If the financial crisis has taught us anything, it is that brokers should always be prepared for a “black swan” event to hit the industry. For those unfamiliar with the term, a “black swan” is so rare that it is way beyond what is expected. The financial collapse of 2008 was one of those events resulting in a rapid decline in the mortgage broker industry.
This decline is now reversing as large banks reject customers that have nowhere else to turn other than the broker community. Customers are finding brokers that are now held to a higher professional standard and that are forced to differentiate themselves with excellent service and competitive products.
State of the Wholesale Mortgage Industry
The financial crisis led to changes in regulations that caused significant shifts in the profitability of the independent broker. You just have to look at the numbers. The mortgage broker industry in the U.S. originated $173 million in loans in 2010, down from $.1. billion in 2003! A similar trend is in the membership trends of industry organization National Association of Mortgage Brokers (NAMB). Here membership has declined to 5,600 members in 2015 from levels as high as 25,000 in 2006.
Mortgage broker share of originations has also been in decline, shrinking from 30% of all loans in the mid-2000 period to less than 10% today.
The good news is that membership is starting to climb off the lows as brokers find profitable ways to re-enter the industry.
Brokers are also starting to get organized on the political front. The regulatory conversation is largely influenced by lobbyists hired by the big banks. By joining industry organizations such as the National Association of Mortgage Brokers, brokers are finding their voice at the regulatory table.
High Bank Credit Standards Lead to Market Shifts
Now that banks are operating under tighter scrutiny, they have to turn away clients that represent risk at the margin. These customers have nowhere to turn other than brokers, who are willing to shop for underwriters that are ready to take on more risk as part of their loan portfolio. They are also being encouraged by estate attorneys and financial planners that refer business to resources that can customize plans for high net worth individuals.
SAFE and Dodd-Frank Act Improving the Industry
The Housing and Economic Recovery Act of 2008 has a provision called the SAFE Act which imposes minimum standards on mortgage originators. This includes written tests and required state-level licensing. It even requires an FBI criminal background check. Similar rules were outlined by the Consumer Financial Protection Bureau. The CFPB prohibits brokers from placing borrowers in more expensive mortgages to boost their compensation. The regulations also:
- Provide greater loan transparency
- Provide for a 3-day waiting period for consumers to sign documents
- Customers must receive disclosure forms
The Dodd-Frank act also mandates how brokers are paid. Now they cannot encourage borrowers to take out higher interest rates to boost compensation.
Shrinking Mortgage Buyer Market
Several major players have chosen to exit the wholesale mortgage industry. These include companies such as MetLife, PHH and Bank of America. As outlets for loan sales disappear, brokers have less operating leverage when selling loans. Less leverage leads to lower profits.
This makes sense and will probably continue. Regulatory pressure on big banks makes operations at the margin less profitable. Said another way, a small mortgage purchase, and a large mortgage purchase takes roughly the same amount of work. Since the effort needed to comply with regulations reduces operating margin, banks need more major deals to retain profitability. Any smaller operators can no longer sell to the large banks, making the market for these loans less competitive.
Regulation Makes Comparison Shopping for Loans More Difficult
One of the pillars of value offered by brokers is the ability to shop loans to different wholesalers. However, what if all wholesalers started to operate under the same government imposed conditions? That is what is happening today with bank one offering similar terms to bank two due to 95% of loans being backed by government agencies.
The Pros and Cons of Technology
Brokers are also looking for ways to accomplish more with less overhead. One of the ways to do this is with technology. Examples of new entrants in this area include:
- FHA Connection: A tool that enables brokers to connect to the FHA portal, where they can pull case numbers and connect to a 360 mortgage representative.
- Broker Docs: This cloud-based platform reduces document clearing closing time by approximately half.
The downside of technology is that it will empower the consumer by bypassing the broker altogether. Imagine a user visiting a website, shopping for a mortgage and completing the entire process online. Unfortunately, that future is here with the PennyMac platform. To be fair, PennyMac also provides a portal for brokers that can place mortgages on behalf of clients.
Sites such as Lending Tree could be the friend of brokers that would not have been found without some online help. We will have to take a wait and see approach to determine if these types of sites have in the origination market.
The Future Looks Dim to Bright
With the bad news out of the way, there is some good news on the horizon. In a low-interest rate environment, all financial institutions are fighting for yield. Private investors are often willing to accept more risk in order to get more yield from investments. This will open the door to the independent broker or groups of brokers that can package loans for this market.
There is also brighter future on the consumer front as the strict lending standards of the big banks forces segments of the market to shop elsewhere for a loan. This includes groups that have more trouble qualifying for a loan such as freelancers, the self-employed and those with marginal credit.
According to the U.S. Labor department, job opportunities for mortgage brokers are in line with average employment growth, another sign that things are stabilizing.
Fixing Industry Optics
The independent mortgage broker has an image problem that needs to be corrected. The financial crisis made the industry focused on the few bad players that did exercise a fiduciary role in protecting consumers. The industry will not begin to thrive until consumers see the mortgage broker as someone that can achieve better value and experience than what is offered by “name brand” institutions.
The process is already in the works with organizations such as the NAMB providing a seal of approval for members. The seal indicates that member institutions meet the ethical standards of the NAMB and abide by highly professional standards. They also offer three certification exams (CMC, CRMS, GMA) that have been passed by over 1,000 professionals. These steps combine with regulations that favor the consumer will ensure that the independent broker will rise again.