Brokers will end up getting warehouse lines and becoming small bankers at worse.  Or form a co-op of brokers to increase net worth.

What was needed was greater regulation on wall street. Really over the Bond rating companies that stamped AAA ratings of junk loans. The mortgage community as a whole has suffered and as a result so will consumers.

Great post with the exception that "Borrowers can now see EVERYTHING that is being charged and why".....No they cant. Hell I can hardly understand the new GFE, and have heard an overwhelming responce from consumers and lenders aswell.

This is crazy. I am so greatful I have other business's. I produced over 83mm in volume with 3 offices a month. Kiss that good buy

too much goverment

Here in the 2 states of Missouri & Kansas in the KC Metro there is a requirement for Continuing Education for LO's who work for Mortgage Companies and Mortgage Brokers.  LO's who work for the big banks (who actually caused most of the financial crisis) are not required to complete any Continuing Education Classes.  The government feels that the public is already protected enough since the LO's work for Big Banks who are able to police themselves! Ha!

I am a licensed real estate broker and licensed loan officer in the State of Texas. I recently took the state exam and the national NMLS test which all loan originators must take to stay in business. Roughest tests since my college days. Passed both of them but I have heard that many are not passing. In areas where there are no prep classes, most are failing. This should eliminate(and is) eliminating many from the business. A lot more fees of course.

Next year, the mortgage bankers will be going through the same thing. The Office of the Comptroller of Currency, who enforces Bankers, is preparing for this a s we speak. I suspect that the real estate industry may be subject to national testing before long. Ethics have diminished since I first started 23 years ago. A few crooks in the mortgage industry have caused all of this. A few Realtors who ignore all the rules of ethics could bring on the next wave of regulations. National licensing is on the horizon. RESPA is regulated by HUD, the Equal Credit Opportunity Act is enforced by the Federal Trade Commission, and Truth in Lending is under regulation Z issued by the Board fo Govenors of the Federal Reserve. They all have an eye on the Realtor community. New licenses, testing, etc. can generate a lot of revenue. Be prepared.

Excellent post, Phil, and your analysis of the outcome is likely spot-on.  

I often liken the U.S. response to the banking meltdown to what we experienced as air travelers following 911.  Initially, the pendulum swung dramatically, in a very frightened knee-jerk reaction -- understandable even as it was also  frustrating.  Over time, federal administrators and travelers both adjusted, in various ways, to the new air travel security environment.  Restrictions eventually loosened a bit and became more practical; security clearance procedures were streamlined to expedite the process; and the world didn't come to an end when we had to report to the airport an hour or two in advance, depending on where and when we were traveling, in order to allow for security clearance.  

Rather likewise, the past two years have seen dramatic mortgage lending reforms, largely designed to benefit and protect the borrower and to guard against a future such meltdown.  Those of us in the trenches know that not all of these changes have necessarily improved matters, and certainly some changes have confounded and compounded the intricacies and difficulties of residential mortgage lending processes.  For instance, I've yet to encounter anyone on the lending side who completely understands and/or agrees with the revised GFE (good faith estimate).  Meanwhile, we've all largely adjusted to the revised HUD-1 settlement statement and how financial information is reflected there -- although I believe it is not as clear to buyers/borrowers as the older version was.  Underwriters and appraisers are still running scared -- again, understandable even as it can sometimes be frustrating. 

Eventually, though -- and I think this will be over the next couple of years -- virtually everyone involved day-to-day in real estate transactions -- real estate professionals, mortgage lenders and their processors and underwriters, appraisers, buyers/borrowers, etc. -- will have adjusted to the new practices and policies, and areas that are problematic will have been adjusted by federal and state regulators to be more practical and, I hope, lenient where appropriate and fiscally responsible, and we'll all be humming along again -- not just  from a real estate perspective, but also as a nation.  I have faith that most people want to do the right thing, and that what may be wrong, or at least not quite right or best, with matters at present, is largely the result of the magnitude and complexity of the crisis.   

