The Inside War: Mortgage Banks vs Mortgage Brokers

As the mortgage meltdown continues to grab headlines, it appears that mortgage brokers and mortgage banks are back in the sleeping in seperate bedroom stage.  It does appear that many mortgage banks have been trying to throw mortgage brokers under the bus in order to shield themselves from any complicity and use the market upheavel to possibly steal back some of the market share they have lost over the years.  Mortgage brokers keep getting the blame in the media and it seems that mortgage banks are quick to fan the flames.

Over the past decade, the broker channel has been a valued part of mortgage banks' origination strategy.   It is a lot cheaper and efficient to offer loan products through mortgage brokers rather than a bank trying to staff, train, and compensate their own work.  If a mortgage company wants to expand, the easiest way is to offer products wholesale to mortgage brokers. 

What the mortgage banks didn't count on was that mortgage brokers would actually cannibalize the market share of the banks' retail outlets.  The bottom line is that brokers do it cheaper, faster, and better than bank retail operations.   In effect, the genie is out of the bottle and the mortgage banks are trying to figure out how to get back some of that market share now that brokers originate about 60% all mortgage loans.  Mortgage banks see an opportunity to beef up their retail staffs and keep some additional profits for themselves.  They may not say it out right, but the subliminal messages are clear in the advertising.  Direct lender.  Unregulated brokers.  Big national bank.  No one can do what we can.  No middle men.  No yield spread premium.  FDIC insured.  Blah, blah, blah.

Despite the hype, retail mortgage operations have no chance of competing head to head with good mortgage brokers and they know it.   Retail banks are simply too bloated with non-productive corporate staff, executives and huge advertising budgets to keep cost low.  Many in the brokerage industry feel that mortgage banks have been using under handed tactics to try to tilt the playing field back in favor of retail banks.  While it is unlikely that there is a massive conspiracy against mortgage brokers, one does have to wonder about some of the gems that have been dropped lately.

Countrywide sent out a letter that when you read between the lines, blames mortgage brokers for their problems.  Many brokers have long considered Countrywide the darkside of mortgage lending.  Brokers gleefully fed the beast with mortgages only to have Countrywide's retail and retention departments compete fiercely against the broker.

A Wells Fargo executive in an interview with a national media outlet says that their rates are now better through the retail channel instead of brokers.  Of course, this assumes your broker is stupid enough to send your deal to Wells Fargo when there are plenty of other wholesale mortgage banks who weren't trying to charge Jumbo customers 8% for a 30 year fixed mortgage with 20% down.

Next we get this idiot on CNBC outright blaming mortgage brokers.  How this guy can sit on national television with a straight face is beyond me.  Unregulated?  No skin in the game?  Only go to places where you have a checking account?   Last time I checked, mortgage brokers are pretty much regulated in all but a few states.  It is the retail loan officer for large mortgage banks who doesn't have to follow state licensing laws according to the Supreme Court.  Love the comment about Countrywide.  I guess we can ignore all those Option Arms they were pimping on the unsuspecting public... but hey they are FDIC insured.

The mortgage banks would have everyone believe that the mortgage brokers are the ones giving them the bad loans.  Of course, the problem with this is that mortgage brokers can only offer what the banks approve.  Remember, mortgage brokers DO NOT create, underwrite, or fund mortgage loans in any manner.   Any loan a mortgage broker originates has to be done so with the blessing of a mortgage bank.  If a shady JT Marlin mortgage broker is putting little old ladies in option ARMs while inflating her social security checks and earning 5% yield spread premium on the loan it is done so with the blessings of a mortgage bank.

There is also plenty of lobbying at the state and federal level for new laws regulating mortgages.  Politicians are definitely tripping over themselves to add their two cents which is about all their idiotic legislation is worth.  Nothing like passing laws affecting industries you don't understand to pander to the media and your voters.  Again, it also appears that the mortgage banks have politicians in their back pocket.  The only problem is that the laws only seem to apply to mortgage brokers, not state and federally chartered banks.   Are these laws designed to protect the consumer or help mortgage banks by tying the hands of mortgage brokers?

At the end of the day, it remains to be seen who will win.  I predict in the short term, mortgage banks are going to get some share back from the brokers.  It will be temporary.  Brokers didn't explode on the scene out of good will and the free market favored brokers.  Money talks and BS walks.  In the long run, banks will realize once again that the wholesale market works and the broker can be their best friend.  Hopefully, the brokers who have been thrown under the bus by mortgage banks won't have short memories when the gleeful wholesale mortgage account executive comes knocking.