Banker’s Hours: The new home loan landscape, part 1
When you think of home loans you think of banks.
Urban legends abound about the Great Meltdown of 2008 and the financial crisis that closed out the first decade of the 21st century. One of the most pervasive of these beliefs is that banks generated the majority of toxic mortgages that resulted in over-building, and ultimately billions of dollars in foreclosed loans.
Some big banks were conduits, i.e. purchasers, of the bad loans, most notably Washington Mutual Savings Bank and IndyMac Bank, but the bulk of the mortgages were originated by mortgage companies and mortgage brokers. Indeed, banks were more victims of the crash than they were perpetrators, by virtue of the development and construction loans made to feed the housing boom.
Smaller banks especially stayed out of the residential loan origination business. But mortgage brokers proliferated in number, which was fine with borrowers. Consumers were eager to accept big proceeds checks for refis, or buy homes they thought they’d never have, and welcomed the help of , mortgage brokers to guide them through the many mortgage options i.e., stated income, no income stated income and stated assets.
Since 2008 mortgage brokers and larger mortgage companies have carved out an even larger share of mortgage originations. Some six years ago, I did some consulting work for a community bank located in one of Colorado’s year-round resort areas to determine opportunities for the institution in producing mortgage loans to pass on to the secondary market. The potential turned out to be significant and the competition wasn’t coming from other banks and credit unions. Of the 125 residential loans funded in February of 2017, 13% were originated by larger mortgage companies, and 56% by small mortgage broker operations. Non-bank producers accounted for almost 70% of residential mortgages written.
This trend isn’t abating. On Jan. 10 of this year, Wells Fargo announced that it would be scaling back residential mortgage operations, although it would continue to serve existing mortgage customers. A quarter of a century ago many TBIF (Too Big to Fail) banks were funding conduit facilities which purchased and passed through home loans into mortgage backed securities. Not so today.
As part of the aforementioned consulting gig, I wrote a regular column for the local newspaper called “Ask a Banker.” I managed to get the institution’s name in the piece without charge — worked great. One of the questions from a reader went something like this, “People tell me not to go to a bank for a loan to buy a house, because they don’t really care about helping you.” Why this attitude?
Is it the cost of money? Can you get a lower interest rate if you get your home loan from a non-bank lender? Nope, and that’s never been the case. In my first mortgage lending job back in 1961 the first thing the boss told me was, “We all feed at the same trough for money. It’s service that makes the difference.” Back then commercial banks made very few residential mortgages, and S&L’s stuck to conventional mortgages at 80% of value. It was mortgage companies that sold all of their FHA and VA loans to other investors that served the bulk of the residential mortgage market.
Interest rates have always varied little, if at all, between different lenders for the same type of mortgage. It’s still the same money trough.
So why do borrowers seem to favor brokers over banks? After all, weren’t mortgage brokers the moustache twirling Snidely Whiplashes that conned consumers into taking out big loans at high rates that resulted in foreclosure? Have the first 10 years of the century been wiped from memory?
The answer lies, I suspect, in the guidance given by my boss way back in the last century. Loan Originators (LO’s), whether they’re independent operators or work for a mortgage company, have a very strong incentive to provide service to their borrowers. The regular readers of this column — I affectionately call them “The Dynamic Duo” — will recall that I perpetually posit that “we’re all motivated by how we’re compensated.”
When an LO is successful in bringing a borrower’s mortgage application to the funding table, the originator is very well compensated. The lender making the loan pays the person or business that was responsible for producing it generally between 1.50 and 1,75% of the loan amount. If the LO works for a mortgage origination company, the operation may pay as much as 65% to 75% of the lender paid compensation to the LO. If the originator is a sole practitioner, as many are, then they keep the whole amount. Of course, in the latter instance there are expenses, but an experienced LO is adept at capping costs.
A home loan today isn’t the $70,000 mortgage on your grandparents’ split level. Fannie Mae and Freddie Mac are buying million-dollar home loans in high cost areas. A “modest” $400,000 dollar loan can gross $9,000. Say that a fairly active LO can close three deals a month, thus grossing, say, $27,000 for a month’s effort. Who do you think that the LO is working for? That’s right, for the borrower. It’s noteworthy that mortgage loan originators don’t call the customer a borrower, but rather a client.
These people work very hard, and most are highly competent. They’re also in demand; they’re recruited like five-star prep quarterbacks. Currently, two of the biggest mortgage originators in the country, Rocket Mortgage and United Wholesale Mortgage, are in a very nasty court fight over poaching high performance producers.
Please join us at the next session of “Banker’s Hours” for the back story on that catfight.
Pat Dalrymple is a western Colorado native and has spent more than 50 years in mortgage lending and banking in the Roaring Fork Valley. He’ll be happy to answer your questions or hear your comments. His email is email@example.com.
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