Mortgage Brokers Vs. Banks
By John Kim
comes
When it to searching for the right kind of mortgage to
meet your needs, you will probably come across a decision about
who you should borrow from: Do mortgage brokers or banks make
better lenders?
A mortgage broker is a mediator that facilitates the process of
acquiring a mortgage for individuals as well as businesses.
Essentially, they are like home loan supermarkets. Their broad
access to lenders as well as their wide offering of various
programs makes them a convenient source of help for many
borrowers. If you have less-than-perfect credit or are in
unusual circumstances, mortgage brokers can still find you the
type of funding you need. Mortgage brokers will charge a
broker’s fee, which you should ask about and take into account
when calculating your initial payments.
Mortgage brokers will typically originate, process, and pass
the loan on to a lender who will subsequently sell it to an
investor. They take commission and will have higher closing
fees. Beware of gouging, as brokers have full discretion on how
much they want to charge the borrower for processing the
documents necessary for the loan.
Today, about 20,000 mortgage brokerage operations account for
more than 80% of mortgages are issued by mortgage brokers in the
U.S. The convenience and resources they offer to borrowers is
the key to their popularity.
The term “mortgage banker” refers either to an individual loan
officer who works at a bank or to the bank itself. They
specialize in originating mortgages and selling them to
investors and continue to service them. Both the origination and
servicing processes require fees, which are the two primary
sources of income for mortgage banks.
A key difference between mortgage banks and mortgage brokers is
that banks have more of a standardized and set approach to
setting fees. Bankers are told what fees to charge and are told
not to stray away from them. This allows for more stability and
prevents the borrower from being surprised when it comes to
discovering what the fees for the home loan will be.
Now the question is which is the better option? The answer is
quite simple: Whoever gets you the better deal. It should be
noted that while some borrowers enjoy the comfort and help of
having a mortgage banker see them through the life of their loan
(though not all do), while others do not mind either way. This
discernment, along with a thorough comparison of deals that you
can get from mortgage brokers and bankers, should give you a
fairly clear idea of which path to take.
Friday, November 7, 2008
banks
Banks – Why So Many?
By Bob Clifford
Does it seem like there is a bank on every corner? It does to
me. Everyone needs a bank and everyone’s banking needs are
different thus we see new community banks, state chartered banks
and nationally chartered banks doting our landscape. Banking is
a very personal activity and people constantly look for an
environment that they feel comfortable in. The result seems to
be another new branch of an existing bank or a new bank opening
up on your corner.
What are your banking hot buttons? Is it the convenience,
consistent customer service, familiarity with staff, product
selection or maybe rates. Usually there are a combination of
factors that will lead you to develop relations with a bank. If
all banks met all needs there probably would only be about eight
large banks in the country.
Banking can be a profitable business. It is federally and state
regulated so it gives a certain sense of security to investors.
The risk level is reduced so there always seems to be a good
supply of investors available for start-up banks. Two key
factors in the success of that new bank opening up down the
street from you may be the leadership of that bank such as a CEO
who is well known, respected and has a long-term successful
community presence. The second factor would be a board of
directors and investors that have a strong net worth, believe in
the mission of the bank and make a personal significant
investment. Staying power is key.
Many businesses and individuals follow their banker from bank
to bank. Many times the path will lead to an existing or new
community or small regional bank. Clients’ desire for personal
banking relationships continues to drive the opening of the new
neighborhood bank. The advances in technology have allowed the
new banks to play with the big boys and deliver the type of
services that are being demanded by their clients. An example
would be on-line banking which reduces the inconvenience issue.
There is a tremendous amount of wealth in the United States.
That fact will continue to drive the expansion of existing banks
and start up of new ones. The owners of that wealth constantly
look for a combination of factors from their bank such as
understanding their needs and meeting their service
expectations. Demand will continue to drive the supply of new
banks. Hence, a "bank on every corner".
By Bob Clifford
Does it seem like there is a bank on every corner? It does to
me. Everyone needs a bank and everyone’s banking needs are
different thus we see new community banks, state chartered banks
and nationally chartered banks doting our landscape. Banking is
a very personal activity and people constantly look for an
environment that they feel comfortable in. The result seems to
be another new branch of an existing bank or a new bank opening
up on your corner.
