Banks Rethink Relationships With Mortgage Brokers

Industry that flourished after the S&Ls collapsed could find its role reduced after lending correction.

As the housing market slowed in 2005, W. Bailey Smith needed help with his 40 residential loans.

Smith, a Laguna Beach resident, estate planning attorney, and part-time real estate investor in homes and related properties, wanted to refinance the loans to lower his monthly payments. It was getting harder to find tenants for some of his properties.

Yet he was wary of mortgage brokers because the last broker he worked with said he only needed a 15 percent down payment to buy a property and then changed it to 20 percent late in the deal.

Smith said he’s found a loan officer at Wachovia, formerly World Savings, who never changes key terms at the last minute. He’s refinanced 30 loans with Wachovia’s Gregg Madsen and has five more deals in the works.

“He’s fastidious,” Smith said of Madsen. “I have dealt with a lot of flakes in the lending biz.”

Smith may represent a shift in consumer sentiment against mortgage brokers.

As loan defaults and foreclosures rise, politicians and consumer groups have directed many of their attacks toward mortgage brokers. They say some brokers steered consumers into loans they couldn’t afford to earn a bigger commission.

California’s Department of Real Estate is encouraging consumers to report abusive practices by brokers, and at least two members of Congress have introduced separate bills that would expand broker regulation.

Brokers, meanwhile, are firing back and say an entire industry is being blamed for actions of a few bad apples. And banks, not brokers, bear the ultimate responsibility for every single home loan, brokers say.

It remains to be seen if most home buyers and homeowners seeking to refinance have been swayed by the criticism.

But some big banks are paying attention. They’re cutting brokers out of some loan deals or applying greater scrutiny to brokers.

Bank of America on Thursday said it will close its lending division that works with brokers, affecting about 700 workers in Brea, Rancho Cordova, Dallas, and Richmond, Va. The workers can apply for other jobs with the lender, and less than 100 workers will ultimately be let go in Brea, according to the company.

Floyd Robinson, president of consumer real estate at the bank, said in a statement, the company will focus on its “more competitive” retail channels.

Wells Fargo, in summer, stopped making subprime loans via brokers but kept working with them at retail offices. In early October, Washington Mutual said brokers will have to prove they disclosed key loan terms to borrowers.

Other lenders, including Indymac Bancorp, while not abandoning brokers, have said they are expanding retail operations.

Brent King, senior vice president in the mortgage division of Wachovia, said while his firm works with and values brokers, loans touched by brokers historically go into default more often than retail loans. The reason may be fraud, he said.

“The more hands that touch the file, the greater opportunity for fraud,” King said.

But the difference is small enough to warrant a continued relationship with brokers, he said.

In Orange County in July, 2.47 percent of outstanding loans made by brokers were delinquent or in foreclosure vs. 1.21 percent of retail loans, according to First American LoanPerformance, which tracks about 80 percent of the market. Statewide the difference is greater with 5.88 percent of broker loans gone sour vs. 2.2 percent of retail loans.

The differences are small but telling. In Orange County, broker loans account for just 35 percent of outstanding loans but in July made up about twice as many loans in foreclosure.

John Marcell, a broker in Upland and former president of the California Association of Mortgage Brokers, said there is a fundamental flaw with the statistics and attacks against brokers – the term “broker” is too broad.

In California, for example, brokers who are licensed by the Department of Real Estate generally are working in the consumer’s best interest, Marcell said. But brokerages set up as corporations and holding one state finance license can have unlicensed employees helping consumers get loans.

Those unlicensed folks are running amok and giving everyone else a bad name, Marcell said.

Everyone who deals with consumers on home loans, whether a broker or loan officer at a bank, should face a background check and be required to take some ongoing education, Marcell said.

He added that critics who charge brokers with leading people into harmful loans are missing the point.

“We only give out the products that we have been given by lenders,” he said. “The lenders create the products and say here are the products you can sell. If we didn’t have the products to sell, we wouldn’t have sold them.”

Jack Williams, head of brokerage Benefit Mutual Mortgage in Brea, said the bank is ultimately funding each loan brought by a broker and has a “fiduciary duty to make sure the broker has down his job.”

Raphael Bostic, a professor of Real Estate and associate director with USC’s Lusk Center for Real Estate, said banks didn’t carefully scrutinize brokers or their loans when most mortgages could be profitably sold.

That’s all changed amid a housing downturn two years long and still going. Banks are looking for the causes of costly defaults and finding the “safety of broker loans is qualitatively different,” Bostic said.

“Brokers are not going away, but I do think how they do business is going to change,” Bostic said. “They will be subject to much more scrutiny then they have in this last little bit, and I’m not sure that’s a bad thing. The brokers to some extent have slipped through regulatory cracks.”

Indeed, on October 22, Rep. Barney Frank, D-Mass. and chairman of the House Financial Services Committee, introduced a bill that would bar brokers and lenders from receiving incentive payments to sign up borrowers for overly expensive loans. And it would require brokers and bank loan officers to be licensed by state or federal authorities.

That follows a bill introduced Sept. 5 by Senator Chris Dodd, D-Conn., that would give mortgage brokers a fiduciary responsibility to borrowers.

All this is in stark contrast to the last big shake-up in the lending industry, when the savings and loan associations collapsed in the late 1980s and early 1990s. Brokers grew to prominence in their wake, said Wachovia’s King.

King said the lending industry pendulum now is swinging against brokers, but not entirely.

“I think it will end somewhere in the middle,” he said. “It’s just heading in the other direction right now.”

Banks rethink relationships with mortgage brokers
By MATHEW PADILLA | The Orange County Register