BankThink

Mortgage Brokers, It's Time to Get Real

Depending on whose version of the story you read, in 1929 either Joe Kennedy, James Pierpont Morgan or Bernard Baruch is reported to have said that he knew it was time to get out of the stock market when his shoeshine boy started giving him stock tips. I should have known in 2006 that we were about to have the greatest financial crash since the Depression when my pool boy announced that he was making his last visit to my home because he was off to join his friend in Florida as a mortgage broker.

This week the mortgage brokerage industry is up in arms about the Fed's new broker pay rules. Broker trade groups are attempting to enjoin the new rules in court and they are predicting all kinds of dire consequences for the nation. Yet an article reporting these reactions in Wednesday's American Banker ["Broker Pay Rules Forcing Banks to Play the 'Bad Cop' "] draws all the wrong conclusions. The story opens with the statement that "lenders are realizing — sadly — they will have to police their brokers," a statement that, in the aftermath of the financial crisis and the substantial contribution to that crisis by out-of-control mortgage lending, is quite extraordinary.

And so the grumbling continues. Among the litany of complaints appears the stunning revelation that the new rules require a "delicate balance between what you make in profit and the amount you need to pay loan officers to be competitive." Welcome to the world of competition!

The new rules, it is said, will "unfairly hurt first-time homebuyers and borrowers with dings to their credit who typically relied on brokers using some of the yield [spread premium] to fund a loan's closing costs." Leave aside the fact that such premiums were generally kept secret from borrowers, why is the new restriction a problem? After deciding, no doubt not for philanthropic purposes, whether to bestow some of his or her secret commission upon a borrower who could not even afford to pay that much in order to close the deal, would the broker also have been willing to sign a guarantee that the borrower would actually repay the loan?

An astonishing analogy is drawn by one mortgage lender: "Would you rather buy a pair of shoes from Target or a pair of shoes from Prada? They will both last the same time and do the job." Only often they won't — and didn't as we all learned to our massive collective cost in 2008.

The wailing continues: technology and compliance costs favor the larger banks — well DUH! — and there will be a decline in customer service because the costs of better service cannot be factored into the pricing. I thought it was the personal service that made brokers so special to customers? Or do brokers want to be paid for mass production and then paid again for service?

Perhaps most absurd is the complaint by another mortgage company president that "high-producing, high-paid brokers face an immediate pay cut because of the caps on lender-paid commission. The top tier just got squeezed because of compensation reform." Where has he been during the past three years?

Let's talk turkey. Mortgage brokers can earn exceptionally — and I mean exceptionally — high compensation by applying a relatively modest range of skills. Good luck to them.

With high compensation, however, comes high responsibility. At least this used to be the case and should once again be the quid pro quo. So why should the mortgage industry be especially exempt from this basic principle of competitive economics?

Even more importantly, banks use mortgage brokers as an outsourced extension of their sales forces. Why on earth would banks not want to "police their brokers"? Bank reputations have suffered enormously as a result of the reckless practices of mortgage brokers. It would be as irresponsible for a bank not to require attestations of compliance by brokers as it would be not to require outsourced technology providers to guarantee minimum customer service and data protection standards. Banks that, in the past, did not impose such minimum requirements were not only irresponsible to the public at large but were also neglecting their duty to shareholders. The general public, taxpayers and employees, and bank shareholders all paid a huge cost as a result.

The reported protests from the mortgage banking industry are nothing more than self-serving hot air. It is high time mortgage lenders stopped acting like victims and started exercising the responsibility that comes with the rich fees they earn from lending. Or start servicing swimming pools instead.

Lawrence G. Baxter is a professor at Duke Law School. He was formerly an executive vice president of Wachovia Corp., heading its e-commerce division from 1995-2006.

 

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