What are your banking hot buttons? Is it the convenience,
consistent customer service, familiarity with staff, product
selection or maybe rates. Usually there are a combination of
factors that will lead you to develop relations with a bank. If
all banks met all needs there probably would only be about eight
large banks in the country.
Banking can be a profitable business. It is federally and state
regulated so it gives a certain sense of security to investors.
The risk level is reduced so there always seems to be a good
supply of investors available for start-up banks. Two key
factors in the success of that new bank opening up down the
street from you may be the leadership of that bank such as a CEO
who is well known, respected and has a long-term successful
community presence. The second factor would be a board of
directors and investors that have a strong net worth, believe in
the mission of the bank and make a personal significant
investment. Staying power is key.
Many businesses and individuals follow their banker from bank
to bank. Many times the path will lead to an existing or new
community or small regional bank. Clients’ desire for personal
banking relationships continues to drive the opening of the new
neighborhood bank. The advances in technology have allowed the
new banks to play with the big boys and deliver the type of
services that are being demanded by their clients. An example
would be on-line banking which reduces the inconvenience issue.
There is a tremendous amount of wealth in the United States.
That fact will continue to drive the expansion of existing banks
and start up of new ones. The owners of that wealth constantly
look for a combination of factors from their bank such as
understanding their needs and meeting their service
expectations. Demand will continue to drive the supply of new
banks. Hence, a "bank on every corner".
banks
Banks – Why So Many?
By Bob Clifford
Does it seem like there is a bank on every corner? It does to
me. Everyone needs a bank and everyone’s banking needs are
different thus we see new community banks, state chartered banks
and nationally chartered banks doting our landscape. Banking is
a very personal activity and people constantly look for an
environment that they feel comfortable in. The result seems to
be another new branch of an existing bank or a new bank opening
up on your corner.
What are your banking hot buttons? Is it the convenience,
consistent customer service, familiarity with staff, product
selection or maybe rates. Usually there are a combination of
factors that will lead you to develop relations with a bank. If
all banks met all needs there probably would only be about eight
large banks in the country.
Banking can be a profitable business. It is federally and state
regulated so it gives a certain sense of security to investors.
The risk level is reduced so there always seems to be a good
supply of investors available for start-up banks. Two key
factors in the success of that new bank opening up down the
street from you may be the leadership of that bank such as a CEO
who is well known, respected and has a long-term successful
community presence. The second factor would be a board of
directors and investors that have a strong net worth, believe in
the mission of the bank and make a personal significant
investment. Staying power is key.
Many businesses and individuals follow their banker from bank
to bank. Many times the path will lead to an existing or new
community or small regional bank. Clients’ desire for personal
banking relationships continues to drive the opening of the new
neighborhood bank. The advances in technology have allowed the
new banks to play with the big boys and deliver the type of
services that are being demanded by their clients. An example
would be on-line banking which reduces the inconvenience issue.
There is a tremendous amount of wealth in the United States.
That fact will continue to drive the expansion of existing banks
and start up of new ones. The owners of that wealth constantly
look for a combination of factors from their bank such as
understanding their needs and meeting their service
expectations. Demand will continue to drive the supply of new
banks. Hence, a "bank on every corner".
By Bob Clifford
Does it seem like there is a bank on every corner? It does to
me. Everyone needs a bank and everyone’s banking needs are
different thus we see new community banks, state chartered banks
and nationally chartered banks doting our landscape. Banking is
a very personal activity and people constantly look for an
environment that they feel comfortable in. The result seems to
be another new branch of an existing bank or a new bank opening
up on your corner.
What are your banking hot buttons? Is it the convenience,
consistent customer service, familiarity with staff, product
selection or maybe rates. Usually there are a combination of
factors that will lead you to develop relations with a bank. If
all banks met all needs there probably would only be about eight
large banks in the country.
Banking can be a profitable business. It is federally and state
regulated so it gives a certain sense of security to investors.
The risk level is reduced so there always seems to be a good
supply of investors available for start-up banks. Two key
factors in the success of that new bank opening up down the
street from you may be the leadership of that bank such as a CEO
who is well known, respected and has a long-term successful
community presence. The second factor would be a board of
directors and investors that have a strong net worth, believe in
the mission of the bank and make a personal significant
investment. Staying power is key.
