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.
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.
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}