While some of the biggest retail mortgage lenders shutting down their wholesale lending departments claim it’s a sound strategy for reducing loan fraud, I have to question their motives. B of A, WaMu, IndyMac, and others may accomplish a couple of less-than-altruistic goals — first, deflecting the blame for the mortgage mayhem and the brunt of resulting legislation onto brokers, and second, reducing competition at a time when approvable mortgage applications are down. Pretty neat trick.
Yes, I believe that broker-originated mortgages are more likely to end up in default than their retail counterparts (B of A analysts found 4 to 5 times more likely, in fact) but encouraging legislators to paint all brokers with the same brush is bad for honest businesspeople and the consumer as well. I understand that brokers don’t face the same consequences of a default as the lender that holds the loan in its portfolio, but neither do lenders who sell their mortgages on the secondary market. And yet brokers have much higher burdens to meet in terms of disclosure and even marketing. For example, in Nevada brokers cannot engage in joint marketing efforts with real estate agents but banks can.
Lenders shutting brokers out altogether and legislators making brokerage too burdensome to be viable effectively reduce competition — borrowers may have fewer products to choose from and may pay more for them. Trigger-happy legislators should look more closely into the industry and find a real solution — for example, brokers could be required to post bonds or carry sufficient insurance to make up losses to the wholesalers. Those with good track records would be rewarded with lower premiums while the others would pay more or be forced to leave the business. A national code of conduct, education, and licensing requirement could re-instill confidence in brokerage as a reputable channel for mortgage sales.
And don’t let lenders who offload their risk by repackaging mortgages and selling them on the secondary market off the hook either. Those who have the most control over the transaction need to assume the bulk of the risk as well — again, either through bonding or insurance — and the good guys should get rewarded with lower costs of doing business.
Wholesalers should take a look at their underwriting practices for in-house vs. broker-originated loans. Is someone verifying income and assets or just taking the applicant’s word for it? Applicants can fake a bank statement, W-2 and pay stub easily enough — it doesn’t matter who the loan comes from — verification used to be standard practice regardless. “Make sense” guidelines should still apply to stated income loans — were the broker-originated ones any less plausible than the in-house applications? If so, they shouldn’t have been approved.
And finally, those screaming suck-ups hell-bent on protecting the innocent consumers (yes I mean politicians and pseudo-advocates) should take a look at the FBI web site. According to that the greatest perpetrators of loan fraud by far are those “innocent” consumers, not the lenders.
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