The Evolution of the Mortgage Market

There have been 3 major inflection points in the mortgage industry over the last 30 years. The first occurred in the mid 1970s when mortgage rates were no longer set by the Federal Government and became market driven. This was a much needed change. It was the only was to maintain a steady availability of mortgage financing to the public. Up until this point with the mortgage rate being set by Washington, lenders would only focus in on mortgages financing when it made good business sense. When mortgage rates were fixed at 8.75% and lenders could charge 10.00% on business loans their focus would be to originate business loans. On the other hand if they could only charge 7.00% on a business loan then mortgages became an attractive source of business.

The mortgage market responded to changes in market rates by varying the number of mortgages they were willing to close. Once mortgage rates became market driven there would always be mortgage money available to the public, just the cost of the financing would be higher or lower depending on the overall cost of money at the time.

Once the shock of this wore off consumers slowly got accustomed to mortgage rates being differently from day to day and lender to lender. A person would purchase his home at whatever mortgage rate is available at the time. If rates come down at a later date he would simply refinance and take advantage of the lower cost of financing.

Mortgages were still a local business. The majority of mortgages were placed with local Savings Banks that served the community and kept the mortgages after they closed. This system worked well until the mid 80s when we faced the Savings & Loan crisis which forced most of the Saving Banks out of business. A new business model for delivering mortgages to the public emerged. No longer were mortgages originated by the local institutions they were now being offered through mortgage bankers and brokers whose sole business was mortgage origination. No deposits were taken in, no branch network was needed, and no car loans were written. They focused on originating mortgages, bundling them and selling them off to investors. This system worked well until we entered the third and latest inflection point, the mortgage crisis we're currently facing.

The weak point of this delivery system became painfully obvious when housing prices stopped their rapid rate of appreciation and began to depreciate. Add industry mismanagement and greed on top of a global recession and you have the disaster we are currently dealing with. This has caused the greatest change in the financial marketplace since the Great Depression.

Institutions are closing down, being taken over by larger institutions or reaching out to the government for financial assistance. This is causing a major consolidation in the mortgage market. For a lender to survive it needs access to a reliable and moderately priced source of funds. The only source of funds that meets theses requirements are deposits. Institutions that have relied on Wall Street for capital to operate their businesses cannot operate in this environment. Only banks that deal with consumer deposits can be committed to the mortgage business today.

For a mortgage broker to deliver the proper level of services to his clients he needs multiple sources of mortgage products and lenders. My analysis of the industry confirms that the era of the mortgage broker and mortgage banker is coming to an end. It's my prediction that that the market will be dominated by those institutions that are "too big to fail". Government support comes with strings attached. As long as the government needs to supply financial support to these lenders, the lenders will be obligated to supply mortgage products to the public. They will also be expected to deliver these products at a fair price.

It is for this reason that I have decided to close Shelter Rock Mortgage Corporation and partner with an institution that is not only committed to the mortgage business but large enough to stay committed. I am now working exclusively with Bank of America. It is the largest mortgage lender in the country, has a corporate culture focused on customer service and has the financial strength to aggressively price their products.

By combining the strength of the largest bank in the country with my years of experience I will be able to continue to delver the level of service that my clients expect from me. I'm excited about this transition and look forward to the benefits this partnership will bring to all concerned.