Since the mortgage meltdown of the latter 2000s, there has been a change in the perception of many consumers, the media, legislators and regulators towards small, independent mortgage creditors and brokerages. Once seen as a lower cost, efficient loan origination model that allowed consumers access to home financing in a “one stop shop” environment, small creditors and brokerages suffered from being labeled as the scapegoat for the greater woes of the home finance system.
Mortgage brokers, by definition, connect consumers to other institutions’ money. Small creditors almost always do the same thing, even if they are a depository. What is often misunderstood is that even the larger creditors perform their mortgage lending in much the same way, just on a different scale. Very few home loans are actually held in portfolio. Jumbo (above the conforming loan limits) and home equity lines are examples of exceptions to this rule. It isn’t practical or possible for banks and credit unions to actually lend money directly from their vaults, over and over again, given the size of the system. Even the largest mortgage servicing banks securitize their mortgage portfolio in order to replenish funds so that they can lend again. In other words, even the big boys are lending other people’s money.
Mortgage brokers and small creditors were not the cause of the meltdown that the world experienced, because mortgage brokers and small creditors didn’t and still don’t make their own guidelines or products. Instead, their role was and still is to act as a value added switchboard operator, connecting consumers to products that fit the needs of specific lending scenarios. The value add comes in the form of consumer interaction and education, holding the hand of the consumer through the myriad maze of complexity that is mortgage finance, collecting information, determining available options based upon consumer needs or requests, working with many difference mortgage creditors who offer different loan products, services and guidelines, reviewing and possibly underwriting the collected information, coordinating third party services and ultimately coordinating the settlement process so that financing can be consummated.
Many valid concerns arise when considering today’s mortgage marketplace. Mortgage volume across the nation is declining. A significant number of large depositories are no longer offering brokers access to their products through wholesale channels as they try to strengthen their retail offering given the decline. Many smaller depositories have discontinued offering home loan products to consumers because they simply cannot do so in an efficient manner due in large part to today’s regulatory environment. This is true of both banks and credit unions. At the creditor level, mortgage finance has a much higher “break even” closed loan volume requirement than in the recent past given dramatically increased overhead to cover the cost of compliance efforts and requirements.
►Reduction of competition is leading to monopolization by the large depositories–contrary to the “Too Big to Fail” mantra, the large institutions now make up a larger piece of the mortgage pie than before the crash.
►The largest historical wholesale channel lenders, most of whom are the big banks themselves, have stopped offering outlets directly to mortgage brokers in an attempt to avoid media scrutiny and to try to control risks brought on by new regulations that require severely enhanced third-party oversight.
►Smaller depositories have altogether discontinued their home loan divisions in droves as a result of increased regulation and limited loan volume to support the increased overhead requirements.
►Underserved marketplaces, particularly those in rural or small communities, have few local mortgage offerings to choose from – it is extremely expensive for depositories to offer mortgage finance directly through their smaller branch offices
►While there are many positives to the enhancement of requirements placed upon mortgage loan originators of any kind, working for any employer, there are drawbacks as well—most depositories cannot afford to have a local, specialized mortgage loan originator available to their branch office network, creating non-local, call-center style origination offices
Brokers bring benefits
►Third-party origination promotes pricing and efficiency competition
►Brokers can offer the products of multiple depositories efficiently and through a single bricks and mortar location
►Depositories can reach communities that they don’t have physical branch locations placed within and diversify their home loan risk geographically without the fixed overhead
►Consumers in smaller, underserved marketplaces can have access to the same programs that are found in densely populated areas
►Individual creditors often offer their loan products with overlays, or their own restrictions that are over and above the guidelines of the agencies (collectively referring to Fannie Mae, Freddie Mac, HUD’s FHA program, the USDA home loan program and the VA home loan program) and differ from institution to institution—brokers have access to multiple creditors for this very reason, so that they can serve consumers while providing access to specific fits for specific lending scenarios
►Home loan rates vary by day and vary by institution as that institution’s needs for home loan volume change—by working with a variety of creditors, brokers have the unique ability to maintain competitive pricing and rates even as some lenders come in and out of the market
Eric Wiley is senior vice president and chief operations officer for Lake Oswego, Ore.-based Pacific Residential Mortgage LLC. He may be reached by phone at (503) 905-4902 or e-mail [email protected]