Mortgage Brokers, RIP

"The broker model is broken," said Calculated Risk yesterday, citing comments from Jamie Dimon of JP Morgan (JPM) saying that delinquencies on broker-originated loans are three times higher than on loans originated in-house.

What's more, says Paul Jackson of Housing Wire in an email to me,

If you want to discuss what will largely be the single largest effect on Main Street of the BAC/CFC merger, it's this: say goodbye to brokers.
Countrywide is (was?) one of the largest remaining mortgage operations with an active wholesale lending channel; while Countrywide has repeatedly said it is committed to brokers, BofA has a decidedly different view, having shuttered wholesale last year.
No one has talked yet about this, but you can bet that BofA will take steps to pull CFC out of the wholesale mortgage origination channel. And that will definitely be felt.

Jackson has dug up an old quote from BofA's Ken Lewis:

While Charlotte-based Bank of America wants to sell more mortgages, Lewis said, the company isn't attracted to the mortgage industry's business model. "We like the product, but we don't like the business," he said. He added that the bank is "not particularly interested" in wholesale lending through outside mortgage brokers and bankers - an area where Countrywide has a presence.

That doesn't mean Lewis wasn't interested in Countrywide, of course. Mortgages can and should be inherently profitable things, so long as they're underwritten intelligently. And Countrywide's servicing revenues are large and stable. But if Countrywide is now going to stop using outside brokers, as seems likely, the future for those brokers seems bleak indeed - after all, most other independent mortgage lenders have already closed their doors.

Frankly, in an era where people can get mortgage quotes online almost as easily as they can buy car insurance, I fail to see why mortgage brokers should exist. It would be an industry crying out for disintermediation even if it weren't obvious that mortgage brokers are top of the list of people to blame for the current mortgage crisis. In the debate about "predatory lenders" and "predatory borrowers", the bigger truth is that the real problem was predatory brokers - people who abused the trust of both lenders and borrowers. If they do disappear, they shan't be missed.

Comments

[Uncle BillyShorthairs]

Your post belies a lack of knowledge about a small subset of brokers that tried to tilt against our current mortgage windmill.

I started brokering loans back in 2003. Scumbags abounded. I saw a great niche - giving people wholesale "par" rates on loans (no undisclosed ysp), and charging a fully disclosed origination fee. Was one of the first to sign up with an organization that committed to do business this way. Wyswyg brokerage. Moderately successful. Most were very skeptical, and even after consummating loans, people often thought they got a raw deal because they couldn't help but think they could've gotten that 1% loan they kept hearing about on the radio.

Typical broker: useless and very very expensive
Ethical, knowledgeable broker: priceless

There is still room for ethical brokers. Some states require a fiduciary duty from their brokers, but this is difficult to enforce.
What happens when the brokers disappear? People migrate to the online scams like lending tree (who were actually sucking people into their own more expensive products -- not "letting the lenders compete). Other sites abound. Compare rates, they say. Problem is, there is zero relationship between what lenders publish, and what the borrower will ultimately receive. Ethical broker sorts through this b.s. Borrower direct to lenders are lambs to the slaughter. Find a broker that is willing to commit, in writing, their fee, and you will almost invariably get one that will shop apples to apples very effectively. Lenders have *no* fiduciary to their borrowers, and they do *not* need to disclose wholesale rates. Baby is getting tossed with bathwater.

[User 141103]

As an older (more mature?) wholesale Account Manager, I remember the days of a limited number of mortgage brokers. The mortgage brokers hold the same business position as any other industry. They are the tenacles that reach out to the general public and the underserved communities. The insurance "agent" shares the same condition. The insurance agent can be circumvented with online purchases or some alternative means of insurance protection (mailings).
The mortgage broker is a necessity to the lending industry. They are more creative, persistant and forceful in securing loans for their clients. (some to a fault, I know) The banks could have owned the market, but they are inherently slow, conservative and not willing to reach out to the underserved. Don't you think Bank Of America would already owned all of the retail business if they knew how? Banks like the product. They don't like the business (see article above)
Third party originations is a crucial part of any business. The mortgage lending industry has come under scrutiny because of recent abuses.
You cannot stop a lender from developing a marketable product and enlisting unscrupulous brokers to sell it.
How do you stop a Bank United from selling an inherently risky loan program at bargain prices and huge broker rebates, when the rest of the industry has disbanned the practice?
How to you stop a Lehman Brothers, Merrill Lynch or Bear Sterns from launching new surrogate brokers to sell and promote some risky loan products?
You can't. Government can't. Banks would love to be the only ones originating loans. Half the underserved and minorities would never own homes.
I agree with the previous poster. Have a national disclosure process, where the borrower can compare prices, charges and rates without the current ludicrous disclosures. All fees, rebates, service release premiums and other broker compensation should be disclosed uniformally.
Ever been in a grocery store buying a can of beans? Notice the disclosure of the pricing. Way too much information, but I can understand it. Why does a can of beans deserve better and more understandable disclosure than a mortgage loan?

[Tom B]

The two mortgage brokers I used were excellent. It's like anything else-- do you walk into a doctor's office and have him cut your appendix out, or do you get a few recommendations first? You gotta use the good guys.

[tcornelison]

In case you do not realize it, the vast majority of local Community Banks are also mortgage brokers. These Community Banks and other mortgage brokers are an integral part of the industry in the United States. If you really want to see the mortgage/housing industry collapse just eliminate the mortgage broker.

