The Future of Mortgage Brokers April 30, 2008
The reputation of mortgage brokers as a group has been tarnished by local and nationwide “brokers gone wild” stories that don’t need to be rehashed here. We all know there are some exceptionally fine mortgage brokers who perform exemplary for their clients. This blog article is not another attempt to throw mortgage brokers under the bus but to ponder the future of the mortgage broker.
We all have witnessed the closure of over 254, and counting, wholesale lenders. Brokers who are not actively thinking about the possibilities of more wholesale lines disappearing must still be living in denial. From the CR4RE Newsletter:
“Depository lenders who wish to commit portfolio dollars to keeping their origination operations going will do so only in the retail channel. This not only cuts loose brokers; it cuts loose a lot of correspondent lending in which smaller depositories (like community banks and credit unions) have been off-loading mortgages onto the big aggregators (who are currently shutting down their correspondent operations). There’s never been any upside of carrying a wholesale operation in a downturn—the whole point of wholesale lending is that it can be thrown off in a downturn, since brokers aren’t your employees—but it has never made less sense than it does today to stay in that channel. This has “tightening” effects in and of itself, beyond guideline or price tightening: more loans are being made by an originator who has some stake in the outcome (not as much as they ought, but more than a broker does).”
As more wholesalers shut down, some mortgage brokers and LOs will give up and try to obtain work at a bank or credit union where they may find the culture radically different. This could turn out to be a very good fit for some folks.
Some mortgage brokers will believe that the market will come back (mini refi booms tend to fuel that belief) but we are already hearing now that not all these inquiries and refi applications will translate into closed deals. Some customers simply no longer qualify due to continuous tightening of underwriting guidelines. Beyond the conforming purchase money loans and refis, there are three growth areas that are easy to see: FHA, hard money lending, and working with investors.
Mortgage brokers with correspondent lines of credit, with FHA approval in place, with in-house underwriting, compliance, auditing, and training all in place will be able to weather the storm and I predict the cream of the crop will survive. The key will be how well capitalized they are against lender buyback provisions, and if they control and maintain their own database of existing clients. Mortgage brokers who have largely left the client database maintenance in the hands of their LOs might lose access to those (hopefully very well served) clients if their loan originators cannot make the transition from writing, say 25 slam dunk stated income refis per month to 3 FHA deals a month.
Brokers who rely mainly on radio advertising and direct mail may keep the phones ringing with incoming leads. However, brokers are casting a very wide net at a relatively high cost. The ROI must be justified and that may mean cutting staff or giving fewer leads to fewer LOs, lowering LO compensation split, or pushing the lead cost onto the LO.
We would all hope that consumers are starting to wise up about not responding to mortgage spam, unsolicited mortgage offers that sound too good to be true, and lead generation sites. I recently noticed that lowermybills.com took a step into the gutter and moved from the world of deceptive banner ads to my junk mail folder.
FHA lending means making a commitment to compliance and training. This takes time, money, and an internal motivation to transform a brokerage from small to medium and actually hire real people to do the job of “compliance officer” and pay taxes on your W-2 employees. Not all brokers will make the decision to seek FHA approval. “Hey, conforming loan limit increases are going to be approved! Why bother with FHA?” In the future world of the mortgage broker that is already here, underwriting guidelines are nowhere near the good old days nor will we find them at the conforming lenders anytime soon. That leaves hard money.
Another growth area for mortgage brokers that do not want to seek out FHA approval is to become experts at finding private financing or hard money lending for their clients. Yes interest rates are going to be higher and documentation will be heavier. Yes, loan-to-value ratios will be tougher and appraisers aren’t as easily threatened with retaliation if values aren’t met. However, mortgage brokers who want to specialize in finding hard money or private money for consumers who do not meet FHA or GSE conforming guidelines can create a niche market for themselves and grow their business. This is a good opportunity for brokers who do not want to compete in the conforming market. Caveat: Make sure you have a competent attorney on retainer who is familiar with the Consumer Loan Law, Usury Law, and, well, everything in here. Trust me on this one.
Both FHA and hard money lending will require an investment in regulatory education. This means having systems put into place to make sure your loan originators are actually following state and federal lending laws on a daily basis and not just saying “This is HOEPA, meeting adjourned.” This means moving beyond just giving LOs a laptop with mortgage software and a lead sheet. Not all brokers are positioned to make this shift.
Also from the CR4RE Newsletter:
“The upside for the serious real estate investor is the elimination of unqualified buyer competition…smaller lenders with better service provision and local smarts may again be able to compete on rate. The bad news is that no one will compete on product: you’ll likely get the same terms offered from any lender you choose, unless you’re willing to pay a hefty premium for something “out of the box.”
Working with real estate investors is another niche market for mortgage brokers as a future growth area for the end of 2009 and 2010 as we have yet to see home prices bottom out.
We are all living through changes of historic proportion in the mortgage market. The future of today’s mortgage broker depends on the broker’s ability to adapt to what lies ahead. With heavy competition from banks in the conforming loan market, brokers who can reach consumers in small communities that banks can’t reach, will still be able to compete effectively for conforming market share. FHA lending, private money and investors are all growth areas for brokers.
