The Finger Pointing Continues

JUL 11, 2012 1:55pm ET
Comments (7)

In a speech at the American Bankers Association Conference in June, Consumer Financial Protection Bureau Deputy Director Raj Date outlines his—and one has to assume the CFPB’s—view of the causes of the mortgage meltdown, and the CFPB’s plans to increase regulation of the mortgage industry going forward. Getting past the political pandering, a few comments in the speech were interesting and worth another look.

Several times in his remarks, Date cites mortgage brokers as a—if not the—source of the mortgage meltdown. “…most of those problematic mortgages were originated not by supervised banks, but by mortgage brokers and finance companies who then sold those loans into capital market execution on Wall Street.”

First, I assume that Date understands that by definition mortgage brokers only originated “those” loans, which were subsequently funded by either mortgage companies or supervised banks. A high percentage of these loans ended up with the GSEs, which go almost entirely without mention in Date’s speech.

The causes of the mortgage meltdown were widespread: Congress, the GSEs, supervised lenders, mortgage companies and yes, mortgage brokers. Repeatedly identifying one group may be politically expedient, but it isn’t honest.

Date later justifies the loan officer compensation provisions in Dodd-Frank, where he again picks on the broker who adds a 2% overage to a mortgage. Did this happen? Absolutely. Is it predatory? I’m not so sure.

Taking a step back, the brokers in this case are selling mortgages and want to sell their products for the highest price possible. And a smart broker also weighs the risk of losing repeat business if the price they charge is too high.

This same balancing act is repeated daily in every aspect of our lives, when we buy a car, when we buy a house, when we buy an iPhone. For purely political reasons, the federal government has decided that it needs to limit these market forces in the narrow confines of originator compensation. I’m not sure this makes a lot of sense.

Throughout most of the rest of his remarks, Date comments on the need and the CFPB’s intent to supervise brokers and finance companies. Leaving aside the fact that neither of these entities have creditors (depositors) who have government guarantees, I suspect that this issue alone may have a dramatic impact on the mortgage market going forward.

A few weeks ago, I had a conversation with the COO of a loan origination system firm. The LOS company’s primary customer base is brokers and mortgage bankers. He was very optimistic about resurgence of the broker/banker segment of the of the mortgage market. In his view, these people represent the closest thing the mortgage market has to true entrepreneurs. They had a significant share of loan production prior to the mortgage meltdown and they will again. Although I hope he’s right, I’m not so sure.

Competition that bankers and brokers provide to the regulated participants in the mortgage market is good for consumers and the industry. My fear is that, as entrepreneurs, they will find increased government supervision to be both onerous and perhaps not worth the hassle.

Comments (7)
My experience has been that mortgage brokers were more likely to be falsifying loan application data and supporting documents than employees of regulated banks and S&Ls. While fair competition is good for consumers, dishonest competition has not proved good for anyone but the dishonest brokers themselves.

And I don't mean to let off the hook bank executives who decided to push mortgage volume at the expense of mortgage quality. Or Wall Street crooks who sold crap as AAA. Or the ratings agencies that issued the AAA, Etc. Plenty of blame to go around. Including regulators asleep at the switch and Congress getting discounted mortgages for themselves and their staff.
Posted by | Thursday, July 12 2012 at 12:51PM ET
Mortgage4 brokers routinely sought out appraisers who could "Hit the Sales Price" or "Make the Deal Work". They even shopped and assigned work based on verbal representations by appraisers who told them they could do so, which is a violation of what the appraisal license laws were all about.

Inflated and misleading appraisals were blamed by the banks and S&L's as the cause of the 1980's banking crisis. FIRREA was intended to put a firewall between loan origination and appraisal. Lenders got around it by doing business with loan brokers, who ordered their own appraisals. And they did so for years, performing economic coercion on honest appraisers... Then NY-AG Cuomo an FNMA came to the conclusion that inflated appraisals were the cause of the problem . . Problem solved when AMC took control of ordering appraisals... They cut the fees in half and demanded faster delivery time, problem solved. . . . . . . {wait, it is not over}
Posted by | Thursday, July 12 2012 at 2:42PM ET
As a former Mortgage Broker, I find it ironic that the Banks defer a lot of the criticism on to the Mortgage Brokers. Much of the loan programs and underwriting guidelines for these programs came directly from the Banks. We were given loan products and asked to find Buyers who could use these programs. We would not have been able to originate many of these loans had there not been a place to approve and close them. The Banks and Politics have created a smoke and mirror effect and the consumer is falling for it.

