Are the Mortgage Brokers Guilty as Charged?
Mortgage broker January 30th, 2008In my last article, I promised to explore the role of the Mortgage Broker in the current "Subprime Crisis." Every night on cable news programs I hear at least one "expert" suggest that the subprime crisis was the fault of those darn Mortgage Brokers running amok. Now I am a Mortgage Broker and so I would not blame you for taking what I say here with just a grain of salt. I am hoping I can convince you using plain common sense that the expert's assertions are wrong.
Previously I have talked about that fact that mortgage companies like Countrywide, do not directly determine how high or low fixed rate mortgages are at any given time. The actual level of interest rates are set by Wall Street investment firms, such as Bear Sterns, or Morgan Stanley, at whatever rate will prompt investors to choose mortgage backed securities over government backed securities, or other types of investments. Mortgage Companies start with the yield required to attract investors and add a small margin to compensate them for the roll they play in the process of matching up loans with borrowers. A mortgage company will usually try to make the same small margin originating and servicing loans regardless of where rates sit.
In order attract fixed income investors the investment firm must provide them with information about not only the yield for a mortgage backed investment, but also what criteria will be used to approve the loans within that pool so the investor can judge the risk they must take to earn the yield. The qualifying criteria for loans in the pool must be set out in the beginning when the loan pool is established.
That means if the loans in a pool will be granted to borrowers with no down payment, and no documentation of income, and relatively poor credit, this criteria is designed into the program way before that loan product becomes available to a Mortgage Broker to offer his clients.
What exactly is a Mortgage Broker anyway? If we are going to blame them for everything we should probably know who they are.
Once a loan program is designed, it is released to banks and mortgage companies who will find borrowers who will qualify for them. Mortgage companies like Countrywide have networks of branch offices, and fleets of loan officers trying to match up borrowers with all of the many different programs available. These loan officers are considered "retail" loan officers because they work directly for the mortgage company.
Out of the rate a borrower agrees to pay an amount is set aside by the mortgage company to pay the loan officer a commission called an origination fee. The industry normally expects to pay about 1% of the loan amount as a fee for the origination of a loan. The same bank may elect to offer the very same loan programs to independent loan originators called Mortgage Brokers on a “wholesale” basis. This simply means if an independent brokerage originates the same loan for the bank, the bank will pay the origination fee to the broker instead of a retail loan officer.
Please note that I said the same loan programs, which means the same underwriting guidelines, and the same fee! In most cases the loan must be underwritten by the bank itself prior to funding the loan to make sure that it meets all of the criteria that were designed into the program on Wall Street.
If a Mortgage Broker is able to originate loans that require no down payment, and no documentation of income, for borrowers with a poor credit history, it means that a loan program was designed to allow no down payment, no documentation of income, and poor credit history, by some investment firm on Wall Street.
I am not prepared to say that Mortgage Brokers are completely guiltless in creating this crisis we find ourselves in. Of course there are good brokers and bad brokers out there. The bad ones may well have put people in loans that they could never hope to afford. They knew that their borrower the Night Watchman did not make $12,000 per month as was stated on the application. Some of the bad ones charged the Night Watchman huge amounts of extra commission through a mechanism called rebate pricing. Some of the Mortgage Brokers out there should be ashamed of themselves, but they did not do what they are accused of almost every night on the cable news channels. They did not design the programs crazy loan programs that ultimately caused the subprime mortgage crisis.
The FBI is catching on to the reality of the situation as indicated by this recent Reuters article.
Bye the way, in my twenty two years as a loan originator, I have worked about half of that time “in house” as a retail loan officer for well known banks and mortgage companies. I believe I saw just as many loans approved for $12,000 per month night watchmen, and excessive rebates charged by retail loan officers as by brokers. So before we demand the heads of all Mortgage Brokers, let’s be sure we know where the problems actually lie.