MORTGAGE BROKERS: ARE THEY OBSOLETE?
Being a mortgage broker myself this is a difficult question for me to answer but it’s also one that is now out there on the table because of Barak Obama’s financial reform package, which contains a measure that will create a new agency called the Consumer Financial Protection Agency. This Agency will have broad powers that will include switching the regulatory powers, from the fed and the banks, to the Agency itself, the rules of the game, in effect, and the enforcement of those rules will now fall under their control. One of those expected to be altered or changed dramatically is that of the underwriting systems that are (still) being employed today, by the major, and even minor, players in the mortgage business; the lenders, the banks and the mortgage brokers. The Lenders: like B.O.A., Countrywide, TB&W, Wells Fargo, and many others are the major players in this drama, while the mortgage brokers, like Direct Lending, Tropic Shores’ mortgage division, of which I am presently affiliated with (both) are the minor players and while I am well-aware of the missteps of many mortgage brokers, it is the mortgage brokers, the minor players, who are (supposedly) going to be sacrificed in this financial reform overhaul. The question is why and the answer is the underwriting system, a system most people are unaware of and do not understand to begin with. I will attempt here, in as condensed a version as I can, to try to explain that system, in layman’s, understandable terms: The underwriting system is basically one person, usually a real estate attorney or bank manager, who “okays the deal.” He bases his approval on the financial well-being of the borrower and the risk factor that that borrower would present the lender. This underwriter takes into consideration the borrowers credit score, employment history, income and assets and liabilities. If he has a good debt to income ratio he gets a lower interest interest rate than if he has a bad debt to income ratio. The Underwriter (supposedly) makes the decision to make the loan on the borrower’s ability to repay the loan (make the payments.) In the 2003-2007 housing boom, however, something known as Desktop Underwriter made its presence more well-known to the bankers as well as brokers. Desktop Underwriter is a system (still being used today) that empowers the holder of the underwriting system to approve, or disapprove, his OWN loan. In simpler terms: a mortgage banker, or broker, gets D.U., as the one I was working for during that period had, and then has the ability to use that program (you upload it into your computer) to approve ANY loan that meets the qualifications they have set out and SHOWN you how to approve on the desktop. The catch-22 was that the banker or broker had to be HONEST! Which, as we now know, was THE catch-22 to end all catch-22’s. How does a guy stay honest when he stands to MAKE 10 grand if he approves the loan and NOTHING if he turns it down? And so began the period of “liar loans” no-doc loans, a loan where no documentation was even required; just a high enough credit score.
In the past, banks, almost always, were used to loaning money from their own assets (their money) and also servicing the loan themselves but, somewhere in the late 1970’s things began to change when Tricky Dick Nixon privatized everything he possibly could, including Fannie Mae and Freddie Mac and the banks began selling their loans to other banks and lending institutions for the yield spread. And so, to bring us back to the present, when a banker or broker has no “skin in the game” he is apt to make as many “risky” loans as he can because he is making his living that way and that is what happened in the recent four or five-year housing boom. And so, the “experts” have begun to think that the “old system” was more likely to keep everyone honest and they wish to bring it back by passing a law that says only banks that also service their loans will be able to stay in business. In other words, if you have the money to make the loan and collect the payments than you stay in business but if you don’t then it’s goodbye. This is too harsh because not only will it cost a lot of jobs but it will empower only the BIG BOYS, B.O.A., CITIBANK, WELLS FARGO, etc… etc. It is also unfair, believe it or not, to the consumers, the ones that it’s supposed to help, because they will be able to charge anything they want because they will be the only game in town. Even today the banks make yield spread on almost every deal that they do because they do not have to disclose this fact even though mortgage brokers do (have to disclose their YSP). And so, are mortgage brokers a thing of the past? That will be up to Congress and the politicians, as usual, and so we will soon see, we will soon see. Hey, wait a minute, I just thought of an idea, they want to change the system: how about if the borrower has a high debt to income ratio charging him less of an interest rate so he can make the payment easier and how about charging lower interest rates on credit cards and how about giving any student who has the intellectual capacity to attend college free admission and how about “forgive us our debts as we forgive our debtors” and how about … wait a minute … naw … wouldn’t work … I mean we all know what happened to the last guy that preached that … still it might work … I mean it could if … aw’well … just sayin’ …