“Survivor” … no, not the widely popular television show, though many similarities of people surviving a jungle and learning how to adapt to the current industry environment. But all of us that are still surviving in this industry and plan on seeing it through these tough times and look forward to getting to the more lucrative and positive territory again. We believe that this industry must pull itself up by their boot straps, continue to work hard and plan to change the mystery of this industry in order to gain back the respectability it deserves. The mortgage lending business has been a mainstay of the financial economic landscape for many decades, and consumers, as well as industry veterans, need mortgage lending to regain its position atop the financial services arena so people can purchase homes and be offered refinancing options to obtain the wealth rewards we want to achieve.
We have both been employed in the mortgage lending business for over a combined 60 years, and have commented that these past two years have been the most difficult and challenging times we have seen in the business. From the beginning of this decade, we have seen a record volume of originations, as well as record profits and commissions for the industry. Many people made a lot of money during this span, but a lot of mistakes had been made as well. Many people have come and gone from this industry over this past decade. The industry as a whole has taken a large hit to the foundation and the principles that have made it the stronghold of this country.
We believe that the wholesale and thereby the broker channel has taken the largest hit in this downfall of the mortgage industry over the past two years. Arguably, records show that somewhere between 60 to 65 percent of all originations from 2000-2008 were made by mortgage brokers. Since the majority of loans were originated via the wholesale channel and by mortgage brokers, is this why they are getting the largest portion of the blame? We all believe that there is plenty of blame to go around for the fiasco that currently exists in this industry. Yes, mortgage brokers may have taken the applications from the majority of the borrowers, but the loan products were dictated by larger lenders, investors, as well as Wall Street, and let us not forget the guidelines and underwriting of the actual loans were done by the lender. Supposedly, there were limitations and guidelines in place to limit the risk of broker loans, but now the total blame of the debacle seems to be laid at the feet of mortgage brokers.
While it can be said that mistakes were made, and yes, there were some people who abused the system, even some who committed actual “fraud,” but certainly that was a small minority. We have both known many great brokers, who have a strong following, great foundation in the community, outstanding principles and are now being grouped in with many brokers who just recently started in the business to make as much money as they could and then move on, others who deliberately found the loopholes to originate difficult and risky loans, as well as others that became very greedy. Many looked too short-term, but the financial rewards were large for originating more and more loans, especially in the Alt-A and sub-prime product world, that lenders, and ultimately Wall Street and investors, were re-packaging and re-selling into a very demand side industry.
Now, in order to correct the problem, as perceived by Congress and other financial service pundits, some believe the answer is more regulation and lending conservatism. We could not disagree more with that approach. We all agree that the “risk meter” may have been so far to the left or risky, but the answer is not to go so far to the right or ultra conservative. We hear that there are more than 2,700 pieces of legislation in front of state legislators and U.S. Congress regarding mortgage lending focusing on the limitations and/or abolishment of mortgage brokers. Now the optimistic view is that states have been, some to a fault, heavily involved in the licensing and regulation of mortgage brokers and bankers. But as we all know, the large lenders, the government-sponsored enterprises (GSEs) of Fannie Mae and Freddie Mac and Wall Street make the rules as to whom they will do business with. As we have seen, many of the larger lenders and the GSEs have eliminated or greatly restricted those who may qualify in their wholesale channels, making it increasingly difficult for brokers to do business.
We will all agree that there is still some room to filter this industry, removing those individuals and companies that are affecting the rest of us. But we believe with the assistance of the National Association of Mortgage Brokers (NAMB) and Mortgage Bankers Association (MBA), that we can re-build this industry back to respectability. But it will take us all working together, sharing our thoughts and ideas, not looking as we all are vicious competitors, but as a team to bring back this valuable and well-needed financial service industry back to the public to restore confidence in the system, confidence between us, and confidence by the public in the products and services we all offer.
In the meantime, we see that many mortgage brokers are looking at their options in order to survive. The many options that are available include, the mergers of brokers that compliment each other across different communities or product offerings; becoming a net branch of a larger lender to take advantage of more competitive pricing, products and technology; or looking to convert to mortgage banking by obtaining a warehouse line of credit and control their business as to lender selection as well as possible agency approvals. As any good business person constantly does, they review their options in order to either survive and/or improve their business into the future.
We will review these options in more detail and other current issues in future articles. We appreciate you taking the time to read this article and look forward to communicating and sharing our thoughts and ideas in future writings.
David Lykken is president, mortgage strategies and managing partner with Mortgage Banking Solutions. David has more than 34 years of industry experience and has garnered a national reputation. David has become a frequent guest on FOX Business News with Neil Cavuto, Stuart Varney, Liz Claman and Dave Asman with additional guest appearances on the CBS Evening News, Bloomberg TV and radio. He may be reached by phone at (512) 977-9900, ext. 101.