Many businesses and individuals follow their banker from bank
to bank. Many times the path will lead to an existing or new
community or small regional bank. Clients’ desire for personal
banking relationships continues to drive the opening of the new
neighborhood bank. The advances in technology have allowed the
new banks to play with the big boys and deliver the type of
services that are being demanded by their clients. An example
would be on-line banking which reduces the inconvenience issue.
There is a tremendous amount of wealth in the United States.
That fact will continue to drive the expansion of existing banks
and start up of new ones. The owners of that wealth constantly
look for a combination of factors from their bank such as
understanding their needs and meeting their service
expectations. Demand will continue to drive the supply of new
banks. Hence, a "bank on every corner".
banks
Superficially, banking appears to be a commodity business. In
fact, it appears to be a particularly poor commodity business,
because capacity is not constrained by the need to invest in a
substantial physical infrastructure. True, whatever investments
are made in tangible assets are usually intended as a means to
acquire more intangible assets; however, a branch is hardly
comparable to an oil well.
A bank’s ability to lend money (and thus produce income) is not
completely and inextricably linked to the size of its deposits.
In other words, loans are the result of both a bank’s capacity
to lend money and its willingness to lend money.
It’s hard to find a parallel in tangible commodity businesses.
Theoretically, this should make little difference in the long
run. However, the lack of physical supply constraints in the
market for loans creates the possibility for large,
industry-wide mistakes. Pricing in such an industry can get very
weak at times.
There’s one catch here. The underlying assumption whenever the
commodity business label is used is that both the demand for a
product and the supply of that product are general in nature.
They can’t be specific, because that would destroy the
involuntary nature of pricing within the industry.
For example, if all pineapples were unbranded, identically
tasting fruits the demand side of the business would meet the
requirement for a commodity business. However, if most
pineapples take eighteen months to grow, but there is one
magical plantation where the fruit develops fully in just three
months, the supply side of the business does not meet the
requirement for a true commodity business. The magical pineapple
plantation would produce six times as much fruit per acre and
thus the plantation owner would be able to undercut his
competitor’s prices. He would earn extraordinary profits,
because the return on capital in his business would be much
higher than that of the industry as a whole.
What does this fairy tale have to do with banking? It suggests
extraordinary profits can come from having “sticky” customers or
lower costs. The lower costs needn’t be the result of lower
marginal inputs. The magical pineapple plantation turned the
crop over faster; it didn’t need access to below market prices
for any of its inputs.
The same is true of a grocery store. Two stores that buy and
sell cans of soup at the same exact prices may have very
different returns on capital, if one of the stores turns over
its inventory more quickly, because the fixed costs will be
spread over a larger number of sales.
How does this relate to banking? While a quick turnover (or
some other form of operational efficiency) is the most common
reason for one firm’s unusual profitability in a commodity type
business, there are other ways to earn extraordinary profits.
Some of them are conceptually quite similar to the idea of
owning a magical, one of a kind pineapple plantation. In such
situations, the product appears the same to the consumer; but,
the producer is actually unique (or at the very least special).
All of this helps to explain why some banks are more profitable
than others. However, it doesn’t address the question posed by
Morningstar. So, do all banks have moats?
Before answering that question, it might be best to ask under
what circumstances all banks could have moats. What could
insulate an entire industry from the ravages of competition?
This is the question I discussed in the podcast episode: “Nature
of Competition”. Why can some industries support plenty of
profitable players, while others merely support a handful, one,
or none?
Switching costs are one of the most commonly cited reasons for
a wide moat. I think the matter is actually a lot more
complicated than that. Financially prohibitive switching costs
do create moats. However, most wide-moat companies don’t have
truly prohibitive switching costs. What they do have is a
situation in which it makes little sense to switch to a
competitor and/or a tendency for their customers to not actively
seek to learn more about competing products.
Where the cost of a product is particularly small per cash
outlay, consumers are usually apathetic about seeking out
alternatives. The key here is that the amount has to seem very
small to the buyer at the time the purchase is made.
If you buy a cup (or two) of coffee every morning, it does not
occur to you that you are spending hundreds or thousands of
dollars a year on that coffee and that you could save a lot of
money by buying the cheaper alternative. However, if you’re
buying an appliance or piece of furniture the difference is
immediately obvious and thus price is a major concern.
