What is a Temporary Lender
A temporary lender is a mortgage company who sells a loan it originates into the secondary market shortly after closing, in contrast to the lender one who holds the loan in their portfolio. Most mortgage lenders are temporary lenders.
BREAKING DOWN Temporary Lender
A temporary lender is a mortgage lender who originates a loan and then sells the loan on the secondary mortgage market shortly after its creation.
To sell the mortgage on the secondary market, the temporary lender must first act as a mortgage originator. A mortgage originator works with a borrower to complete a mortgage transaction which takes place in the primary market. The primary mortgage market includes mortgage brokers, mortgage bankers, credit unions and banks.
In the primary market, mortgage originators work with underwriters and loan processors until closing to leaf the mortgage through the approval process. Once a mortgage lender grants the home loan, they may sell the mortgage on the secondary mortgage market. If the mortgage lender chooses that approach, they are acting as temporary lenders.
Temporary Lenders and The Secondary Mortgage Market
When an individual buys a home and takes out a home loan, a bank or lender underwrites that note. The bank funding and servicing the loan uses its funds to issue the loan. To have the funds to continue loaning money to homebuyers, the temporary lender will sell the first loan on the secondary mortgage market.
A loan is worth more on the secondary market than the actual principal balance of the loan because of an above par interest rate. The secondary market process allows for temporary lenders to make money in three significant ways.
- They charge fees to the borrower.
- Originate loans at interest rates above par value, which allows them to sell the notes into the secondary market for a premium price.
- Temporary lenders earn a warehouse spread for the time in which they are the holder of record of the loan.
Investors can buy and sell mortgage and service rights on the secondary mortgage market. The secondary market helps provide small and mid-size banks with the funds they need to make home loans. Before the secondary market was established, only larger banks had the extensive funds necessary to provide for the life of a loan. This limited number of available banks made it more difficult for homebuyers to find mortgage lenders.
Mortgage originators, acting as temporary lenders, sell the new mortgages into the secondary market, where large aggregators package the loans into mortgage-backed securities (MBS). These MBS are offered to investors such as pension funds, insurance companies and hedge funds.
Fannie Mae is the largest and most famous of these aggregators. Its establishment created the secondary mortgage market. Fannie Mae was established by the U.S.Congress in 1938 as part of the New Deal.