When I was asked to do an article on the future of mortgage brokers, I thought that with 25 years in the business, I could do it off the top of my head. But just in case, maybe I should make a few calls. So, I started calling my broker clients and the responses I received ranged from the sky is falling to it has never been better. I thought this is not unusual, some people always see the glass half full others half empty. I decided to dig a little deeper and contacted my fiends throughout all aspects of the mortgage business to get their thoughts. Here is what they had to say.
First thing out of everyone’s mouth was the Home Valuation Code of Conduct (HVCC) and what a colossal mess it is. Appraisal costs have risen and values are a big problem. The quality of appraisals has worsened, mostly because the most experienced appraisers don’t want to work for an appraisal management company (AMC) because of the low pay. Many of the AMCs are national companies and their appraisers don’t have local experience, so the appraisals tend to be very conservative. Because the appraisals, in most cases, are not assignable, it makes it harder to shop loans and creates the need to order a new appraisal if the loan turned down. With all that said, when push comes to shove, many brokers tell me it’s not that big a deal In fact, it has some positive effects. Not being able to shop the loan around once it is submitted increases the pull-through rate for the wholesale lender, which is a good thing because we need them to stay in business! Most of these problems are logistical and should work themselves out over the next few months and is no more difficult than in the past when lenders had their own list of approved appraisers we had to use.
On a side note, the president of the National Association of Realtors (NAR) was in New York recently to meet with New York State Attorney General Andrew Cuomo and his staff who worked directly on the HVCC, to share the concerns of his membership, and ask for their assistance in resolving problems related to the HVCC. He also traveled to Washington, D.C. to meet with the Director of the Federal Housing Finance Agency, James B. Lockhart, to discuss ways they can work with Fannie Mae, Freddie Mac and lenders to ensure that appraisals are accurate. We need to support NAR and all trade associations in their legislative efforts on this issue.
So, if appraisals are not the real issue what is? The overwhelming response was competition from big banks and pending legislation.
Let’s tackle big banks first (we won’t name them but come on … we know who they are). The big banks offer better rates through retail than the wholesale market, and therefore, brokers have a more difficult time competing. Their underwriting is easier on retail and they won’t offer competitive jumbo programs to brokers. Okay, so really what is new? Banks have always offered special terms to their good customers, especially ones with large deposits. Go back 25 years and there was no secondary market for jumbo loans. Right now, VA/FHA and conforming loans are the broker’s most competitive programs, so we need to focus on them. Big banks will come back into the market when there is new competition for jumbo loans. My best guess is sometime next year.
Now, let’s get to the meat and potatoes, upcoming legislation for our industry. This is of course the massive “point the finger campaign” that hopes to pin all the ills of the mortgage industry on third-party originations … mortgage brokers. Of course, this is not true, but big banks and Wall Street have more powerful and influential lobby groups than we do and that is how they spin it. The Federal Reserve policy that goes into effect the end of July deals with what fees the broker can collect prior to the borrower receiving a Regulation Z disclosure from the lender. This will impact the mortgage broker more than the mortgage banker who is the lender and can provide the Regulation Z. This policy is, of course, full of interpretation, and I am not the legal expert to advise the industry, so I would say everyone needs to read up on this and get a more thorough understanding of the situation. Still, this is not a deal killer, just another hurdle to jump.
HR 1728 has passed the House and is on its way to the Senate. This bill has many complicated factors, but two aspects of importance are: Stated-income loans and regulation on what fees we can charge. We are not doing many stated-income loans currently, so this is not a big issue, but the fees issue is a different matter. As of the time of this writing, the bill has not passed, so I urge you to contact your legislators and the National Association of Mortgage Brokers to fight this purposed bill.
Tracy Kelly of Kelly Mortgage summed it up this way:
“We are throwing the baby out with the bath water. To blame all the industry’s woes on the broker is just not right. In every industry, there are competent people and incompetent people. I know that I have taken more continuing educations classes by virtue of being approved in many states than the average loan officer at any large bank. It seems that I am always taking a class to keep my licenses active. To insinuate that all brokers are not educated or ethical is just an incorrect statement. I have fought too hard to get to where I am today, and I will not leave without a fight. I am in this for the long haul!”
We need more people like Tracy!
So, now we are back to square one in the industry. The mortgage brokers had, for a long time, built up an overwhelming advantage with the wholesaler lenders and now it has turned around 180 degrees in favor of the wholesaler. Brokers are no longer able to submit files to multiple lenders and then play the market for the lower rates and bigger rebates. Lenders are no longer under pressure to approve marginal loans that are poorly processed just to save a perceived broker relationship. Now, the broker must submit quality loans that are well-processed and delivered in a timely fashion. The good news is that wholesale lenders are enjoying better margins than in any time in recent history. Wholesalers making a profit is good news because it will encourage more lenders to come back into the wholesale market. The big banks are making money on their new loan originations, yet they won’t be able to handle the industry volume through their retail outlets. The mortgage broker is an intricate part of the mortgage industry. If the big banks don’t expand wholesale lending, then regional banks will pick up the slack. I have recently been contacted by lenders looking to get back into the market, and I have also heard about Wall Street looking to get back into mortgage backed securities, and why not. Housing prices don’t look to go much lower, and sanity has returned to underwriting and program guidelines. There is money to be made in mortgages, and I never underestimate the greed factor in business. If there are profits, they will come and they will need mortgage brokers to maximize them.
The battle for the mortgage broker can be compared to stepping into the ring with Mike Tyson. Mike won most of his fights before they even started. His opponents were so intimidated that Tyson often knocked them out in the first round. As a boxing historian, I will tell you that the longer the fight went on, the more successful the opponents were. We have taken some vicious blows, but we have not been knocked out! At the same time, we are not out to the woods by any stretch of the imagination, but as Dennis Reese, a long-time veteran of the mortgage industry said to me this week, “It is in a period of huge chaos and change that the opportunity to form great companies is born. This should be looked on as an opportunity, not a doomsday event.” I like that. Moreover, it may be a good time for some small mortgage brokers to consolidate. I keep hearing that wholesale lenders are cutting off brokers for lack of volume, and that would be one reason to join forces. Volume is always a great negotiating tool.
Todd Shillington of Amerifund Lending Group is a large mortgage broker who has been very successful for many years. I asked him for his plan to survive the current environment this is what he said:
“In order to survive, you need very good processing. The lenders won’t accept poorly-processed loans and it just creates more time delays. The education of loan officers is critical. We have weekly Webinars to keep our people up to date. We offer a very competitive commission split model with our loan officers who mostly work out of their homes. This helps keep our costs down so we can use our resources more effectively. Again, the strong will survive, but there is more consolidation to come. We need to be lean and aggressive to survive.”
Sounds like good advice to me.
Gilbert Frank has spent the last 25 years in wholesale and retail lending.