Somewhat off point here, while I do have faith that our country will pull out of this crisis and be stronger and wiser for it, every one of us as citizens of what I continue to believe is one of the greatest countries in the world must guard against the negative pundits -- media, government, etc. -- propelling us toward the proverbial self-fulfilling prophecy.  To listen to the radio or TV and to read the papers is to submit one's self to a constant barrage of naysayers and negativity.  Tune 'em out.  The best thing we can do to get our economy steaming along again is for each and every one of us to loosen the purse-strongs a bit.  Judiciously, to be sure -- but we all have GOT to get back in the market, buying goods and services.  This will ramp up manufacturing and ancillary businesses/services and in turn result in job creation and restoration.  THAT is what is going to turn around our economy. 

Best wishes to all -- and here's wishing you and yours a lovely Labor Day Weekend, fellow Americans!

Syndi Chesser, 100% Club, Broker Associate, Builder

Senior Partner - Chesser Meade Group

Accredited Buyer Representative (ABR)

Certified Distressed Property Expert (CDPE)

RE/MAX Associates of Louisville (Kentucky)

O/C: 502.222.9167

Fax: 502.222.9030

Email:  ChesserMeadeGrp@aol.com

Web: www.ChesserMeadeGroup.com  

Thanks Phil, very informative. I especially like your objective take on the subject. Glad you seem to have found a solution for yourself. Good luck!

Beat Bossart, Broker Associate

Madeline Schaider Real Estate

I Agree for in the end the borrower and Realtor will pay the price. Those left still working in this industry will be the caliber of the Telemarketer. It will be a matter of volume, not service. A difficult loan will be tossed aside for there is no incentive to work it through. Turn times will be extrodinarily long. All this is already happening and with more documentation than ever before and little incentive to get it done it will surely get worse.

Home Buyers will continue to make the largest purchase of their lives and will be getting advice from someone who may make as much as a department store clerk. If you do not beleive me, look what happened to  Appraisers. Those with the highest credentials and years of experience have had their income cut in half or more. There is no incentive for them to be the best in the field, now there main focus is on volume and covering their a--.

I have been a Mortgage Originator and Consultant for 27 years, refused to participate in Neg Am or Sub Prime Loans. Ninety Five Percent of my clients were Easy Doc and to this day I only know of one default. I have worked through two down markets but never have I seen an Industry Killer and Real Estate Value Killer as what has been put in place and what is forthcoming.

We make loans of nearly three quarters of a million dollars with 3 1/2 % down but have killed the buyer who has 25 to 30% down, 740 + Fico Scores, 6 months post closing reserves and is self employed or runs a prominant business. The weekly numbers on Real Estate sales seems to come as a shock, the only shock to me is the number is not greater. Thirty per cent of the inventory would be gobbled up if we went back to the basics for streamlining purchases for the Entreprenuer.

I say it again, it will get worse for the next thing on the Horizon is higher interest rates, let's see how many people qualify then.

The final regulations implementing the reforms are months away from being drafted, commented on and implemented. The conclusion that brokers are "done, stick a fork in 'em" is unsupported by the facts; there are too many uninformed and misinformed "experts" on this subject.  For example, YSP is not eliminated by the reforms, directly or indirectly.

It's to the benefit of all responsible, informed mortgage brokers that those of you who cannot or will take the time to become informed, properly licensed and support our trade group leave the business or go to work for lenders.  Our opportunities as brokers will increase dramatically as more "faux brokers" move to lenders and competing with lenders will become easier when their origination staffs include them.  

Thanks Phil for posting this. I operate business here in San Francisco bay area and have been seeing many loan brokers closing their doors. Some of them used to do loans but now representing clients on both on purchases and loans. Your post on eliminating YSP will definitely let more mortgage loan brokers difficult to survive in this economy

Hi, I am a realtor working with many mortgage brokers and one of them told me that during a meeting with a Wells Fargo executive, he doesn't believe MB would dissappear... Wells Fargo executive said that most of its mortgage business comes from mortgage brokers... so they will defend mortgage brokers to stya in business.

