What is ‘Temporary Lender’
A temporary lender is a mortgage company that sells the loans it originates into the secondary market shortly after closing, as opposed to holding the loans in their portfolio. Most mortgage lenders are temporary lenders.
BREAKING DOWN ‘Temporary Lender’
A temporary lender is a mortgage lender that originates a loan and then sells the loan on the secondary mortgage market shortly after its creation.
In order 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; this 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 can sell the mortgage on the secondary mortgage market. If the mortgage lender chooses to do that, 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 loan. The bank funding and servicing the loan uses its own funds to issue the loan, so in order to continue loaning money to homebuyers, they sell the first loan on the secondary mortgage market. Investors buy and sell mortgage and servicing rights on the secondary mortgage market. The secondary market helps provide small and mid-size banks with the funds to make home loans. Before the secondary market was established, only larger banks had the extensive funds to provide the funds for the life of the loan. This 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 and sell the mortgage-backed security to investors such as pension funds, insurance companies and hedge funds. Fannie Mae is the largest and most famous of these aggregators and created the secondary mortgage market when it was established by the U.S.Congress in 1938 as part of the New Deal, making it possible for smaller and mid-size banks and other loan originators to issue housing loans.
The process allows for temporary lenders make money in three significant ways. First, they charge fees to the borrower. Second, they originate loans at interest rates above par value, which allows them to sell the loans into the secondary market for a premium price. The loan is worth more in the secondary market than the actual principal balance of the loan because of that above par interest rate. Third, depending upon the slope of the yield curve, temporary lenders earn a warehouse spread for the time in which they are the holder of record of the loan.