We’ve talked a lot about how it makes sense for an originator to latch onto a commercial or federally chartered national bank.  Net worth, state licensing preemption and funding liquidity are just a few of the underlying motivations.  It also makes a lot sense for a  bank to have a mortgage operation, either as a subsidiary or as a division. 

The reason is simple: Banks now have limited opportunities to generate reasonable spreads from the rate they earn on their assets over the rate they pay on their liabilities. That is unless they take on added risks and we all know this is not in the cards for most bankers. 


There are a few good reasons for a bank to consider operating a mortgage operation:

  1. Impressive warehouse spreads.  A bank can provide the warehouse facility to the mortgage operation and earn the note rate until the loan is purchased by secondary market investors.  If the cost of funds is 1% and the note rate is 4.75%, the bank can earn 3.75% during the warehouse period.  In addition, this is a revolving line that can be turned 2-3 times per month.
  2. Fee Income:  The bank can generate fee income from origination and secondary market activities (there are sales and operation’s costs associated with operating a mortgage bank).  A well run mortgage bank today can earn in excess of 30-40 basis points of pre-tax earnings. 
  3. Access to New Customers:  The origination activities of a mortgage bank can generate cross selling opportunities for the bank.  Other financial services such as checking accounts, credit cards and CDs can be pitched to mortgage banking customers