Nice article and what a wealth of response comments.  Well done!

I disagree somewhat with the definitions. But generally speakeing, I agree with Phil. I am currently "employed" by a large national brokerage (now that we all must be W-2 if we intent to originate government loans). I have worked for brokers and mortgage bankers as a loan officer for 13 years. For years, mortgage brokers were always required to disclose to the customer the YSP. Most borrowers were in the dark as to what that meant. When I worked for "mortgage bankers" we recieved the same YSP, but were not required to disclose what we made on the "back end". Hence for years, brokers and bankers have played on different, uneven playing fields. Whenever I worked for a broker and was competing with a banker on rate, I always had the rate sensitive client to ask the banker what they were making on the back end to they could always make an informed decision as possible. I even told them to ask the banker for the rate sheet and taught them what to look for.

When I worked for "bankers" I made just as much on the back end, just was not required to disclose although many times I did and amazingly my best clients understood and appreciated my professional service and forthrightness. Hence, I earned thier trust.

Unfortunately, over the years we in the industry have taught the consumer by default to always shop for loans on the basis of rate and fees instead of making sure the type of loan and the time they were in the loan was correct for reaching thier long and short term financial objectives. Whenever I got a phone call from a consumer asking what my rate and fees were (a rate shopper), I would always answer "Well that depends". After I explained, many invariably would still want to lowest rate and fees. I answered that no one on a given day would neccessarily have the lowest rates...it always would vary on a given day, and with a particular loan program. Some still insisted and went elsewhere. Ok by me, most would have been a pain to work with anyway. I never was sorry, for quite a few went with a friend of mine down the street who worked for a firm that advertised that they always had the lowest rates. I would hear his horror stories often at lunch.

Also, the new GFE we are now required to use is confusing the clients more than ever. I have chosen to use it as a sales tool and provide the client with as much explanation as possible so they understand. Most are very appreciative and I have been able to establish "trusted advisor" status with many. This takes a lot of time with the client.

BUT since government continues to meddle in our industry and furthur commoditizes mortgage lending, they will make consumer choice virtually disappear and fewer and fewer families will be able to qualify for the financing they need and the entire real estate industry will suffer as financing gets harder and harder to get. I am finding even now about 60% of clients coming to me (referred by real estate agents) do not credit qualify. Forcing them out of the market for a period of time until we can improve thier credit.

I don't see the overall picture improving anytime soon. Until then we will fight the good fight. I still love this industry and up to this point anyway, am still enjoying working with people who very much need my services. Fortunately, I don't need to work anymore, I just love doing what I am doing.

While I agree with some of the information in your post, I stand on a more middle ground as to the demise of brokers.  I have been in the mortgage industry for over 25 years.  I have spent over 10 years in retail origination and 15 years in wholesale lending.  During those 25 years, I have seen much legislation that was predicted as the "demise of morgage broker origination as we know it"... much of these predictions occur with the announcement of the legislation, but when the actual regulations are implemented, the changes are never as devistating as predicted.

The new legislation DOES mention that the compensation must be based on loan amount, not program type or interest rate.  ALL compensation currently is affected by loan amount... the larger the loan the higher the potential compensation.  What will have to be ironed out is the tie of compensation to various interest rates and we don't know how that will be implemented at this stage, so enough of the spectulation... let's see what the reality is when it is upon us.

