As it stands, one in three mortgages originated by people in this country are done through Wells Fargo. Another key statistic is, that at one time, mortgage brokers originated 40% of all mortgages. Since 2008, this number has dwindled as enhanced scrutiny and the advent of the NMLS (National Mortgage Licensing Registry) testing requirements sent many brokers packing or back to school in order to maintain their profession. Settlements exceeding $25 billion in fines, fees, and penalties were levied against the major banks for various mortgage infractions in the last 36 months. This has caused Citibank, Chase, Bank of America, and Goldman Sachs to abandon the mortgage broker and/or correspondent (“direct lender”) distribution channels. As other mortgage professionals and I had shared with so many people, this is not good for brokers, but in the long run it is not good for the American people. In the end, borrowers will pay more in costs, fees, and higher interest rates.
For example, we are living in a day and age when it is an absolute crime to quote someone a zero point rate above 4.00% to refinace their home, when the borrower has equity and a 750 plus FICO score. However, this is exactly what a Bank of America retail branch representative did when quoting a rate for a potential borrower. The borrower was told three times that the best they could offer was 4.125%. Then, the same individual called me and I locked him for 45 days at 3.5%. On a monthly basis, this is a difference of $210 in payment. Another example is that one of my colleagues received a similar call and was competing for business with a retail branch representative from Chase. This person was quoted a rate in the 5.00% range! I couldn’t believe what I was told. As you can imagine, my friend easily bested that proposal and took the business from Chase. Clearly, the consumer suffers when left with only a retail option.
By and large, brokers provide cheaper options by working with a plethora of lenders. The list of available sources is dwindling, but most brokers work with at least seven different lenders. As such, if competing against bank “V,” it behooves the broker to check with bank “W,” “X,” “Y,” and “Z” to determine who has the lowest rate and highest closing cost credit to pass on to the borrower. The broker’s costs are cheaper than a retail branch because our overhead is normally lower, as most brokers only hire the bare minimum staff needed to function and run their businesses effectively. Also, most brokers (and their staff) live and die by the deal. So if deals don’t close, brokers don’t get paid. Conversely, banks still pay salaries and benefits, which can cost thousands per month per employee. Accordingly, it filters down to the rate quoted to the consumer. Finally, for the most part, brokers are specialists in their trade. They are not bound to cross sell or collaborate with other departments to offer other goods and services. Their only focus is mortgages--plain and simple. Hence, it is easy to surmise that brokers have a distinct advantage over the loan officer at the local branch. Indeed, that’s what makes Wells Fargo’s decision leaves many shaking in their boots.
Following the announcement, US Bank held a conference call with its field representatives and brokers. The bank is contemplating its commitment to the broker channel (wholesale) and whether or not it wants to continue working with third party originators. Whispers were heard in the halls of GMAC (AKA Ally Bank) as its field reps celebrated and worried at the same time. Wells Fargo’s exit means more broker business, but the decision makers in the corner office took a look at their own discontinuation of brokered loans as well. The reasoning that Wells gave for its decision was “due to the complexities of this business in the current environment.” Hence, this is code for “we have taken too many hits, have been sued too many times, and have paid out too much money, so now, if we don’t do the loans ourselves, we are not going to do them.” What a travesty. Some people blame dishonest brokers, and there are some. There are also many honest ones with spotless records and impeccable character. Therefore, don’t punish the majority for the sins of a few. The country needs more choices and options, but Wells was an option that has been taken away.
In summary, these are some amazing times in the mortgage industry. Anyone in the industry who isn’t busy obviously isn’t going into the office right now. Rates are at their lowest point in recorded history. Brokers are working to originate loans but also looking for new sources while pondering their future. Many of us feel that extinction is around the corner and we are being forced out. Well, I don’t necessarily buy that. Realtors know that a competent broker with a solid Rolodex of lenders is hard to find, so they are worth keeping. The best of brokers can tear apart a 1040 and figure out a borrower’s true income. There is always a market for a true pro. Wells’ exit has caused many hearts to skip a beat and initiate heartburn, but it is not the end of the world. When private equity, hedge funds, investment banks, insurance companies, and other esoteric players entered the market, Wells only had a small piece of the market and having a Fannie/Freddie loan was the exception not the rule. The market will scream louder for alternative products to fill unique leads, and brokers will be there to fill those voids. It’s still scary to watch Wells go. Now, you have to wonder--who’s next?
Preston Howard is a mortgage broker and Principal of Rose City Realty, Inc. in Pasadena, CA. Specializing in various facets of real estate finance, he can be reached at email@example.com.