The reputation of mortgage brokers as a group has been tarnished by local and nationwide “brokers gone wild
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The reputation of mortgage brokers as a group has been tarnished by local and nationwide “brokers gone wild
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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 We hear lenders pledging allegiance to the wholesale channel (most recently Wells Fargo), but those pledges have been rescinded in the past (WAMU).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.
heehee….I’m back! It seems the state government has screwed up.
I didn’t “heehee” at that, just at the thought of a couple of you thinking, “Crap!….he’s back again!”
See what happens when the government gets too involved? (I think I might have mentioned that before.)
I’m afraid that’s just the beginning. I believe that wholesale will survive but I also agree that many large banks will “cut off their noses”. Brokers will migrate more to regional lenders who know the value of the broker. Something we’ve already done.
However, there are alot of small brokers that will not survive not just because of the current market but because of the government interference coming down the road both federal and state. The rash of overregulation that is to come will drive these brokers out of business not because they don’t/won’t want to comply but because they won’t be able to keep up with all of the new regulations and that they won’t be able to compete.
Driving the bad broker’s is good for the customers and good brokers.
Driving the good broker’s out of business because some so called “consumer advocate” who put more money on the table (or under), was at the right (or wrong) place at the right time is bad.
I’m not saying that’s what happened or will happen but loan originators are the only one’s affected by human nature.
“This means moving beyond just giving LOs a laptop with mortgage software and a lead sheet.”
AMEN Sista!!!
Many moons ago I was asked to treat all of my clients as “lead generators”. I said no…and switched to Real Estate. My clients were most elderly widows at the time who depended on me to manage their assets. To me it was unconscionable to think of anything or anyone but the client in the limited time I had to devote to each one. The concept of “angling” to get more business from their friends, just nauseated me.
Hence my “I don’t need no stinkin ANGLE” response to Craig some time ago.
Clients need our thoughtful consideration of their objective and best course of action, whether we are agents or loan officers or Title Reps or Escrow people.
“Man running round with lead sheet and cell phone may speak forked tongue” might make a good billboard about now.
Hey Jeff,
I hear that Chase subprime wholesale is going down today….probably not because of government interferance.
Government at the STATE level seems to be moving quite a lot faster than at the federal level. That must mean market corrections are happening as they should.
Always good to read your comments; you’re entertaining!
Ardell,
What do you think about the ‘by referral only” programs that have been wildly popular over the past 10 years? Many Realtors and LOs subscribe to this belief system.
For some reason I associate the “by referral only” programs with the “we don’t work weekend” crowd. I could be wrong, but I think the original By Referral Only also espoused trying to make real estate a 9-5 job. My experience does not fit that scenario when offering best service to clients.
Let me google it and see if I can find a direct relationship.
It definitely mentions working less.
“Thanks to you I work a lot less and now have a six-figure income. It’s absolutely incredible.”
It’s also a system that puts words in the agents’ mouth and sends “personalized mailings at the touch of a button.”
From the consumer side of things, I don’t see the advantage of a buyer or seller getting bunches of stuff written by experts…the expert not being the person that they hire as a result of reading them.
I like the concept of Sweat Hugs better. Was based more on working harder and smarter, and not finding easier was to get committed leads so you can take off on Sunday. My $.02
I just spent the better part of a couple of days making sure all 8 of the listings I am associated with are going to be open on Sunday. Taking Sunday off in Real Estate is not a concept I can support.
Jillayne, I did receive a memo today that Chase Home Equity is no longer providing second mortgages for correspondents and brokers…Larry Cragun at RE Undressed did a post on this…sounds like they’re shutting down? http://realestateundressed.com/2008/05/15/and-the-implosion-keeps-on-imploding-now-it-is-chase-home-equity/
We still have four (that I can think of) resources for second mortgages. Chase was a favorite to work with.
Ardell and Jillayne, I’m not sure if you’re referring to Joe Stumpf’s group “By Referral Only”. I was a member for several years and I wouldn’t say it’s a “we don’t work weekends” group. As with anything, it is what you make it. And there is no one right way to do this (RE and mortgage) business IMHO. I’m no longer a member of BRO…I did enjoy it. You pick and choose what suits your style and your needs. Be successful and work less? I’m having a hard time seeing any issues with that as long as your clients are cared for.
It was probably 6 years ago that I belonged and had a coach…I think I was in it for maybe 2 years (might have just been 1). The most valuable thing I learned was setting boundaries…and yes, some of that included with my time.
I never think it’s a good idea to lump a whole group of people and make assumptions about them…whether it’s loan originators, BRO or “bubble bloggers”. 🙂
I can’t seem to edit my message, I meant to say in the second line that I was a member “several years ago” not “for several years”.
Rhonda,
We’re not talking about Joe Stumpf.
Joe Stumpf started the company “By Referral Only” which many agents and LO’s belong to. Perhaps I misunderstood.
# 9 Bili, you found it to be true with your agent, so why wouldn’t it be true with your lender? 🙂 !
Blunt: The marketing pitch of “By Referral Only” is to sell books, tapes other general crap.
Just do your job well, and you’ll get referrals. No need to pay anyone to tell you that, ever. But don’t get me started on how much I hate sales seminars …..
Any agent who wants every weekend off is doing a disservice to his buyers and to his sellers. Plain and simple.
That doesn’t mean you have to agree to do everything at the drop of a hat either – many things can be planned.
But, there is nothing that makes me lose respect faster for an agent than not to be able to reach them on a weekend, without even a return phone call or email. If I have an interested buyer – I’d think they’d be quick-draw-macgraw on their dialing panel on their cell phone!
I’m not sure what you mean by “it”, Leanne.
Sorry Jillayne…..I believe I posted my comments under the wrong article. It was meant for your article titled “A Mortgage Broker is not a Lender”, where your state govt passed regulations to line their own pockets.
Hi Jeff,
Well your comment still works for this article, too. Have you seen more small mortgage brokers exiting the business in your market area?
There has been a few that I know of. However, they were recent start ups within the last year or so.
We have recently consolidated and our business has actually picked up even after physically exiting one market. We decided to move the staff to our main office but they (LO’s) decided to quit and take the remaining staff with them and start up a net branch. That was over a month ago. The rumor going around is that they were fired and that we would be out of business within a year. (Wonder who started that?) However, we’ve replaced them and the reality is that our phones have been ringing off the hook since they left. That leaves me to wonder what they were doing when they were working for us.
As far as that Net Branch, I know where they’re supposed to be located but I haven’t seen the doors open yet and the realtors keep asking me “What happened to Joe? Where did he go?”
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