Additionally, the new legislation states that the broker cannot receive compensation from the borrower AND the lender.  They can receive compensation from one or the other, not both.  one of the things that many people fail to mention re: YSP is that, effective with the new GFE regulation of the beginning of 2010, the YSP from the lender is now effectively paid TO THE BORROWER ON THE GFE, and the broker now charges the borrower an "offsetting 'origination charge' ", thus effectively structuring payment ONLY from the borrower.  Any compensation from YSP into the transaction that is not covered by the origination charge becomes the borrower's money, and any actual charges that exceed the original quote on the GFE, become the responsibility of the broker and come out of their pocket.  It has, in theory, become impossible for a broker to become compensated by the lender or by both the lender and the borrower!

I believe there is a legitimate place in the food chain for mortgage brokers and feel there will always be a demand for their services.  It's unfortunate, however that the legislators have so overreacted with the laws, in trying to put the bottom feeders out of business, that the rest of us, who have been legitimately, morally  and ethically lending for so long, are now put in a position to decide at what point we no longer want to endure the pain of jumping through the legislator's hoops and decide to move on.  I am also offended that, as a broker, I am subjected to state and nationally implemented registration, licensing, fingerprinting, background checks and testing for every state that I want to earn an income in and my peers at the "banks" are required to ONLY register on the NMLS.  Additionally, ONLY YSP (broker yield spread premium) is mentioned in this new legislation... and NOT SRP (service release premium) which is the income the banks make in the sale of the loan on the secondary market... absolutely tied to interest rate, not loan size, but not regulated because it is earned "after the transaction" (even though the only reason it exists is because the transaction exists!)

If someone wants to investigate a conspiracy or an injustice, why brokers and bankers are not forced to operate on the same level playing field might be a good starting point.

Hi Phil,  Very informative post.  My contacts in that industry felt the YSP was going to catch up with them in the end !

Phil, it certainly would be negative if all we end up with were big banks as mortgage lenders. The big banks are already trying to tell us what to do, but the way some of the Broker were taken advantage of borrowers was causing problems as well. It is never easy to find the perfect solution and I am sure we will see revisions to the new regulations as some of the issues you mentioned will show up. For the most part you are right "leave it to the government to create a piece of legislation to hinder an improving market" but not doing anything was not good either, because the lending industry demonstrated that it can police itself ( good old american greed !) !!

Michael, thank you for carefully explaining this to those that have no knowledge about the big picture. I agree with everything you explained, again "thank you." There will hopefully always be home financing going forward and if so, then everything is fine. The Realtors need to focus on finding the next home buyer 1st and finding a home seller 2nd. This is because of the absorption rate etc. I am not worried about what Loan Officer is in businees or not, its pointless. To you Realtors out there with a license to sell or kill. Let's fix American one home at a time because depreciation of homes greatly affects consumer confidence.

Phil,

I also have to respectfully disagree with your post. Yes, there will be massive changes to the way we do business but the mortgage broker channel won't simply die away. I operate as a mortgage banker but we also act as a true mortgage broker so we are seeing the changes from both sides happen at the same time. Some of the rumors floating around regarding compensation actually make me believe that the broker channel may actually be more lucrative than the correspondent channel.

I think that this move by the bank lobby was two fold. The primary focus of this drive to eliminate LO commissions really ties back into the banks profitability. I have a close friend that works for a large regional bank working currently for a small salary but a fairly hefty commission on loans he originates. They have recently told him the commissions will be going away but his salary will be increasing. In the end, the bank will be paying out 1/2 of what they were with little to no loss of revenue. Banks want nothing more than to commoditize mortgage loans just like they have CD and savings rates. That way, they can reap huge profits while paying a $10 an hour clerk to process mortgage loans. The bank won't make any less per loan than before, but now they don't have any commissions to pay out. The tightening this may cause the broker is a secondary side effect of their primary motive. Many of my wholesale lenders have told me they are discussing flat fees on loans so that the commission we would receive as a broker wouldn't be tied to the terms of the loan. This may actually HELP to create competitiveness between major lenders as brokers can easily look for the best combination of rate & flat fee paid.

