by Brian Brady
Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL
Is the business of broking mortgage loans dead? About two years ago, Morgan Brown predicted our demise on Blown Mortgage. His conclusion was that the industry would need a scapegoat for the poor lending practices and that “blaming” mortgage brokers was convenient (and not necessarily fair). His conclusion suggested that the big lenders were trying to gobble up market share to the detriment of the consumer.
Morgan predicted that the brunt of the regulatory changes would be aimed squarely at the mortgage broker; he was correct. He predicted that the big lenders would tighten up their standards and practices in the wholesale lending channel; he was correct.
That scheme backfired on the big banks. Congress is really pissed that they haven’t been doing more with the TARP funds federal largesse to make loans and they are coming down hard on whom President Obama calls the “fat cat bankers on Wall Street”.
Bawld Guy Axiom: Lenders Lend
Brady Corollary: Lenders lend unless it’s more profitable to do something else.
Government-subsidies proved that in 2009. The TARP funds allowed big banks to borrow money at a ridiculously low cost-of funds. The government guarantee on all agency products indemnified those big banks from losses. Essentially, the big banks could buy their product (a dollar) for $1.01 and sell it for $1.05; that’s a 500% markup and a helluva business. It would be natural for them to “crowd out” mortgage brokers, through poor pricing and horrible service, to benefit their retail lending channel.
Here’s what those big banks didn’t expect: public outrage over bonus pay and a proposed “windfall profits tax” on their guaranteed profits. While I hate excessive government interference, you gotta wonder why the bankers thought they could get paid like Gordon Gekko as wards of the Government. One would think they’d lay low at a GS-15 salary, for a year or two, after they repaid the TARP money.
The profits party is over for bankers and now they have to EARN those bonuses.
Guess what they’re doing? They’ve turned to mortgage brokers again as a viable loan delivery channel. How do I know this? The biggest banks (Bank of America nee Countrywide and Wells Fargo) are “buying the market” this year with ridiculously aggressive pricing. Just this week, BofA was priced .5% better than the nearest competitor. This means that the wholesale rate, for a $500,000 mortgage, would cost $2,500 less when delivered to BofA than a regional, non-depository mortgage company.
They’re up to their old tricks and who can blame them? 2009 was a great year to be a mortgage broker because the big lending institutions didn’t want to take any risk. Want a FHA spot approval for a condo? Borrowers were declined at the “Big Three” and forced to come to a mortgage broker. Want an exception to the lender-imposed higher credit scores? That’s right, Mr REALTOR, call your local mortgage broker. While the “fat cat bankers” padded their wallets with risk-free profits, I cleaned their clock at the point of sale…and I’m gonna do it for another seven years, too.
In 2009, I shifted my business to use our direct lending channel, thinking that it would improve the experience for home buyers and allow me to compete against the larger lenders. I found myself broking more loans last quarter than all of 2008 and I didn’t use the “fat cat bankers” to fund them; I used regional non-depository lenders to get these deals funded. While the regulators got all up in our business, mortgage brokers still proved that they are the superior choice for the consumer.
The strategy backfired on the bankers because they thought they could force the public to meet their imposed guidelines rather than the more lenient ones offered by HUD and VA. Mortgage brokerage ranks were so reduced that those of us left had a field day, adding REALTOR relationships and funding loans the “fat cat bankers” didn’t want to try. These weren’t bad loans either; they just required a little work and attention.
Expect lenders to court mortgage brokers in a BIG way this year, as origination volume shrinks and competition for the lending dollar becomes stiff. It starts off with aggressive pricing and ends in a relaxation of loan guidelines for “good” mortgage brokers. I think the worst is over in mortgage lending. Things should get pretty darned good over the next 5-7 years.
This time, I’m spending less and saving more. I expect it’ll be a helluva ride.
Robert Worthington says:
Hey Brian. You make an interesting point about the demise of the mortgage broker!
January 14, 2010 — 8:18 pm
Rhonda Porter says:
I have a different opinion on why the biggest of banks are “buying the market”–yes, they are using mortgage brokers and correspondent lenders as a channel, however I think it’s to buy marketshare before they turn the spicket off mortgage brokers. I believe the big banks believe that once they have significant market share, they’ll start terminating broker relationships or forcing buy backs (over small issues such as a what they might define as a non-qualifying “changed circumstance”) putting brokers out of biz.
Some big banks have all ready reorganized their mortgage loan centers, getting rid of or reducing some highly qualified loan originators…they’ll swap them for lower paid, less experirenced “mortgage bank tellers”.
January 15, 2010 — 8:10 am
Chris says:
I echo Rhonda’s comments.
The big banks are already positioning themselves to reduce the channels of origination to capitalize on substantial reductions in loan volumes. National and state law changes are one way they are going after independent companies.
There is a huge difference between brokers and correspondents and the consumer will suffer with less competition. These guys are sneaky, smart and cut-throat and they need to make up for losses they’re holding on their books. The FED backs them and they are once again, quietly, screwing the American people.
January 15, 2010 — 9:11 am
Michael Mullin says:
Brian, well said and I couldn’t agree more. It is really simple folks – in general, mortgage brokers deliver a wider choice of product for the consumer and can do it faster and at a lower net cost to the banks than their own retail operations. Brokers are also held to higher educational and licensing requirements. It’s hard to imagine that kind of business model disappearing.
January 15, 2010 — 9:40 am
Jason Berman says:
The mortgage broker channel will remain viable if brokers can deliver quality loans to wholesalers at a lower cost than it would cost wholesalers to originate loans on their own. Period.
Mortgage brokering is a more efficient model. It’s one that consumers and regulators should embrace. If mortgage brokers disappear, housing market will suffer as costs to consumers will increase. The past 18 mos. has provided more than ample evidence that this will occur.
January 15, 2010 — 10:20 am
Brian Brady says:
@Jason Your first statement makes complete sense. As banks reduced compensation, in order to build a profitable retail sales force, they found that the quality originators left for smaller correspondents and brokerages. This left them with below average producers. I’ve spoken to sales managers at 2 of the “Big Three” and this has been their challenge in 2009.
“If mortgage brokers disappear, housing market will suffer as costs to consumers will increase. The past 18 mos. has provided more than ample evidence that this will occur.”
Which is why this channel won’t disappear. Banks have to earn their money now…quickly and they will take the path of least resistance.
@Rhonda I would have agreed with you six months ago but these banks are coming off a great year and the gravy train stopped. The retail mortgage salesperson is less educated, less experienced, and less regulated.
My congrats to all of you who made it.
January 15, 2010 — 11:53 am
Ken Cook says:
“My congrats to all of you who made it.” ’nuff said.
January 15, 2010 — 8:21 pm