A Short History of Mortgage Brokering

The following is an excerpt from Chapter 2 of Volume I of The Mortgage Professional's Handbook:

THE MODERN ERA

Rocke Andrews, President
NAMB: The Association of Mortgage Professionals

With the passing of Dodd Frank and the birth of the CFPB, new regulations came out in rapid fire.  Brokers were required to disclose their compensation, which was limited to no more than 3% — restrictions which were not imposed on their banking competitors.  Banks were able to pay their LO's higher commissions because, unlike brokers, there were no regulations artificially restricting the prices they could receive when they in turn went to sell (or internally capitalized the value of servicing).   The new Good Faith Estimate made broker loans appear to be more expensive by the required disclosure of total compensation earned including lender rebates.  The brokers that survived were more like the original broker shops of the early 1990’s in their structure – one and two person shops that had low costs and experienced, knowledgeable originators.  By 2012 the economy was recovering slightly and home prices were gradually increasing.  Regulations and guidelines were easing somewhat, and wholesalers returned to the market.  Interest rates were very low and hedge funds were seeking greater returns.  Initially these funds bought residential properties at bargain prices and as that became less profitable they bought mortgage companies.  Wholesalers returned, but to a smaller broker origination channel.

 

Brokers and NAMB members have changed over the years.  Originally, they were originators who sought out sources for those turned down by the banks.  Broker success was a result of creativity, spending time knowing and understanding the borrowers, and a determination to find a solution somewhere that would fit their needs.  Their compensation typically varied on the degree of difficulty of the transaction. This commitment to success led to loyal consumer and real estate partner relationships.  Brokers had a knowledge and understanding of their investor partners that made them a valued delivery channel.  As the broker channel moved to more conventional products, the successful broker was one that could successfully recruit and keep numerous loan originators.  Mortgage shops grew in average size from three to five employees to significantly larger ventures of 20-25 with several branches around the state.  Brokers needed to know investor programs and guidelines, state and Department of Labor laws, and how to compensate originators without giving away all the profit.  Mortgage broker shops grew in size and volume and competed with banks in their communities, advertising on television and radio.  The small independent broker shops grew to a more midsized broker/banker hybrid that concentrated on originating all kinds of loans.

 

As the mortgage market neared the peak, brokers sold their companies or merged with bankers.  Entire broker offices were converted to banking branches for retail mortgage banks, and were recruited on the promise of operating as net-branches, sharing some of the corporate profits.  The rapid fall of the real estate market increased the urgency to get out of the broker channel and the number of broker shops as well as broker originators declined significantly. Concerns about buybacks and possible civil and criminal repercussions decimated the broker numbers as well as the membership in the trade association NAMB.  NAMB’s membership decreased from around 25,000 to closer to 2,500.  Numbers of licensed brokers and originators similarly decreased in size.  The shops that survived through the downturn concentrated on private money and niche financing not used by the larger banks.  Broker skills needed during this time were the ability to manage the business expenses and to become more of a streamlined  one- to three-person shop.  Brokers downsized with the market in order to survive.  Most had to dip into their savings and profits from the good years to survive. 

 

The new GFE and other regulations reduced the compensation earned per loan and increased the work required per loan.  With less volume overall and a decreasing market share, brokers could no longer afford to keep numerous LO’s on staff.  The LO’s moved to banks or other fields of endeavor and the remaining brokers hung on.  LO Compensation rules considered brokers as loan originators and limited their compensation per transaction to 3%, which included the lenders fees. The brokers had to pay their own overhead, employees wages, and originators compensation on a transaction-limited income regardless of the amount of time spent on a loan.  The historic broker method of searching for a solution through long hours turned somewhat unprofitable.  Loans already took longer to close and the amount earned on every loan was fixed regardless of the amount of time spent.  Smaller loans and more difficult consumer files, the staple of brokers over the years, were no longer the way to financial success.  Along with the decline in broker numbers was the decline of options available to lower-income borrowers with credit and down-payment issues, and more difficult investor files, such as those with multiple properties.   Lower-income borrowers and minority unbanked consumer loans suffered significantly.

Read the rest of this chapter in The Mortgage Professional's Handbook!

Rocke Andrews has been originating mortgages in Tucson, Arizona since 1987.  He has owned a mortgage broker company since 1993, currently Lending Arizona, LLC.  Over that time he has been broker, responsible individual, and branch manager for mortgage lenders.  He has served some capacity in NAMB since 1999 and in the Arizona state association since 1994.  He was selected and attended the Freddie Mac Train the Trainer class for Loan prospector in 2001.  He as been NAMB National Instructor since 2005 and has taught in many states and the country of Dubai.  Currently the president of NAMB and is active in Tucson as a member of the Tucson Conquistadores, a business group that puts on the PGA golf tournament there to raise funds for youth sports in Southern Arizona.