Question

Savings Institutions, Credit Unions, and Finance Companies have been successful as “niche lenders,” that is, specializing in one or more specific areas of lending.  
           A. In what lending area(s) does each specialized?

           B. What advantages and disadvantages does each have compared to Commercial Banks?

Answer 1

A.) Due to the demand for real estate loans to people who are not American citizens, some niche lenders offer foreign national loans. Foreign national loans are similar to standard U.S. loans, except that the required down payment is generally larger—about 30%. A foreign national is not a U.S. citizen, but is temporarily residing in the United States. For tax reporting purposes, foreign nationals are issued individual tax identification numbers rather than social security numbers.

Usually niche lenders work with foreign nationals because they do not have social security numbers and their American credit history may be minimal or nonexistent.

Private individuals are non-fiduciary lenders who offer an alternative source of financing. They participate in financing real estate by carrying back loans on their own property and by investing in security instruments (mortgages and deeds of trust).

Sellers are a major source of junior loans to buyers. Sellers may finance a portion of the purchase with a carryback loan. Sellers often require larger down payments than institutional lenders because of the higher risk normally associated with this type of loan.

There is a niche for everyone in the mortgage loan business. A mortgage broker originates loans with the intention of brokering them to lending institutions that have a wholesale loan department. Mortgage brokers are third party originators (TPOs) and not lenders. Mortgage brokers qualify borrowers, take applications, and send completed loan packages to the wholesale lender. The lender approves and underwrites loans and funds them at closing. Usually, mortgage brokers are not authorized to provide final loan approval and they do not disburse money. The loan is funded in the name of the lender and not the mortgage broker. The mortgage broker does not service the loan and has no other concern with it once it is funded.
Mortgage brokers coordinate the loan process between the borrower and the wholesale lender and charge an origination fee to provide this service to the borrower. If the lender wants to make 2 points on the loan (2% of the loan amount), the lender charges the points to the borrower and discloses the amount as points on the Loan Estimate or Good Faith Estimate (GFE). A mortgage broker must disclose the same fee on the GFE as a broker fee.
Private investors who are looking for a higher rate of return than what is available in a bank certificate of deposit may buy and sell existing short-term junior loans through a mortgage company. Their main objectives are the safety of the loan and a high return on their investment.