Generally, if a product can be sold over and over again at a
very low price per transaction, profits will be higher, because
the buyer will not make much of an effort to compare prices.
Likewise, if a customer is billed for a variety of different
products or services each amounting to only a small charge, the
customer’s price awareness will be lower than if the charges
were combined and listed as a single item.
Where price visibility, comparability, or immediacy is reduced,
greater profitability becomes more likely. People are very
sensitive to price differences between large, juxtaposed
numbers. If tomorrow the federal government prohibited gas
stations from posting their prices per gallon, drivers would
begin to become less concerned about gas prices.
There would be an uproar at first. But, over the years, gas
prices would receive less and less news coverage and would fall
off the list of consumer concerns. Obviously, a crude oil price
quoted in dollars also contributes to price awareness. But, the
point remains the same. Where prices are less visible, price
competition is less fierce.
Compounding is a great way to exploit a lack of price
awareness. The differences between various interest rates always
seem small when placed side by side. Over time, these
differences become quite large. However, the fact that no large
differences are clearly visible at the time a decision is made
about where to bank helps to minimize price competition between
banks.
It also increases the relative importance of other aspects of
banking like convenience and service. Usually, the cost to make
a good impression is very low compared to the size of the assets
that could result from attracting more deposits.
On the other hand, the importance of making a good second and
third impression is minimal. Once a depositor uses a particular
bank, they are unlikely to visit competitors. When they need to
do their banking, they will go directly to their own bank (or
its website).
This is very different from the environment found in most
consumer businesses. Packaged goods companies have their
products placed next to their competitor’s products on store
shelves. Retail stores are usually clustered. Whether they are
located in malls or in free standing buildings, it’s a safe bet
the customer has to pass at least one competing retail outlet to
shop at their favorite location. In most cases, the other
location won’t compete in every category as the customer’s
favorite store; but, it will offer at least some competing
products. As a result, the shopper is offered the option of
switching every time she makes the trip.
When someone walks into a bank, it’s usually their own bank.
They don’t have any use for other banks (after all, their money
isn’t there). The cost of switching banks isn’t very high.
However, the amount of active effort required to make the switch
is substantial.
Switching banks isn’t as easy as switching toothpaste. But,
more importantly, the alternative isn’t as obvious in banking.
We all know other banks exist. But, unless we have a reason to
consider switching from our current bank, we don’t even bother
to check out the competition.
The result is a very narrow, very real moat.
fact, it appears to be a particularly poor commodity business,
because capacity is not constrained by the need to invest in a
substantial physical infrastructure. True, whatever investments
are made in tangible assets are usually intended as a means to
acquire more intangible assets; however, a branch is hardly
comparable to an oil well.
A bank’s ability to lend money (and thus produce income) is not
completely and inextricably linked to the size of its deposits.
In other words, loans are the result of both a bank’s capacity
to lend money and its willingness to lend money.
It’s hard to find a parallel in tangible commodity businesses.
Theoretically, this should make little difference in the long
run. However, the lack of physical supply constraints in the
market for loans creates the possibility for large,
industry-wide mistakes. Pricing in such an industry can get very
weak at times.
There’s one catch here. The underlying assumption whenever the
commodity business label is used is that both the demand for a
product and the supply of that product are general in nature.
They can’t be specific, because that would destroy the
involuntary nature of pricing within the industry.
For example, if all pineapples were unbranded, identically
tasting fruits the demand side of the business would meet the
requirement for a commodity business. However, if most
pineapples take eighteen months to grow, but there is one
magical plantation where the fruit develops fully in just three
months, the supply side of the business does not meet the
requirement for a true commodity business. The magical pineapple
plantation would produce six times as much fruit per acre and
thus the plantation owner would be able to undercut his
competitor’s prices. He would earn extraordinary profits,
because the return on capital in his business would be much
higher than that of the industry as a whole.
What does this fairy tale have to do with banking? It suggests
extraordinary profits can come from having “sticky” customers or
lower costs. The lower costs needn’t be the result of lower
marginal inputs. The magical pineapple plantation turned the
crop over faster; it didn’t need access to below market prices
for any of its inputs.
