What Next? Mortgage Professionals need to restructure

by 01 Jan 2008

Am I the only guy who knew this wasn’t going to last forever? With 20 years experience in this industry, I’ve seen markets heat and cool with regularity. The only variable has been degree. So, just like the Talking Heads, I ask: “How did I get here?” and...what next?

First, let’s get one thing straight; there is no single bad guy. Or, more accurately, we’re all to blame. Up and down the food chain, we all contributed to this mess. This downturn in prices would have upset any market, regardless of the existence of neg-am adjustables, or greedy wholesalers, or the EE-VILE mortgage broker (punching bag of the press and general public). Home valuation declines hurt any market; when the value of the collateral declines, the value of the underlying financing declines with it.

I do not want to spend an inordinate amount of time chewing over the blame-game, but I do have to first set the record straight as it concerns the reputation of mortgage brokers which has suffered unfairly:

1) The vast majority of mortgage brokers are honest, well-meaning, competent professionals. And we did only what we were being asked to do; sell what the wholesalers gave us to sell. They sent hordes of reps into the field to solicit loans that investors sold them, and home buyers obviously wanted. Remember the million-dollar road show that New Century paraded around the country? My God, what compelling inducement. Decision One placed not one, but 5, that’s 5 reps in Fresno, CA insuring that the company would be able to keep weekly contact with virtually all mortgage brokers in our market, and it all worked. Com-Unity placed underwriters in larger broker offices to underwrite on-the-spot! They gave us product to sell, and we did so!

2) The problem with mortgage brokers is that too many of them, while mostly well-meaning and honest, did not know what they were doing. The state of California, in it’s infinite wisdom, has created two avenues one can pursue to enter the business of selling home loans; one, is get a real estate license, find an employing broker, and go to work. Second (and this is where the problem lies), is fill out some forms, lie that you have a $50,000 net worth, and VOILA! You’re a mortgage broker! Then, you can hire more people who know nothing, and you’re a Mortgage Company. Get rid of the Consumer Finance Lenders License for SFH financing and you will solve most of the problems emanating from bad mortgage brokers. Licensing requirements in other states needs to tighten as well.

3) Last, but not least, one of the biggest misconceptions of the unwashed masses is the issue of rebate to mortgage brokers. Someone tell me why a mortgage broker should be forced to sell his or her product at wholesale prices? Is there any other retail industry that does this? No. I am not going to defend rebates as something that helps the borrower reduce closing costs. Although it indirectly does, the main role of a rebate is to compensate the mortgage broker. There, I said it. The vast majority of the rebate money goes into the pocket of the broker, and that is 100% fair! The average mortgage broker should be making about 2 to 3 points per file, depending on the complexity of the transaction. We charge the borrower one to one-and-a-half points, and get one to one-and-a-half points on the back from the wholesale lender. The borrower pays a RETAIL INTEREST RATE that is about ¼ to ½ percent higher than the WHOLESALE INTEREST RATE. Why is this bad? Where is the bad guy in this scenario? It’s been described as “Steering the customer to higher rates JUST to get the kickback.” Or (and this is an actual quote from a recent Forbes magazine article on CNNFN.COM) “… (Mortgage brokers) are being paid a bribe to stab the poor home owner with higher rates than he would otherwise be able to get”. Huh? So, we mark up our interest rates to retail, and we’re suddenly thieves? My mechanic marks up the parts he puts in my car, EVERYBODY marks up from wholesale… so, why is it a crime for the mortgage broker to do the same? We get an average of 2 to 3 points on a file, while the average real estate agent gets 5 to 6 points to fill out a listing agreement, put it on MLS and negotiate the sale. I realize real estate agents are pros too (cough, cough), but why is it NO ONE vilifies them for taking up to 6% of a home owners money, while the mortgage broker is the epitome of evil in the world? WHERE is the National Association of Mortgage Brokers in this debate?

Alas, I digress.

For those of you who think the wholesale/mortgage broker business arrangement is dead, think again. There is too much money in it to die. Yes, many companies will go away, and just like the savings and loans of yesteryear, there will be fewer of them, and the landscape will change, but we are here to stay. It’s too easy to set up a wholesale company; the cost efficiency is too good for the industry to go away. There will be new regulations, and we will have to fight off the overreactions from lawmakers, but we are here to stay. And for an honest, experienced mortgage broker, the best is yet to come. You are going to see business return in a stampede that will make everyone smile again.

To Wit: FNMA (“A” paper) rates will go down to the 3.5 to 4% range in the next 2 years. Housing prices will settle to the bottom at about that time, and average wages will increase enough to somewhat equalize the market and the pent-up demand will explode. For those of us left standing, it will be heady times again.

I know, you’re still shaking your head over my first statement; Rates are going down to 3.5 to 4%. I can prove it.

Recall your college Macro Economics class about economic cycles. (Stay with me on this...force yourself) In a normal market, long-term debt securities yield higher than short-term securities. This is called “The Yield Curve”. In a normal yield curve, everything is chugging along in equilibrium. Supply is equal to demand, GDP grows at about 2 to 3% annually and things are going smoothly. In an overheated economy, the yield curve inverts as the overheating begins to cool, meaning more people are selling short-term securities than are selling long-term securities, and yields are higher on the short end than long end. Well, never mind, just go get a long-term chart of yield curves over the last 30 years, and you will see a trend; EVERY TIME AN INVERTED YIELD CURVE CORRECTS, RATES PLUMMET IN THE SUBSEQUENT TWO YEAR PERIOD. In simple terms, we go into a recession. And it’s already started. See http://money.cnn.com/2007/11/21/markets/bondcenter/bonds/index.htm?postversion=2007112112 for confirmation. Also, see http://www.smartmoney.com/onebond/index.cfm?story=yieldcurve to go back to 1978 for a monthly look at yield curves, and then find the declining mortgage rate periods and the lights will come on. This morning, November 21, 2007, the 10-year note is yielding below 4%. Six months ago it was yielding over 5%. The yield curve went inverted in January of 2006 and did not correct until July of 2007. The trends of past years are repeating, predictable as the sun rising in the east.

The good times are 2 years away, granted, and this severe downturn will flush out the lazy, the incompetent and most of the dishonest. Those of us left standing will be smiling again. With less competition, it will be much easier to make a substantial honest living.

You heard it here first.


Phil Hawkins is employed with Downey Savings Bank and lives inFresnoCalifornia.



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