Why mortgage brokers must change with the times
September 07, 2011
The Bank of America says it's leaving the correspondent loan business, something which ought to catch the eye of mortgage borrowers because of the way the lending system works.
"As part of our ongoing activities to align the Bank of America Home Loans business to the bank's customer-driven strategy," the bank said in a statement, "we have made the decision to exit the correspondent mortgage lending division. We intend to sell the correspondent mortgage lending division or, if a suitable deal is not identified, we will consider other options, including winding down the correspondent lending business in an orderly manner. At this time, our correspondent lending operations continue business as usual.
"Consistent with other recent decisions in the Home Loans business--our exit from the wholesale lending and reverse mortgage businesses, and selling Balboa Insurance--we are strengthening our focus on serving the needs of the bank's 58 million households and supporting growth across the franchise."
Nothing in this announcement says the Bank of America will no longer offer mortgages. What it does say is that it will market them in a different manner. Instead of allowing outside retailers to originate mortgages with its cash, BOA is taking a piece of its mortgage loan business in-house.
This is a perfectly smart strategy for the bank: First, it gives BOA better quality control, something every lender wants. Second, it allows BOA to better control costs if it can sell mortgages through salaried employees rather than through loan officers paid on commission.
Of course, what's good for the bank may not be so good for other parties, say mortgage brokers, businesses and individuals who retail loans.
Mortgage brokers say they can get borrowers good deals because they have relationships with lots of banks. If we assume this is correct, then if the ability to get money from a major lender is at an end, it means the mortgage broker has one fewer funding source--and the bank faces less competition.
For mortgage brokers these have been the toughest of times. The Dodd-Frank Wall Street Reform and Consumer Protection Act ended the use of yield spread premiums or YSPs, a compensation system which rewarded lenders and loan officers with higher fees when mortgage rates were overpriced. For instance, if a borrower who qualified for 5 percent financing was sold a 6 percent mortgage, there would be extra compensation in the deal for the lender or loan officer.
Such up-selling was common. The Wall Street Journal has reported that 61 percent of all subprime loans originated in 2006 went to borrowers who actually qualified for lower-cost FHA, VA and conventional financing. (See: Subprime Debacle Traps Even Very Credit-Worthy, December 3, 2007).
The grim reality for mortgage brokers is that they're a vanishing species. A tough market, new regulatory standards, and declining access to funds are driving many out of business.
Changing marketplace standards are likely to result in lower mortgage rates for borrowers and better product choices. This is actually a marketplace where mortgage brokers can thrive and be successful, but not with the strategies and attitudes of the past. Mortgage brokers will have to evolve--and by "evolve" we mean offer borrowers an edge in the marketplace.