In 2003 when rates reached the point where they are now I worked directly for one of the top three lenders in the nation. Even with the brokers out there this industry giant was taking 120+ days to process and close an application to refinance one of their own loans. It would take years for the national lenders and banks to hire enough loan officers, processors, underwiters and closers to handle the volume that would be dumped on them if brokers went away, assuming that they would even want to. Keep in mind they will benefit tremendously from the constricted availability of mortgage loans.

Large banks and lenders like Bank of America, Wachovia, Citigroup, WaMU, Wells Fargo & Countrywide stink at customer service. Brokers exist because they are more capable of delivering the level of service the consumer wants and most of them care about that consumer, much more than the megabank does. Large wholesale lenders have the tools that will allow them to virtually eliminate fraud in the application process. They do not use them because up to this point the default rates have not justified the cost. That is changing and wholesale lenders are implementing more of these controls every day.

The "Mortgage Crisis" was not caused by brokers. The lax practices of the large wholesale lenders attracted a fringe element to the industry through the broker channel of loan origination because it was the easiest point of entry. Anytime there is a weakness that can be exploited for ill gotten gain it will happen, regardless of the industry. If wholesale lenders impose strict rule sets for their brokers, verify application data electronically using available technology and follow the rules, the industry can return to a normal, efficient and healthy opperating environment in a matter of months without stifling the entreprenuerial spirit that makes this a great industry to work in.

If wholesale lenders adopt sound underwriting and verification practices the bad mortgage brokers will go away very quickly without a single law being passed.

[petyaczar]

YOur comments are superficial and specious.

In an age when anbyone can get a real time stock price quote on TV or over the internet or phone. Then using your false logic, why should stock brokers and market makers exist! You answer must be they should no longer exist.

Banks and investment houses talk donw and dis brokers because brokers ARE THEIR COMPETITION and the banks do not like competition.

I would suggest that the BANKS are the dinosaurs in the 21 century financial equation. A bloated bunch of miscreants with outdated policies and fee structures situated in concrete slabs cheating people out of their money on a regular basis by paying zero percent on depositied available funds and overcharging on the loans made with those very same funds.

I minimize my exposure and business dealings with banks down to an absolute minimum. Give me a competent independent broker EVERY TIME. Whether that be mortgages, real estate,insurance, or stocks.

Whio cares what those dinosaurs- the banks and investment houses- have to say dissing their competitors? All such entrenched 19th and 20th century financial infrastuructre should go away and be replaced by the free flow and availablility of information and capital utilizing independent agents (brokers) and the internet. etc.

You are an "apparchilk" of the past.

[GeorgeBailey]

I worked for several mortgage brokers and bankers during the 1993-97. Mortgage brokers were no different than real estate agents or insurance agents. Some did what was best for the client, some did what was best for their YSP ( ie commission). Yes, there were scumbags. Yes, I worked with several loan officers who sold the payment (ignoring fees) to less sophisticated borrowers. Frankly, a mortgage broker could make more selling a subprime loan to The Associates/Ford Motor Credit than a conventional loan to Countrywide. Did I steer people away from conventional to subprime? NO! Did my associates? YES. What bothered me at the time was that The Associates/Ford Motor Credit would give anyone a mortgage - they priced for risk. As long as the borrower had a pulse, The Associates/Ford Motor Credit would give them a mortgage. I finally left the business due to my conscience and catholic upbringing. Damn those nuns!

Now...flash forward to 2001. I am working for Citibank. There's a big announcement that we're buying The Associates. Holy crap! I did a spit-take of coffee through my nose. I could not believe that we would buy such a bottom-fishing credit organization. To Citi's credit, we cleaned up the shop - terminating 1,000s of brokers.
I moved over to counter-party mgmt - we approved and monitored the brokers and bankers selling Citi 1st & 2nd mortgages. What opened my eyes even further was inconsistency between state licensing requirements for brokers. Some required just a fee, others required a minimum net worth. There needs to be more uniformity to licensing brokers.

Now, do I think brokers are necessary? YES. As a mortgage broker, I pushed harder to get GOOD loans approved. I was more of an advocate for my borrower/client than the in-house loan officers. Brokers work harder for their clients. Sure, they're motivated by YSP and the origination point. But, they are also motivated by being on straight commission. No loans close, I can't make my own mortgage payment next month! Remember Gordon Gekko from the movie "Wall Street" and his famous quote, "Greed is good". Listen to the entire scene. Enhancing one's personal at the expense of another's is no good. Making it win-win is a good thing. My client got to refi down to a better rate or got cash out to pay for college - I got a reasonable commission.
Thanks. Good luck.

[I shouldknow]

I’ve been in the retail mortgage origination business for 38 years. Over that past 14 years I’ve worked for one of the most successful lenders in the country. During that time I’ve directly oversaw an average of more than $100 million per month in fundings. To say that a broker who is brokering a loan though me or another national lender can close a loan faster than we can close the same loan ourselves is irrational and ludicrous. While there certainly are a few honest brokers out there, the VAST majority are unethical scumbags with one goal in mind on every loan they do; make as much money for themselves on each loan as possible. Their entire calculation and strategy for the loan was how many points over market and how big of a YSP they could get to build their commission. Whenever I would try to recruit a mortgage broker, they would say “why should I work for you and make 50 to 70 basis points commission per loan when I am making 250 to 600 bps brokering loans?”

I’ve always operated on a theory that my father taught me: You can scalp a man once or cut his hair a thousand times. I’ve made plenty of money in this business over that past 38 years treating customers right and making a little on every loan. There will be a huge fallout of brokers, it’s already happening. Most of the dropouts are and have been brokers over the past 16 months. However, brokers are like cockroaches (no offense to cockroaches meant) a number of them will survive, there’s no way around it.