I agree that there were some unscrupulous Mortgage Brokers out there that did some very questionable deals. But I think you find these types of people in every industry. But to say that the mortgage fraud was only committed at the mortgage broker level is untrue and misinformed.

I spent 20+ years in the mortgage industry. During my career, I worked for Banks, Mortgage Bankers, and Mortgage Brokers. I found that the best companies to work with and for were the Mortgage Brokers. It was at this level that you truly had to resources and flexibility to help the consumer. The Mortgage Broker was truly the people's mortgage company. Banks were and are filled with beau racy. The loan guidelines are so vanilla the even their best Depositors have problems getting approved for mortgage loans. This is the reason that the consumer flooded to the Mortgage Brokers. We had the sources to find them the right loan for their circumstance.

But now the big Banks are calling all the shots and driving all the policy changes in this industry. The agencies such CFPB are all politically driven. A result of politicians finding a hot subject and using it for their own agenda. What was wrong with all the Regulating Agencies that are already in place? If they weren't working, then fix them. With all the recent regulatory changes to the mortgage industry, it has become difficult at best to be a Mortgage Broker. For this reason, I chose to leave the mortgage industry. The writing is on the wall for all mortgage brokers. The mortgage broker has become the "fall guy" for the mortgage crisis. The people's mortgage source is now fading away. The consumer must now be ready to pay more for less service.
Posted by | Thursday, July 12 2012 at 2:53PM ET
Goods points made by Mr. Walsh, and it does seem to be political. I agree the fault is spread across the spectrum, even to the borrower who wanted to make a profit by flipping a property in 12 to 24 months. Yes there were plenty of unscrupulous brokers, among other parties in the transaction. Do we really think oversight by a newly hired bureaucrat who hardly knows the business will help? Or is Mr. Date just trying to score political points to justify more oversight through the CFPB.

Perhaps the "mortgage meltdown" was a cleansing of sorts and our business will come back stronger across the board, and most the nefarious characters will move on to other less regulated businesses.
Posted by | Thursday, July 12 2012 at 5:30PM ET
Oh how I wish I didn't throw away a fax solicitation I received from SunTrust Wholesale Lending in Nashville TN in 2008. The heading of the page was something to the effect of how to "How to Correctly Calculate the Income to Meet the Debt to Income Ratio Requirement for a Stated Income Loan Approval".

The fax was basically a worksheet that was intended to be used to "back" the borrower into the minimum income needed to qualify and even gave an address for a website that their underwriters used to look up the customary income range for any given occupation when underwriting a loan.

The worksheet fax was even so bold as to state that it was "highly suggested" that the stated income the broker was going to use to qualify should not exceed 110% of the top end of the income range listed on the salary website. I'll never forget the very clearly implied meaning of the last line on the fax: "It is SunTrust's policy not accept loan submissions with conflicting data within 30 days of a corresponding loan submission". Just to the right of that statement was the Fair Housing registered trademark.

Let me translate for you folks out in Rio Linda: "This is a worksheet for all of our Stupid Brokers that send in stated income loans that we have to turn down because of debt ratio's that don't fit program guidelines. We have to turn them down and you're wasting our time. And furthermore - so that we can claim that we're ethical; we ask that you wait at least 30 days before you resubmit the same loan with a higher income once you have recalculated the income "correctly" based on this worksheet.

I personally stopped submitting loans to them right then. I LEFT the bank world in 1999 to become a broker SPECIFICALLY because I was sick of my superiors pushing "product of the month" on me and my customers and giving me crap for only selling my customers the more conservative programs with lower profit margins. In my mind THAT WAS my competitive advantage over the bank originators.

Initially the banks WANTED their originators to sell every customer a stated income loan if they qualified because they were more profitable than a full income qualifying loan. They were more profitable because the banks could charge a little higher rate and the underwriting and processing cost was much lower which translated into higher profit margins. Once they realized what they had, most banks made a conscious decision to limit their originators use of such programs because of culpability and suddenly became interested in the broker channel as a source of growth and the rest is history...
Posted by | Friday, July 13 2012 at 5:30PM ET
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