The same is true of a grocery store. Two stores that buy and
sell cans of soup at the same exact prices may have very
different returns on capital, if one of the stores turns over
its inventory more quickly, because the fixed costs will be
spread over a larger number of sales.
How does this relate to banking? While a quick turnover (or
some other form of operational efficiency) is the most common
reason for one firm’s unusual profitability in a commodity type
business, there are other ways to earn extraordinary profits.
Some of them are conceptually quite similar to the idea of
owning a magical, one of a kind pineapple plantation. In such
situations, the product appears the same to the consumer; but,
the producer is actually unique (or at the very least special).
All of this helps to explain why some banks are more profitable
than others. However, it doesn’t address the question posed by
Morningstar. So, do all banks have moats?
Before answering that question, it might be best to ask under
what circumstances all banks could have moats. What could
insulate an entire industry from the ravages of competition?
This is the question I discussed in the podcast episode: “Nature
of Competition”. Why can some industries support plenty of
profitable players, while others merely support a handful, one,
or none?
Switching costs are one of the most commonly cited reasons for
a wide moat. I think the matter is actually a lot more
complicated than that. Financially prohibitive switching costs
do create moats. However, most wide-moat companies don’t have
truly prohibitive switching costs. What they do have is a
situation in which it makes little sense to switch to a
competitor and/or a tendency for their customers to not actively
seek to learn more about competing products.
Where the cost of a product is particularly small per cash
outlay, consumers are usually apathetic about seeking out
alternatives. The key here is that the amount has to seem very
small to the buyer at the time the purchase is made.
If you buy a cup (or two) of coffee every morning, it does not
occur to you that you are spending hundreds or thousands of
dollars a year on that coffee and that you could save a lot of
money by buying the cheaper alternative. However, if you’re
buying an appliance or piece of furniture the difference is
immediately obvious and thus price is a major concern.
Generally, if a product can be sold over and over again at a
very low price per transaction, profits will be higher, because
the buyer will not make much of an effort to compare prices.
Likewise, if a customer is billed for a variety of different
products or services each amounting to only a small charge, the
customer’s price awareness will be lower than if the charges
were combined and listed as a single item.
Where price visibility, comparability, or immediacy is reduced,
greater profitability becomes more likely. People are very
sensitive to price differences between large, juxtaposed
numbers. If tomorrow the federal government prohibited gas
stations from posting their prices per gallon, drivers would
begin to become less concerned about gas prices.
There would be an uproar at first. But, over the years, gas
prices would receive less and less news coverage and would fall
off the list of consumer concerns. Obviously, a crude oil price
quoted in dollars also contributes to price awareness. But, the
point remains the same. Where prices are less visible, price
competition is less fierce.
Compounding is a great way to exploit a lack of price
awareness. The differences between various interest rates always
seem small when placed side by side. Over time, these
differences become quite large. However, the fact that no large
differences are clearly visible at the time a decision is made
about where to bank helps to minimize price competition between
banks.
It also increases the relative importance of other aspects of
banking like convenience and service. Usually, the cost to make
a good impression is very low compared to the size of the assets
that could result from attracting more deposits.
On the other hand, the importance of making a good second and
third impression is minimal. Once a depositor uses a particular
bank, they are unlikely to visit competitors. When they need to
do their banking, they will go directly to their own bank (or
its website).
This is very different from the environment found in most
consumer businesses. Packaged goods companies have their
products placed next to their competitor’s products on store
shelves. Retail stores are usually clustered. Whether they are
located in malls or in free standing buildings, it’s a safe bet
the customer has to pass at least one competing retail outlet to
shop at their favorite location. In most cases, the other
location won’t compete in every category as the customer’s
favorite store; but, it will offer at least some competing
products. As a result, the shopper is offered the option of
switching every time she makes the trip.
When someone walks into a bank, it’s usually their own bank.
They don’t have any use for other banks (after all, their money
isn’t there). The cost of switching banks isn’t very high.
However, the amount of active effort required to make the switch
is substantial.
Switching banks isn’t as easy as switching toothpaste. But,
more importantly, the alternative isn’t as obvious in banking.
We all know other banks exist. But, unless we have a reason to
consider switching from our current bank, we don’t even bother
to check out the competition.
The result is a very narrow, very real moat.
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