April 5th, 2009
Lenders Cutting out Mortgage Brokers
Recently JP Morgan Chase and Citi have announced that they will no longer accept loans that were originated from independent mortgage brokers. Additionally, some insurance companies are now refusing to underwrite any homeowners’ policies for loans that were submitted by brokers. While other lenders such as Wells Fargo are still accepting broker originated loans, but this is unsettling news for both borrowers and the brokers. Brokers still account for a significant portion of the mortgages being funded today, and by shuttering operations borrowers are left with fewer options to finance their home.
Chase has given these three reasons for no longer lending to brokers:
- Loans originated from the retail operations have ‘performed better’ than broker originated loans
- Borrowers are ‘best served’ by a bank employee who is well versed in the bank’s products and can provide unbiased opinion as borrowers evaluate their loan options
- Their reach has increased, from 600 locations in 4 states five years ago, to more than 5,000 locations in 23 states
Lenders have the right to shut down operations, but are they really looking out for the consumer’s best interests? You can argue the validity of their statements and the reasons for cutting out mortgage brokers, but what does this mean for the end consumer looking to find the best mortgage deal?
In order to get the best mortgage deal, you should get several quotes from several sources, as each channel can provide different deal with varying limitations and requirements. That means having a few brokers do work for you, a few direct lenders, and even going to your local bank or credit union. Even with Citi and Chase not offering wholesale loans, brokers still have a host of options to price your loan. This also has no affect on you going to different local banks and lenders to obtain price quotes.
In the near term, you can still go to your mortgage broker and have them do the price shopping for you, with exception of those lenders who have discontinued wholesale lending. The real issue is if all the lenders decide to follow Chase and Citi down the slippery slope and shut down wholesale lending completely. This would put all mortgage brokers out of a job and shift all the responsibility to the consumer to find the best mortgage deal out there.
While mortgage brokers have been dragged through the mud for their part in the housing industry collapse, they still provide very tangible benefits. They know their local market; most having connections with appraisers to accurately estimate your property value better than someone working out of a call center in who knows where. They do have the ability to shop your loan with different lenders to find you the best rate. It is true that they have to charge you for this work, which comes in the form of points of yield spread paid by the lender. If the lenders decide that the mortgage channel cannibalizes their own efforts to fund loans and stops offering wholesale lending, it’s the consumer that is left with fewer options to find the best mortgage deal.
One reason that broker loans did not perform as well, may be because lenders gave brokers free reign to originate questionable loans, that the lenders approved.
That’s an interesting point, but as someone that has experience in both a retail and a broker setting, questionable loans were being originated in both situations. You could even make a case that its easier to commit loan fraud in a retail environment because you have more access to underwriters and the approval process.