Jack M. Guttentag The Mortgage Professor

Mortgage lenders comprise two very different types of institutions. The largest number of them are mortgage companies -- or, as they prefer to be called, mortgage banks. Mortgage banks are state-chartered temporary lenders who must sell the loans they originate because they do not have the long-term funding needed to hold them permanently.

Mortgage banks borrow large amounts, but only for the short periods that they must hold mortgages prior to their sale. The unsold mortgages serve as collateral for these loans. As the mortgages are sold, the loans are repaid.

Mortgage bankers need very little capital because they have excellent collateral to secure the short-term loans they need to operate. To hold mortgages permanently would require long-term funding sources, which in turn would require much more capital. That is a different business.

While mortgage banks always sell the mortgages they originate, they may retain the servicing under contract with the buyer. Where servicing is retained, borrowers continue to deal with the same firms that loaned them the money in the first place.

Over the years, however, servicing has become quite concentrated among larger firms, and most mortgage banks today no longer service mortgages. They are strictly in the mortgage-origination business. The upshot is that borrowers who take loans from mortgage banks rarely have their loans serviced by the same firm.

The second type of mortgage lender is the depository institution: commercial banks, savings and loan associations, savings banks, and credit unions. These institutions are chartered by both the federal and state governments to provide a wide variety of financial instruments to consumers and businesses, including deposits or deposit-type instruments, and many types of loans, including home mortgages. Among these groups, only savings and loan associations have viewed themselves historically as being primarily home mortgage lenders -- and since being badly burned in this market in the 1980s, their commitment today is not nearly as strong as it used to be.

Depository institutions have the capacity to hold mortgages permanently in their portfolios if they want to, and some do. They have more capital than mortgage banks, and deposits typically provide a more or less stable funding source. But depositories can also sell mortgages in the secondary market, the same way that mortgage banks do, if the mortgages they write don't fit into their portfolio strategies.

Many depositories have a general policy of holding any adjustable-rate mortgages (ARMs) that they write but selling fixed-rate mortgages (FRMs) in the secondary market. This policy evolved after the interest rate explosion of the early 1980s, which bankrupted many savings and loans holding FRMs. In a rising rate environment, a depository's cost of funds will rise much more rapidly than the income it earns on a portfolio of FRMs.

Some borrowers, such as the one whose letter I reproduced above, are nostalgic for the old system, which existed before there were mortgage banks, when your mortgage lender was your mortgage lender until the loan was paid off. Loans were not sold, and all lenders serviced the loans they made.

Is it possible for a borrower today to find a lender who will operate that way? Such a commitment could not be made by a mortgage bank; it would have to come from a depository that serviced its own mortgages and that was prepared to give up the right to sell them.

I seriously doubt that any depository would commit to never sell its FRMs, but it is possible that they would do it for ARMs. The marketing possibilities are certainly intriguing. Here are some un-copyrighted tag lines: "We are your lender for life, guaranteed." "We don't abuse customers we plan to keep." "We believe in long-term relationships, not casual encounters."

Borrowers were never consulted about the changes in industry practice that resulted in their being thrust into long-term business relationships with firms they did not select. There were side benefits to these changes, of course, including much greater competition for loans and easier lending terms. Still, it would be good if borrowers could choose a lender for life, even at a slightly higher price, and even if they have to take an ARM.

Right now, they have no such choice.