Magazine article Mortgage Banking

Down, but Not Out: Mortgage Brokers Are Adapting Their Business Model to Survive, after Looking like an Endangered Species. Some Insiders Now Believe the Cycle Is Turning and the Role of Brokers Is Poised to Grow

Magazine article Mortgage Banking

Down, but Not Out: Mortgage Brokers Are Adapting Their Business Model to Survive, after Looking like an Endangered Species. Some Insiders Now Believe the Cycle Is Turning and the Role of Brokers Is Poised to Grow

Article excerpt

After plummeting from their peak numbers at the height of the housing bubble, the ranks of mortgage brokers seemingly hit bottom in early 2011. Since then, brokers have staged a very modest recovery. Even so, it's not clear what the future holds for the profession. II Views diverge from those seeing little chance for a significant rebound in broker share of the market to those who expect a full recovery. * For the moment, the skeptical view appears to hold more sway. * "Since the credit crisis, particularly the subprime mortgage meltdown, mortgage brokers have become an endangered species," says Guy Cecala, chief executive officer and publisher of Inside Mortgage Finance. * "I'm not very optimistic about their future," he says, "[or] about the chances for a strong rebound in the volume of mortgages originated through this channel." * Why has the downturn hit this segment of the business so hard? * "Rightly or wrongly, they've borne the brunt of the blame for making and marketing irresponsibly underwritten mortgages," Cecala says, even though mortgage brokers do not actually underwrite loans.

"The issue has always been, [in] the case of the subprime meltdown, [that] a disproportionate number of bad loans--or the loans that defaulted the quickest--came from mortgage brokers," he adds.

"There's always been a perception that mortgage brokers care more about qualifying the borrowers than they do in representing the interests of lenders or investors," says Cecala.

In the wake of the subprime meltdown of 2007 and 2008, "the top lenders immediately started distancing themselves from mortgage brokers," Cecala says. "And that's continuing to this day," he adds. "The latest nail in the coffin, if you will, is Wells Fargo's [July] announcement it would stop doing business with mortgage brokers."

Wells Fargo Home Mortgage was the last major mortgage lender to operate a direct mortgage broker origination channel. The announcement by Wells Fargo came on the same day that the firm agreed to a $175 million settlement with the Department of Justice (DOJ) in a suit that charged the company's mortgage lending efforts had produced a disparate impact against black and Hispanic borrowers during the housing boom.

DOJ claimed Wells Fargo had discriminated against minorities by offering them subprime loans that carry higher fees or interest rates when the borrowers could allegedly have qualified for better terms. DOJ's assertions were based on an analysis of loan rejection data and a theory of disparate impact that showed fewer minorities obtained loans.

In a statement released July 13, Wells Fargo denied the DOJ claims: "Wells Fargo is settling this matter solely for the purpose of avoiding contested litigation with the DOJ."

Wells claimed that the loans associated with the settlement came from independent brokers, yet denied there was any connection between its decision to shut down its mortgage broker channel and the payment of the fine.

Mike Heid, president of Wells Fargo' Home Mortgage, explained the company's view in a July 12 press release: "Through our separate decision to no longer fund mortgages through independent mortgage brokers, we can control how our commitment [to fund homeownership] is met on every mortgage that Wells Fargo makes."

Cecala contends there are other practical issues working against originating through mortgage brokers. "When you try to get any originator to buy back a loan that turns out to be bad or goes to default or is fraudulent, it's problematic dealing with mortgage brokers," he says. "Mortgage brokers sell loans 'as is," says Cecala. "There's no recourse back to them. All you can do is stop buying loans from them. They don't indemnify you for your losses."

The accordion analogy

Other industry observers, however, predict a recovery in housing will spark parallel growth in broker originations.

"I see the mortgage broker industry as somewhat of an accordion," says Dick Bove, senior vice president of equity research at Rochdale Securities LLC, Lutz, Florida. …

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