What has been most challenging for me is to watch it all happen in slow motion. We know what’s coming. The waiting is the hardest part. Here’s a little Tom Petty for you.
Note: You can access the full January edition of the CR4RE newsletter at no cost here, (link opens PDF) which is written by Calculated Risk and Tanta. Quotes in this blog article are used with their permission. Annual subscription is $60.
Sphere: Related Content- Posted in : Mortgage and Lending
- Author : Jillayne Schlicke
Comments»
[...] The Future of Mortgage Brokers, by Jillayne Schlicke. [...]
Great article, Jillayne! And great tune.
I remember reading that how things actually work where the rubber meets the road is that those with great credit and seeking a conforming loan generally do a bit better with their rate (all else equal) going through a broker, whereas those with bad credit and/or seeking a hinky loan do better with a bank. Basically the subprime were subsidizing the conforming loans done with a broker.
Do you expect this to continue to be true, assuming brokerages survive?
How about correspondent lenders? Was this true in the past, and do you think it will continue to be true?
Jillayne;
The nostalgia was good balm for the hard medicine prescribed…it was great to see a young Tom Petty again.
I hope you are not right…but hope is not a strategy.
What I have always valued in the mortgage broker role is the freedom to do the right thing, to be able to represent my client, to give them an edge over the banks.
If the major Fannie Freddie lenders ALL decide to exit the wholesale channel, as you seem to suggest they logically will do, the wholesale business model is largely done. We hear lenders pledging allegiance to the wholesale channel (most recently Wells Fargo), but those pledges have been rescinded in the past (WAMU).
You certainly know how to get a converstion started…not sure it’s going to be a pleasant conversation….
More later…
Hi biliruben,
I love Tom Petty. Saw him here in Seattle with The Replacements as the opening act. I also love the tune “American Girl” but every time I hear it, I flash back to the scene from Silence of the Lambs with Catherine singing that song just before Jamie Gumb kidnaps her in the van. “You need some help with that, mister?”
I imagine that we could cast wholesale lenders in the Jamie Gumb part and the brokers as Catherine. Lenders can, as CR and Tanta pointed out in their January newsletter, kidnap the brokers and throw them down an empty well anytime they want, anytime it makes $en$e, anytime they no longer need brokers.
However, I believe that brokers will survive, just like Catherine does in the movie.
Remember how Catherine gets back in the game? She grabs Jamie’s dog, aptly named “Precious.”
Customers are precious to banks and wholesale lenders. The mortgage market works in cycles. We’re in a downward cycle now. However, the market will cycle back and banks and lenders will want to reach more precious customers in due time.
During the downward trend, existing brokers MUST adapt in order to survive (like Catherine does!) and grab FHA, hard money clients, and investors.
In answer to your question biliruben, I don’t think we can put banks and brokers at opposite ends of the playing field when it comes to finding the best rate for different quality credit. Savy consumers will be able to get a fair rate, fair fees, and good service.
The goal of the “lowest” rate is not a good goal, for that consumer, no matter what their credit score, can be easily manipulated.
Consumers should aim for fair rates and fees, coupled with honest and reliable service. Consumers can find this at a bank, broker, or credit union.
Hi Roger,
The banks and wholesalers will keep brokers in the game as long as it serves their bottom line, and not a day longer. No, wait. After all stock is sold and quarterly bonuses are paid and not a day longer.
I’m not saying all brokers will go away. Not at all. On the contrary, the future depends on how brokers adapt to the changing landscape.
Heh. I forgot that song was in Silence of the Lambs. Creepy, very suspenseful scene. My flashback moment is when Petty opened for Dylan and the Dead back in 1986, but I think that’s enough discussion of flashbacks.
Of course you are correct in your advice to consumers. If banks insist on dissing their own LOs by providing a better rate through their wholesale channels, however, shouldn’t a consumer take advantage of that, assuming one takes all steps necessary to make sure there is no manipulation and everything else is, truly, equal?
If you are deciding between working with a reputable, honest bank LO and an honest, reputable broker, a quarter, or even an 1/8 of a point could mean 10s of thousands of dollars over the life of a loan, and ignoring that, while of course taking your advice on aiming for fair rates and fees from an honest and reliable originator, seems like it would be remarkably foolish. No?
No. The reason why is because there’s an unknown factor X that cannot be controlled by the customer. That factor is called human nature. We can’t control other people, even though we’d like to believe we can just walk away to an other competing company.
At this point in history an LO operating purely in terms of self-interest will say yes to your eighth of a point lower rate, and make up the difference someplace else where you’re not looking. You may not ever spot it, but the LO got what he/she needed to get in order to make a profit on you.
The big dice roll is that yes, perhaps you’ll get lucky and wind up with a great LO, a company whose employees provide great service, the lowest rates and the lowest fees. What luck! Just like Hannibal Lecter got lucky when Chilton left a pen in his padded prison cell.
I supppose it could happen to you!
And 50% of all marriages end in divorce and some people win a little money when they go to Vegas.
I say shop the person and you will receive what’s fair, and might even get lucky.
Only shopping by rate makes you an easy Catherine.
