Prospects dim for mortgage brokers

Prospects dim for mortgage brokers

By Jeremy Stoltz
News Editor

When the residential housing bubble burst the effects rippled through nearly every industry, but one sector has been taking the brunt of the damage and may soon face extinction.

Mortgage brokers, intermediaries that sell loans on behalf of individuals or businesses, have been around since the late 19th century but may not exist by the mid-21st century.

Simply stated, the purpose of a broker is to help homebuyers find an acceptable mortgage loan that meets their needs. This typically entails comparing potential loans from numerous banks in order to find the best fit for both the lender and borrower.

Predatory and sub-prime lending, though, have recently given the brokerage industry a bad name and the laws by which brokers must now abide have become so stringent that these middlemen may not be around for much longer.

“The industry could get phased out completely,” said Lou Rizzi, senior loan officer for U.S. Lending in Downers Grove. “I don’t see what there is to stop it.”

The brokerage industry is based on the ability for banks to lend money. With credit as tight as it is, and hardly anyone buying or building new houses, brokers are wondering how they will survive.

“A lot of people got sucked dry and a lot of bad press went out there for brokers,” Rizzi said, “as it should have because one bad apple spoils the whole bunch.”

Earlier this year, JPMorgan Chase & Co. ended its wholesale lending while Citigroup reduced the number of brokers it deals with from 10,000 to 1,000. Additionally, according to the housing finance tracker, The Mortgage Lender Implode-O-Meter, since late 2006 nearly 350 major U.S. lending institutions have imploded. And those that are still lending have significantly tightened their third-party requirements.

With banks so fearful of lending money, the only route for most would-be homebuyers is to secure capital through government-insured mortgages from the Federal Housing Authority (FHA), the U.S. Department of Housing and Urban Development (HUD), or the U.S. Department of Veterans Affairs (VA).

These loans are traditionally more expensive to the borrower and involve far more red tape than a traditional bank loan. Yet since most of the largest banks are now owned by the government, the options for homebuyers are dwindling.

This is evident in the fact that FHA and VA loans accounted for 35.9 percent of mortgage applications this past June, up from 25.7 percent in May and up 27 percent from a year ago. According to the Mortgage Bankers Association, this is the highest percentage of government-backed applications since 1990.

“That’s not a surprise at all,” said Marve Stockert, executive director of the Illinois Association of Mortgage Professionals. “In less than 30 months, they have gone from a 2 percent market share to a 36 percent market share.

“The problem is that FHA is not known as always taking the best quality loans. And if you don’t take the best quality loans, guess what happens? It’s already been proven over the last two years.”

In addition, homebuyers are flocking to FHA and VA loans because of the restrictions put on mortgage brokers by the Home Valuation Code of Conduct (HVCC) passed in May 2009, which put myriad restrictions on mortgage brokers regarding the appraisal process.

“It’s a disaster,” Stockert said. “HVCC has increased the cost to the consumer dramatically, by about $150 an appraisal. Who did that help? Well, guess who owns the predominant share of the largest appraisal management companies. The big banks do.”

HVCC laws also state that a mortgage broker has no say in the appraiser selection process, and the borrower must accept the first appraisal. The problem, said Stockert, is that most of the experienced appraisers have left the industry and the entire residential housing market—in essence, the entire economy—is left to a group of inexperienced appraisers.

“A lot of the really good appraisers have gotten out of the business,” he said. “They just don’t want to deal with it anymore. So what do we have left?”

Designed to help enhance the integrity of the home appraisal process in the mortgage finance industry, HVCC laws may be the death knell for the mortgage broker industry, said Rizzi.

“I think it’s the most ridiculous rule ever,” he said. “I think it’s somebody making money somewhere because everything is going to a central clearing house. Well, how did the central clearing house get this contract? It’s a fool on the American public.”

Currently, the inventory of untitled homes in Illinois will take between 50 and 54 months to fill, said Stockert.

“The ideal situation is 18 to 24 months,” he said. “If you get down below 18 then you come into a real strong sellers’ market. But here, there are no sales because there is so much product.”

With a lack of credit available to homebuyers, a suspect appraisal system, strict HVCC regulations, a massive surplus of inventory and foreclosures still happening, what is a mortgage broker to do?

“He goes and finds another line of work,” said Rizzi.

Posted on Tuesday, July 21, 2009 (Archive on Tuesday, July 28, 2009)
Posted by jstoltz Contributed by jstoltz

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