MORTGAGE BANKING

Sometimes known as mortgage companies or mortgage dealers, mortgage bankers are dealers in residential, commercial, apartment, condominium, mobile home, and special-purpose property mortgages, in general they are intermediaries among real estate purchasers using debt financing and vectors desiring mortgages or mortgage-backed securities. Mortgage bankers act primarily as a conduit between real estate borrowers and long-term lender.
    The need for mortgage intermediaries is fundamental, and mortgage bankers trace their domestic heritage to the farm mortgage companies that moved capital into the fertile western farms in the 1850s and that fueled the speculative land boom in the 1920s. a dramatic transformation in residential real estate financing followed the financial market collapse in 1929. As the 1929 stock market collapse spread to mortgage institutions, the frequency of mortgage foreclosures increased and the public demand for foreclosure relief grew more insistent. Mortgage moratoriums were in effect in five states by March 1933. After closing banks temporarily for a “bank holiday,” state legislatures across the country rushed to pass mortgage relief acts. On the national level, the federal government sought to induce flagging construction with the National Housing Act of 1934, establishing the Federal Housing Administration insurance program.
    Housing demand remained soft in the 1930s, in spite of governmental programs, and did not revive until after World War II. After a decade of modest building and the initiation of mortgage guarantee programs by the Veteran’s Administration (VA) and the Federal Housing Administration (FHA), the foundation was laid for a burgeoning national mortgage market. With the federal insurance programs, more borrowers qualified for high loan to value mortgages than would qualify for conventional mortgages. The VA and FHA offered mortgage lenders a standardized security, insured by an agency of the federal government, and issued by approved borrowers. Funds could flow easily across state borders and into capital deficit localities. The real estate mortgage was released from being a strictly local arrangement to become a nationally traded security. Although the mortgage market continues to be confined to the local market area of the lending institution, creation of standardized mortgage loan instruments, mortgage loan insurance, and national mortgage loan markets have expanded the geographical scope of mortgage intermediation in the United States financial markets. The mortgage banking industry currently lends approximately $8 billion to the housing industry at any one time, and it transacts an annual volume many times this amount.

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INVESTMENT BANKING SUMMARY

Investment bankers function as intermediaries between providers and users of capital by their activity in the market for new security issues as well as intermediating between investors in the remarketing of existing securities in the secondary markets.
    In the new issues market, the functions of the investment bankers include the negotiations and activities to make new securities acceptable in the market place (origination), the actual purchase of the new security from the issuer at a guaranteed price (underwriting), and the sale of the new security to the investing public through an underwriting syndicate (distribution).
    The investment banker also functions as an investment broker-dealer in the secondary securities market. The secondary market comprises organized exchanges and the over-the-counter market as well as the informal third and fourth markets where transactions are not brought to the organized markets.
    The broker-dealers are compensated for their intermediation activities in the secondary markets by the receipt of commission charges that are negotiated between brokers and their customers. Empirical study has shown that the commission charges are subject to economies for larger share volume and higher price stock transactions. Since income is based upon transactions volume and expenses involve large amounts of fixed costs for office and electronic equipment, brokerage firms experience great variation in earnings from year to year.

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