Accountants' Handbook, Volume Two, Special Industries and Special Topics, 12th Edition

30.3 Mortgage Banking Activities

(a) Overview

Mortgage banking activities primarily include the origination or purchase, sale, and subsequent long-term servicing of mortgage loans. Mortgage loans are originated or purchased from a variety of sources including applications received directly from borrowers (retail originations) and loans acquired from mortgage brokers or other mortgage lenders (wholesale or correspondent purchases). These loans are then generally sold through the secondary mortgage market to permanent investors or retained by the lender in its own loan portfolio. Typically, loans are sold to permanent investors through conduits, although mortgage loans can also be sold through whole loan sales directly to investors or through public or private securitizations completed by the mortgage banker. Secondary market conduits include government-sponsored entities such as Government National Mortgage Association (GNMA), Federal National Mortgage Association (FNMA), and Federal Home Loan Mortgage Corp (FHLMC), and other private companies involved in the acquisition and securitization of mortgage loans. Loan servicing includes the collection, recording, and remittance to investors of monthly mortgage payments, the maintenance of records relating to the loans, and the management of escrows for taxes and insurance. In return for performing these servicing activities, mortgage servicers earn a fee, which is usually a percentage of the loan's unpaid principal balance. Profits are ...