I opened my first mortgage brokerage company in 1991. The industry trend was away from banks and toward brokers. Brokers had several intrinsic advantages:
•1. They could shop the market place for price. While most lenders pricing is very close, mortgage brokers could find that one lender that was buying the market on a given day and take advantage.
•2. They could move the loan to another wholesaler when rates went down. Although not an ethical approach from the standpoint of the wholesalers, it was common practice for mortgage brokers to lock a rate with one investor and deliver the loan to another with a better price when the loan was fully processed. This way they could make additional profit on every loan in a declining rate environment.
•3. They could offer virtually every quirky gimmick loan product around without fear of repercussion from defaults or credit quality problems since their job's done once the loan closes.
•4. They could rack up huge profits by focusing their business around origination of less price sensitive subprime and Alt A loan products.
•5. They could streamline operations by originating nearly 100% "stated income" loan products. Companies like Countrywide (America's Wholesale Lender) thrived on their "Fast and Easy" product line. Other large wholesalers followed suit and many mortgage brokers originated most of their conventional loans on these products.
•6. Their business model was often flexible with low overhead. One loan officer with a computer could be a mortgage broker. When originations were down, they would simply layoff their processors or go to contract processing. They could make a profit in almost any market.
In 2006, mortgage broker market share peaked at over 70%. That meant that the large retail lenders were buying most of their loan originations from third parties rather than from their staff. Obviously, the mortgage broker model was working well for everyone. But what a difference a few years make. When house values were increasing, sometimes by double-digit percentages, yearly, defaults were rare and loan origination quality was not called into question. But with the collapse of the mortgage lending industry everything started to be called into question. www.ml-implode.com lists all the mortgage lenders that have closed their doors since late 2006. One of the biggest lenders on the list was Indymac Bank. Before closing, Indymac discovered through portfolio analysis, that a loan originated by mortgage brokers was 8 times more likely to default than one originated by their own retail-lending group. You read that correctly 800% higher rate of defaults from TPO's (third party originations). To be fair, this number did include a some Correspondent originations, but mostly wholesale.
With the dismal performance of loans originated by brokers, it is no wonder that wholesalers either have gone out of business or put defense mechanisms in place to create advantage for their retail lending departments. Sometimes these defense mechanisms are price related others are underwriting related. Make no mistake, any advantage once enjoyed by brokers is now GONE. The latest report I heard on "mortgage broker "market share is it has dropped to around 20%. This could be going down further in the near future.
The last shoe has yet to fall on the Mortgage Broker world...the HVCC. For those not familiar with the acronym, it stands for the Home Valuation Code of Conduct. To summarize, it says that appraisals must now be ordered by the lender (not the broker). This means that the practice of last minute shifts in investors will be a thing of the past. Gone are the days when brokers can lock with Wells Fargo on day one and deliver the loan to Bank of America on day 20 when the rates have dropped. Wells Fargo in this hypothetical example would own and have exclusive rights to the appraisal. The only way a broker could pull the old switcheroo would be to start the process all over and incur the cost of a new appraisal.
If you are a consumer shopping for a loan; run, don't walk away from any and all mortgage brokers...the deck is now stacked against them. If you are a Realtor advising a buyer on financing choices, do them a favor and send them to a Mortgage Banker or a Bank. It is tempting to support your old mortgage broker friends but they simply cannot perform as well in today's environment as a Banker or a Bank.
Some of my best friends are Mortgage Brokers. I used to be a Mortgage Broker. Some of the best professionals in the industry are Mortgage Brokers. Regardless of this, I would not use them. They are a dying breed and it is already impacting their ability to serve their clients!
If you would like the advice of a professional Mortgage Banker, do not hesitate to call me.