While some of the biggest retail mortgage lenders shutting down their wholesale lending departments claim it’s a sound strategy for reducing loan fraud, I have to question their motives. B of A, WaMu, IndyMac, and others may accomplish a couple of less-than-altruistic goals — first, deflecting the blame for the mortgage mayhem and the brunt of resulting legislation onto brokers, and second, reducing competition at a time when approvable mortgage applications are down. Pretty neat trick.
Yes, I believe that broker-originated mortgages are more likely to end up in default than their retail counterparts (B of A analysts found 4 to 5 times more likely, in fact) but encouraging legislators to paint all brokers with the same brush is bad for honest businesspeople and the consumer as well. I understand that brokers don’t face the same consequences of a default as the lender that holds the loan in its portfolio, but neither do lenders who sell their mortgages on the secondary market. And yet brokers have much higher burdens to meet in terms of disclosure and even marketing. For example, in Nevada brokers cannot engage in joint marketing efforts with real estate agents but banks can.
Lenders shutting brokers out altogether and legislators making brokerage too burdensome to be viable effectively reduce competition — borrowers may have fewer products to choose from and may pay more for them. Trigger-happy legislators should look more closely into the industry and find a real solution — for example, brokers could be required to post bonds or carry sufficient insurance to make up losses to the wholesalers. Those with good track records would be rewarded with lower premiums while the others would pay more or be forced to leave the business. A national code of conduct, education, and licensing requirement could re-instill confidence in brokerage as a reputable channel for mortgage sales.
And don’t let lenders who offload their risk by repackaging mortgages and selling them on the secondary market off the hook either. Those who have the most control over the transaction need to assume the bulk of the risk as well — again, either through bonding or insurance — and the good guys should get rewarded with lower costs of doing business.
Wholesalers should take a look at their underwriting practices for in-house vs. broker-originated loans. Is someone verifying income and assets or just taking the applicant’s word for it? Applicants can fake a bank statement, W-2 and pay stub easily enough — it doesn’t matter who the loan comes from — verification used to be standard practice regardless. “Make sense” guidelines should still apply to stated income loans — were the broker-originated ones any less plausible than the in-house applications? If so, they shouldn’t have been approved.
And finally, those screaming suck-ups hell-bent on protecting the innocent consumers (yes I mean politicians and pseudo-advocates) should take a look at the FBI web site. According to that the greatest perpetrators of loan fraud by far are those “innocent” consumers, not the lenders.
Nice post. The dwindling competition in the mortgage industry can open up a whole new mess for the consumer. It seems as though legislators move to the extreme to pacify the public. In many cases, it leads to less choice and higher restriction which harms those that follow the rules.
Jim
Refinance Tool Box.
The other thing to consider is brokers are always trying to place the difficult loans that banks don’t want so their loans could default at a higher rate without fraud. I enjoyed your post and agree with your points. Thanks and keep up the good work.
Ryan
The big banks want to put brokers out of business. Why else would the new laws apply only to mortgage brokers? Wall street needs to have a fall guy/gal to gain confidence from global investors.
“And finally, those screaming suck-ups hell-bent on protecting the innocent consumers (yes I mean politicians and pseudo-advocates) should take a look at the FBI web site. According to that the greatest perpetrators of loan fraud by far are those “innocent” consumers, not the lenders.”
Great writing. What’s next? Do we regulate car salesmen?
Don–
“The big banks want to put brokers out of business.”
Then why was the media crying about “predatory lenders?” It was almost as if they were trying to blame the lenders. If the banks wanted to put the brokers out of business, why all the talk about “predatory lenders?” They were talking about themselves, if they have any sway with the media. The lenders and brokers have taken too much blame, in my opinion. The borrowers and ratings agencies have taken too little. In the end, every one was to blame; it’s a matter of slicing the blame pie to the correct proportions.
Gina, good stuff. Why don’t you tell me how you really feel!
Ryan of VA Loan has a point, brokers typically can place tougher loans that the banks can’t. Therefore, if brokers only lend to vanilla borrowers like many of the bankers do, they would have fewer defaults.
If you take mortgage brokers out of the equation I could see banks starting to overcharge on loans. Already too many consumers simply go to the bank they “know” and ignore interest rates assuming they are getting an ok deal.
“FBI web site. According to that the greatest perpetrators of loan fraud by far are those “innocent” consumers, not the lenders.”
This is totally the unreported story of this whole mess. So many consumers lied to banks and mortgage brokers. All the regulations are aimed at getting banks to be clear to consumers. We might need some regulations to get consumers to be clear with banks.