DON’T GET IN THE VAN, Biliruben!
This is the way it is today.
In the future, it will be different. Brokers in WA State are getting ready for laws that will prescribe fiduciary duties owed to their clients. This is a radical ransformation. But we’re not there just yet. The effective date is June 12th.
This is why I believe brokers will survive. Because of the other side of human nature, the side that wants to help customers like you for a fair price. I have met some extremely good brokers. They are the ones that will remain standing. Doesn’t justice always win out in the end?
Jillayne,
You got that right! They will stay in wholesale as long as it is in their best interests.
biliruben,
There may be some truth in what you are saying, here’s my observation:
The better informed, better educated borrowers get better “deals” from both retail and wholesale, than the less informed shoppers.
Tanta states
“Retail mortgage origination is expensive and inefficient compared to wholesaling, but lenders can manage the risk and at the moment no other consideration matters much”
The increased efficiency and pricing of wholesale lending CAN be passed on to borrowers, but it does not mean that it always is.
Wholesale could beat retail in prime and subprime, and I believe largely does.
Many retailer lenders had subprime divisions (Wells WAMU, Countrywide), as the profits were too hard to pass up.
Many banks do not offer subprime, and some did not offer FHA, but more offered FHA than subprime. Many times a subprime borrower may have qualified for FHA, and the FHA loan may have been measurably better (though maybe not desired by borrower…no interest only or stated income). So, on the whole, it could be argued that a poorly qualified borrower that went to a bank would more likely get an FHA loan, while that same borrower would be more likely to get a subprime loan from the wholesale channel. No stats to back up the theory.
The only impartial large study I know of on loan costs for subprime borrowers was the 2001 Georgetown University study that concluded subprime borrowers got better deals from brokers than from retail, by about 1.13 points.
Okay. You’ve convinced me, Jillayne.
Jillayne,
I’m not so sure banks will keep brokers around…for a couple reasons.
1) brokers are a convenient scape goat for the mortgage meltdown. It’s real easy for banks (and many of the big players have done this) to shake their fingers at brokers when it is their products, their guidelines, their underwriting and their bank buying the products/programs.
2) brokers originated significantly more loans than banks. I believe that banks under-estimated consumers. They probably believed that Joe and Jill Public would go to their local branch instead of checking out a broker who would shop the loan for them. Banks have lost business to brokers.
3) big banks are too big to think clearly and react quickly. Instead of keeping brokers around, who have provided them significant revenue, they’ll chop off their nose despite their greedy face. Many will continue to blame the broker and discontinue their wholesale relationships. They’ll assume they’ll do just fine without brokers.
Who’ll lose out the most (besides the unemployed broker who’ll refuse to work for a bank after all is said and done) is the consumer. Competition keeps costs down…many many competitors will be wiped out.
And it’s not just the banks. Government is trying to regulate this mess more and more when a lot of it will work organically (and all ready has). For some reason, our elected officials seem more interested in regulating mortgage brokers and originators who work at banks are excluded from regulation…lots of dollars at work there.
Currently in danger in Washington State is the Correspondent Lender who will now have to operate as Consumer Loan companies (thanks to WAMB trusting DFI’s opinion that recent legislation would not have any impact on brokers). Business is going to become too expensive for many family owned companies.
Our company is in the process of obtaining our Consumer Loan License (in addition to all the new mortgage broker hoop-la we’ve been doing)…the irony is that WA DFI has just forced many mortgage brokers to become Consumer Lenders, which allows them to lend at very high interest rates.
If I could have video at the end of this post, I’d have Alanis Morresit’s “Isn’t it Ironic?”
While it’s likely that big national banks may continue to drop wholesale (following the lead of BOA and WAMU), regional banks, and banks with little to no retail presence need the coverage that wholesale can provide.
Curiously, most of the problematic issues in the lending world have already stopped, as the market forces ended them long before the government stepped in.
Now, if we can only keep the government from screwing this up too badly, we may be able to preserve the advantages that mortgage brokers provide to the public.
So, it turns out there have been mortgage brokers out there in WA state that did NOT have to be licensed under the Mortgage Brokers Practices Act, and the loan originators that worked for them did not have to be licensed either. They were exempt. They had all of the characteristics of a mortgage broker, arranging loans via the wholesale channel, with both correspondent relationships, and brokered relationships.
WA state passes a law to regulate those previously unregulated mortgage brokers (or at least not regulated by the Mortgage Broker Practices Act), with little opposition from the mortgage brokers, as they were assured it was only to regulate the exempt lenders. In fact, that is clearly what the law says.
Now, DFI interpets the law to say that mortgage brokers (who HAD been regulated) are now regulated under the Consumer Lending Act?
Is it any wonder that mortgage brokers (many who have supported sensible regulations) are outraged, and feel they have been tricked?
It is an unprincipled and scandalous abuse of authority, and it should be corrected.
Roger, I agree. And who benefits, if you “follow the money” that the mortgage brokers who now have to pay per loan to have the consumer loan license? The State.
Bravo, Jillayne. Excellent article. Mortgage brokers will always have value…if…
they read paragraphs eight, nine, and ten of this article.
Really good analysis.