Mortgage Brokers

The mortgage broker is the middleman between the applicant and the rest of the mortgage industry. As banks and lenders grew in size, they lost personal contact with their applicants. This, in addition to the increasing complexities associated with financing a property, a need developed for a service that would help the applicant. This service gives the applicant the tools needed to make intelligent decisions when applying for a mortgage. The mortgage broker fills this need.

The lenders quickly realized that is was cost effective to deal with mortgage brokers. The manpower they required to deal directly with the consumer was large and the demand for mortgages was different year to year. If the lender didn’t hire additional personnel during periods of high volume, their staff would be overworked, errors would occur and they wouldn’t be able to capitalize on the increased volume of originations. If they increased their staff during periods of high volume, they would have too many people on their payroll when the market corrected, thus forcing them to lay off staff. This didn’t make for a healthy work environment.

The support staff that a lender needs to service a mortgage broker is far less than when dealing directly with the public for several reasons. To begin with, lenders can make demands on the broker that they can’t impose on the general public. Packages being submitted by a broker must be complete. If they are not, the lender is under no obligation to accept the package. The lender can demand that most of the application packages submitted not only meet the lender’s standards, but that they will also close. Typically, only 40% of the applications submitted directly to a lender by consumers, actually close. A lender will expect at least 80% of the applications submitted by a broker will close. All the “hand holding” that is an important part of customer service is passed onto the broker. A lender has better control of their manpower requirements over time, making for a stronger company because their employees feel secure in their positions.

The discounted pricing that a lender gives to a broker costs them less than it would cost the lender to originate the same total value of closed mortgages. This makes dealing with a mortgage broker a sound business decision for the lender.

Most mortgage brokers are small businesses. Their staff tends to develop a personal relationship with their clients. This gives the applicant the ability to be in constant communication with the same people over and over throughout the process. Becasue of the discounts provided to the broker from the lender, this personalized level of service comes with little or no cost to the consumer, making it a win-win situation for the applicant. This is the reason that the market share of broker originated mortgages reached nearly 70% a couple of years ago. An impressive number, when you consider residential mortgage brokers have been in existence for less than 20 years.

As efficient as this system was, it was missing one thing- accountability. Lenders were not as careful in deciding which brokers they wanted to deal with. A lender may have been negligent in their due diligence prior to working with a broker; they may have been afraid of losing market share if their standards were too high; they may have over-estimated their staff’s ability to underwrite mortgages; they may have under-estimated the greed of many brokers, etc. This resulted in the inferior quality of mortgages that were being closed on. Lower quality mortgages yield higher default rates, which lead to higher foreclosure rates, which lead to decreasing values of Mortgage Backed Securities, which in turn yields losses to investors.

The common element that we’ve seen, in all the businesses involved in the mortgage market, is that everyone was assuming that all other entities were doing their job properly. The lender assumed the broker was doing the right thing, the wholesaler assumed the lender had properly underwritten all mortgages, the investor had confidence in the rating agencies, the broker assumed that the lender’s interpretation of underwriting standards was valid, etc.

None of the industry players were doing their job as thoroughly as they should have. Something was bound to give. The spark that initiated the problems in the mortgage market was that the housing market began to slow down. Once appreciating housing prices could no longer be relied on and the entire mortgage marketplace gradually became stressed. The sloppiness of all the industry participants quickly became apparent and the downward spiral accelerated.

The access the industry has to the applicant is through the lender and the mortgage broker. The mortgage broker’s role is pure; he is only working as the middleman between the public and the industry. The lender, as we noted earlier, plays a duel role. He is not only dealing with the consumer but also has a responsibility to write profitable mortgages. Of all the industry players, I feel the broker had the greater degree of responsibility to the applicant and therefore was in the position to minimize the damage of the mortgage meltdown. Unfortunately, too many brokers did not live up to this responsibility. Far too many brokers were putting their own interests over the interests of their clients. There were three general reasons for this: greed, incompetence and the lack of respect for their clients. I don’t want you to conclude that all mortgage brokers failed to do their jobs properly. As a mortgage broker and being active in the various broker associations, I can say with confidence that many of us do our job right. It’s just unfortunate that not all brokers fall into this category.

From the consumer’s prospective I feel that using the right mortgage broker is the best way to finance a home. I also feel that with additional government regulations and improved due diligence from the wholesalers’ and lenders’ prospective, that finding the right mortgage broker will get easier every day.

Let’s look at each of the reasons. Greed is the easiest one, so we’ll start there. There has never been any regulatory limit on the fees charged by mortgage brokers or any other business involved in the mortgage process. The government’s position is to allow for the competitive marketplace do its job. For the most part it has. In most areas of the country there are numerous sources of financing and the free market works. Wholesalers and lenders were historically cautious in limiting broker compensation, although over the last few years this has been changing. This system fails when high-pressure selling tactics are employed or access to mortgages is limited in a community. Greed, in any profession, will never be eliminated. All we can hope to do is to minimize it. Lenders and wholesalers are now recognizing they need to be more proactive in this regard as well as becoming more particular in choosing the brokers they want to deal with.

Regulators are finally addressing the incompetency issue. Someone looking to become a mortgage broker needed little or no education or work experience. For example, in New York State, there was never an educational requirement to become a mortgage broker. This changed on January 1, 2008, but it took 20 years of fighting with State government and a mortgage meltdown, before any education requirement was imposed on a mortgage broker. There is no worse combination; incompetent professionals in a field that the public assumes has at least minimum standards. This low standard literally invites criminals in. This is why the FBI has identified mortgage fraud as the fastest growing white collar crime in the country.

The most ethical person can be incompetent. If the owner doesn’t take the time to teach his originators all the details of the various mortgage programs and underwriting standards, how competent can the originator be? This has been a big problem in the industry. The standard to become an originator is lower than the standard to become a mortgage broker. This puts a high level of responsibility on the mortgage broker regarding the education of his staff. Many mortgage brokers are more interested in hiring salesmen, not financial consultants. A large number of applicants were put into mortgages that were not in the applicants best interest, simply because the originator didn’t know any better.

Regulations are being passed by each State that will not only add an education requirement for originators and a criminal background check but will also assign an identification number to the originator. The number will be put on every application taken by the originator. Now a mortgage can at any time, be tracked ,creating accountability.

The final reason is the most important, lack of respect for the client. If you have respect for your client, regardless of your quality of education or experience level, you will be an asset to your client. Respect requires you to find the answer to a question that is posed to you instead of making something up. Respect requires you to ask enough questions of your client to get a complete picture of their needs and goals. Respect prevents you from charging more for your service than is fair. The most important quality, respect for your client, is the easiest standard to meet. You just need to be a professional.

The easy lending standards we’ve been working with over the last few years have been a powerful set of tools for a mortgage broker to work with. But like all power tools they need to be used intelligently. A chain saw in the right hands takes all the work out of cutting trees, in the wrong hands you are left with a bloody mess. The mortgage meltdown we are currently experiencing is the bloody mess when powerful tools were misused.