuing education and getting tested in each state. The costs are massive. And if the company does pay, the cost is passed back to the borrower in higher rates and fees.
It’s clear how the cost for traditional mortgage correspondents and brokers associated with being regulated by state build up in terms of true dollars and resources. From a focus and cost perspective, depository banks avoid this costly and time consuming arrangement.
Furthermore, lenders who participate in direct-to-consumer sales have their opportunities severely limited by the need for MLOs to have their licenses. At depository banks, MLOs only need to register with the National Mortgage Licensing System and automatically have approval to operate in all states where the bank chooses to do business. Here at Paramount, that’s all 50.
2. Custom products
Depository banks have the flexibility to provide a tailored portfolio of products to borrowers that are not regularly available to correspondents and brokers. I’m a big supporter of bridge loans, which is one example. Bridge loans enable purchasing customers to take cash out of the equity of the home they are selling, and then use that to produce a down payment or money to furnish the new home. You can already see how this product can make the purchasing process extremely less stressful. For correspondents and brokers, this loan is rarely even an option.
3. Sources of funds
Depository banks have special access to less expensive sources of funds, like deposit products and the federal reserve overnight funds desk. Traditional correspondents get their funds from warehouse lines that are 2x more expensive. Can you guess who gets the brunt of that extra cost? That’s right – borrowers. Again, this increase in cost is passed to the borrower through higher rates and fees. Depository banks don’t need to do that.
In short, FDIC insured depository banks have the best and broadest opportunity to fit borrowers’ unique needs.
There are so many more efficiencies, like in marketing and process flow, when a bank can purchase digital property on a larger geographic scale, and has a staff that can each operate legally in all 50 states. Depository banks also have the ability to participate with other banks on large and unique deals.
Buyers and borrowers should always be looking for a depository bank that works with other investors, like Paramount Bank does. It’s the only way they can feel fully confident their price is not inflated to pay for redundant compliance and licensing concerns.