Mortgage brokers are having a tough time, a decline which should trouble real estate borrowers. According to National Mortgage News, â€śthe number of mortgage brokers is down 45 percent from the industry's peak in 2006.â€ť
A lot of professions have seen their numbers erode during the past decade, so what makes mortgage brokers a special case? The answer concerns money. In particular, your money.Click to see today's rates (Mar 26th, 2017)
To understand why mortgage brokers are important â€“ and how they can save you money -- we need to look at the lending system and how it works.
Traditionally much of the money used to create mortgages comes from banks and savings and loan associations (thrifts). They get money from depositors and then lend that money to borrowers.
The difference between their cost of funds and loan income is their â€śnet interest margin.â€ť If you're a bank or an S&L, you want the largest margin possible.
Most of us picture the local bank when we think of mortgage lending. We see aÂ branch office with loan officers and underwriters working to get us a loan, a facility whereÂ we might even make our payment each month.
But not every lender has a sales force or even an office. Many areÂ wholesaleÂ lenders, and mortgage brokers function as their sales force. Instead of paying salaries of loan officers, wholesalers pay commissions to mortgage brokers.
There are several types of lender that might work with a broker.
Mortgage bankers are not â€śbanksâ€ť in the sense of having depositors, bank branches or ATMs. Instead, they typically have enough money to originate a mortgage, but once the mortgageÂ closes and funds, they sell it.
Why do they sell? To raise new money so they can make new mortgages.
Nonbanks are the newest players on the financial block. They get money from Wall Street and from borrowing worldwide, and use that money to create mortgages.
Nonbanks typically sell their loans after origination to raise new capital and pay off the funds they have borrowed.
Portfolio lenders don't sell their loans. They keep them on their own books. Because they don't have to meet the needs of investors, they often come up with the most creative lending programs.
All the lenders above get cash from somewhere but mortgage brokers do something different: they don't raise cash at all. Instead, they have relationships with many lenders and sell the mortgages those lenders have available.
Traditionally, the value of a mortgage broker was to find the best available financing from a large number of lenders, take the loan application, and prepare the mortgage paperwork.
The benefit to the consumer arose when the mortgage broker was able to get better financing than borrowers could not find on their own.Click to see today's rates (Mar 26th, 2017)
The reason mortgage brokers are good for consumers is that they increase access to programs and foster competition for borrowers -- both things that push prices lower.
When thousands of competitors leave a marketplace, that's great for those who remain, but less-great for buyers iin that marketplace.
Unless you enjoy spending hours researching obscure mortgage programs and looking fr the best pricing, you may bbenefit greatly from the services of someone who does this sort of thing professionally, all day long.
Today, we have far fewer mortgage brokers, and that's hardly a surprise. The marketplace has changed, and with it the opportunities for traditional mortgage brokers.
We had the financial meltdown in 2006. Almost overnight, all but the plainest of vanilla mortgage products were off the table, discontinued because of their foreclosure risk. With fewer loan products, borrowers simply had less need for mortgage brokers.
Many lenders no longer wanted to work with mortgage brokers. JPMorgan Chase Chairman and CEO Jamie Dimon told CNBC in 2009 that loans through mortgage brokers had â€śtwo or three times the loss rateâ€ť of loans made through the bank's sales force.
â€śIf I had to point out my biggest mistake, probably of my whole career,â€ť said Dimon, it â€śwas not closing down our mortgage broker business sooner.â€ť
Dodd-Frank was passed in 2010. The new federal regulations require lenders to verify the borrower's ability to repay before originatingÂ a mortgage. Given potentially huge penalties for mistakes, many lenders preferred to rely on in-house loan officers instead ofÂ mortgage brokers.
Internet sites have given borrowers new abilities to locate and compare mortgage options themselves.
And what about now? Is there a place for mortgage brokers in 2017?
If today's mortgage brokers can produce consumer value in the form of better information, competitive rates and stronger loan applications, they will have an opportunity to prosper in the new mortgage marketplace.
If not, they will go the way of the buggy maker and the dial phone.
Mortgage brokers do have access to many programs, and the bestÂ brokers can tell you which loan is likely to work best for you and cost you the least.
Mortgage brokers who work efficiently can provide better deals than direct lenders, and may be better at solving the problems of borrowers who can't be helped by mainstream financing.
When shopping for a mortgage, it can't hurt to get quotes from brokers as well as direct lenders. Then, choose your best deal.Click to see today's rates (Mar 26th, 2017)
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2017 Conforming, FHA, & VA Loan Limits
Mortgage loan limits for every U.S. county, as published by Fannie Mae & Freddie Mac, the Federal Housing Administration (FHA), and the Department of Veterans Affairs (VA)