While I don't think we'll ever see "business as usual", I do think that we'll see an easing in credit over the next few years and market share per broker should increase enough to offset any possible reduction in commission percentage. Overall, I remain upbeat about my little shop and our future in the mortgage brokerage channel

If anything, the author and the subject have stirred many with their respective viewpoints. As one who worked in the business for over 40 years and served the broker industry in a leadership role on both national and state levels, the broker business model WAS and IS a viable channel of distribution. Large lenders and S & Ls lost the origination business a few decades ago when a group of entrepreneurs started packaging loans for funding and sale(yes for some of you, some walked the streets looking for investors for their loans while some lent money and then went to the streets to develop relationships with segments of the secondary market).  These individuals had two things going for them that created a common bond...they had the TRUST of their customers and they did not fully service(collect payments) the loans they originated.

The banking community has been trying for the last decade, to recapture this market share which was in the early 2000s, controlled by the mortgage broker industry(68% of originations involved a broker). Fannie and Freddie continued to grow as primary sources of secondary market activity and the lenders found brokers originated more efficiently than themselves.  Then the Alt-A and subprime companies flooded brokers with incentives to "push" their products at a time the regulators were turning heads on enforcing existing laws and the number of originators swelled.  The broker model as we knew it began to breakdown as the actions of a few began to undermine it. Industry and regulators did little for fear of being involved in litigation.  Some even professed to be powerless.

Few originators were aware of the behind the scenes speculative activity taking place on Wall Street. In short, there is plenty of blame to share.  What's interesting is that Congress including those who in the past had endorsed Fannie and Freddie, passed Financial Reform without accepting the findings of the Commission which had been formed to seek out the issues which caused the meltdown. That group will be "selling" its findings in a book with proceeds going to the Treasury.

The restrictions being legislated on the industry for the sake of consumer protection have escalated the departure of many of the unwanted. Mortgage fraud continues within the orgination process while the aggrevate amount of closing costs per transaction has swollen. Yes both consumers and small business have suffered and it is not over yet.

I would suggest the current environment will NOT cause the death of the mortgage broker. Banks have forced themselves into large originating roles for now but they have avoided for the time being, higher levels of accreditation for their employee loan officers which is why you are seeing some migration to their ranks. That may change as will the outreach of power to change other industry models. However, as net worth requirements increase next year and policies and procedures are written to comply with the new law, a new broker model will begin to evolve including successful brokers(and lenders) who have adapted and adjusted operations as necessary. As the secondary market is redefined and weaknesses in the new law are discovered and amended, the cycle of market share in loan orginating will down the road, move away from the large lenders, to a smaller, more efficient mortgage originator model.

Thanks for a few moments and everyone have a safe remainder of the Holiday weekend.

I agree.   I have seen so many good Mortgage Brokers go and work with the Big Bad Bank of America and other banking giants.

I used to be a partner in a mortgage brokerage firm, and we shut our doors at the end of 2008 like a lot of people did for various reasons. I am sure it has already been stated, but in my opinion, I don't think it is bye-bye broker. Yes, things are changing, and yes in an environment of flux and uncertainty people often "freeze", which looks like death, but it is not death. The industry will thaw out. There will be fewer in the business, and definitely fewer entering the business due to, among many other reasons, how difficult it will be to make a good living at it. However, just like insurance and financial advising, if you are one of the few, and you are good, and you build a reputation, realtors and buyers will flock to you. Brokers are needed! They are the best choice for giving the buyer the best choices for their particular situation.

Would I advise my children to go into the business? Not right now, but in the future, when things settle down, it is indeed and honorable profession to help people with ownership.

Very interesting article.  It never ceases to amaze me how the government gets involved.  They are either involved too little or too much.  We are a creative nation, I am certain that the mortgage brokers will get together and make sure there are still competitive products and market out there for the consumer.

This was the first blog I have read from Phil, but VERY interesting news! The transparency of the deal is a good thing, but I also believe that without competition, many borrowers will be paying more.

Look foreward to your blogs from now on.