The only thing (possibly) standing in the way of the continued decimation of independent loan brokers are two pending lawsuits against the Federal Reserve Board challenging the central bank’s loan officer compensation rule.
As the suits—which are on the verge of being combined by the judge in the case—work their way through the court system brokers continue to see their numbers depleted both in number of working independent loan officers as well as their market share as represented through wholesale fundings.
According to figures compiled by National Mortgage News, wholesale production (where brokers ply their trade) accounted for just 10.7% of originations in the fourth quarter, just a notch above the all-time low of 10.5% established in the second quarter of last year.
To put these readings in perspective, it’s important to remember that during the height of the housing boom (when originations were going gangbusters) brokers had a 30% market share—and at much higher loan volumes.
Of course, some analysts lump brokers in with correspondent funders—that is, firms that have enough financial wherewithal to obtain a warehouse line. For years, regulators and politicians liked to cite statistics saying that brokers had a 70% market share. But in reality, that number was misleading. Brokers and correspondent mortgage firms (those with the warehouse lines) are often referred to as “third-party” lenders. One has the ability to get credit, the other (brokers) does not.
Depending on what point in time you’re looking at, correspondent mortgage firms had a market share of 30% during most of the housing boom. Today, correspondent funders (according to our numbers, at least) control about a near record high of almost 42% of the market.
What’s going on here? It’s simple: as both mortgage bankers and brokers fail, the megabanks have stepped up their purchases of already funded loans from the nation’s remaining smaller firms, that is, those lenders that desperately need a takeout for their production. And given what’s happened to the industry over the past two years in terms of extremely tight underwriting standards and higher capital standards for correspondent originators (those firms that sell to the big boys like Wells Fargo and Bank of America) it appears that the mega banks are gaining on two fronts: as retail funders and buyers of closed loans from the industry’s smaller fish.
Where does that leave loan brokers? Answer: out in the cold.
It’s no secret that that brokers have been blamed for the subprime crisis for up-selling risky products to unsuspecting mortgagors, but as their supporters point out: brokers wouldn’t exist without wholesalers funding those loans, and Wall Street firms securitizing them. Brokers like to point out that they didn’t invent subprime menus—that wholesalers and the Street did.
The surviving brokerage trade groups—the National Association of Mortgage Brokers and the upstart National Association of Independent Housing Professionals—argue that the men and women left in their industry are the ‘cream of the crop,’ and are the “good guys” who survived by being professional, playing by the rules, and kept their noses clean.
In short, NAMB and NAIHP want a fair shake for these survivors. Part of that fair shake is competing against the retail loan officers of banks who do not have to face some of the same state licensing tests and educational payments they face. But that isn’t what these two groups are suing the Fed over.
In their civil suits in U.S. District Court in Washington against the Fed—and in subsequent interviews—they say the April 1 compensation rules are unfair, and in violation of existing laws and regulations. In recent days it appeared that a handful of federal politicians were beginning to get the message. Late last week Rep. Spencer Bachus, chairman of the House Financial Services Committee and all of the Republicans on his panel sent a letter to the Fed demanding that the agency withdraw its loan officer compensation rule.
As of press time, the Fed continued its stance of declining to comment publicly about anything tied to LO comp. The judge presiding over the NAMB/NAIHP complaints could rule within 10 days. And the fate of this declining market niche could be decided once and for all. Or not.
