The Federal Housing Administration's efforts to shift the burden of supervising mortgage brokers to lenders is creating a mini-boom in demand for brokers to bring in homebuyers and refinancing customers.
Some observers had warned that the plan would drive brokers from the lending process. Instead, many lenders have already come up with guidelines to recruit and oversee them and are actively looking to hire.
Wells Fargo & Co., for example, is encouraging brokers to sign up with the lender to originate FHA loans. The agency's new policy is "excellent news for any brokers who would like to submit FHA business but have never received FHA approval," since now they only need a government-approved lender to sponsor them, Wells Fargo said in a memo to wholesale clients last week.
Similarly, at 360 Mortgage Group LLC, "we've been flooded with applications [from brokers] since the start of the year and we haven't seen a slowdown yet," said Andrew WeissMalik, the Austin lender's chief operating officer and vice president. The Department of Housing and Urban Development "is doing it right by putting the liability on those that have the money" — the lenders.
Lenders' broker recruitment would bolster FHA Commissioner David Stevens' argument that eliminating the agency's so-called "mini-Eagle" designation for brokers would open FHA's door to more of them.
"I believe that is the reaction HUD intended when [it] decided to transfer oversight of these third-party originators from HUD to the approved lenders that are accepting loans from them," said Lisa Klika, a vice president of compliance and quality assurance at Guild Mortgage Co. in San Diego.
At a conference in San Francisco last week, Stevens reiterated his rationale for the transfer of oversight: HUD, which runs FHA, simply lacks the resources to police brokers.
"We don't have the breadth and ability to manage mortgage brokers independently," he said, "so lenders will have to manage that."
On May 20, HUD stopped accepting applications from brokers for FHA approval but began allowing them to originate loans if they are sponsored by an FHA-approved lender (known as a "full Eagle").
The department simultaneously raised the minimum net worth requirement for most FHA lenders to $1 million, from $250,000, to help ensure that these lenders have the heft to make the government whole for losses on loans that were not properly underwritten.
Lest anyone think FHA is no longer keeping tabs on brokers, however, Stevens said in an interview that the agency will still "track the broker" and loans' performance.
And since lenders will be on the hook for errors made by brokers, even those that are inviting more such originators to join their rosters are tightening the criteria for acceptance.
WeissMalik at 360 Mortgage said he is considering requiring that brokers have three to five years' of FHA loan-processing experience.
In additional to annual recertification and background checks, he also plans to check brokers quarterly against industry watch lists to determine whether they have been dinged with early-payment defaults or early payoffs.
"We underwrite our brokers as tough as we underwrite our borrowers," he said.
Not all lenders are being as aggressive as Wells and 360 Mortgage. Guild Mortgage's Klika said FHA lenders now have two schools of thought on dealing with brokers. They will either "allow all brokers to submit FHA loans now or just those they are familiar with and have experience originating them," she said.
Guild Mortgage is in the latter camp — it is maintaining the status quo by sticking with its current roster of brokers and refraining from adding ones who were not previously approved by HUD.
Some lenders said they are waiting for additional guidance from HUD on what criteria to use in accepting new brokers.
William McCue, the president of McCue Mortgage Co., a New Britain, Conn., wholesale lender, said he has been hesitant to raise broker requirements because he expects the larger lenders to which he sells his loans, like Bank of America Corp. and Wells, to end up setting their own criteria.
"We're kind of waiting for them because they are going to dictate what criteria to use," McCue said. "Much of the standards will be similar to what FHA required in the past."
Neither Bank of America nor Wells Fargo responded to requests for comment.
Lenders may increase the frequency of broker reviews, perhaps quarterly, out of concern about buyback requests, McCue said. "The question is, how are we going to hold them accountable and how frequently are we going to check them?" he said.
Greg Schroeder, the president of Comergence Compliance Monitoring, an Orange, Calif., company that monitors brokers on lenders' behalf, said some lenders are concerned about jeopardizing their own FHA status.
"It has paralyzed some of our lenders," said Schroeder, a former executive of the now-defunct subprime lender New Century Financial Corp. "They don't want to jeopardize their mortgagee approval because, if they get audited, the lender does not know what FHA is going to look for. So they are not taking any applications from new brokers."
In addition to FHA's Neighborhood Watch website, which is used to monitor and compare the default ratios of brokers, Klika said, lenders have another tool in their arsenal to check up on brokers: the unique identifier from the National Mortgage Licensing System that is part and parcel of compliance with the Safe and Fair Enforcement for Mortgage Licensing Act of 2008.
Because lenders will be held responsible for any faulty brokered loans, she said, that identifier "will be used in hiring and firing decisions."
Many brokers have struggled to pass state and federal licensing tests, thinning the broker ranks even further, McCue said.
FHA-approved brokers previously had to pay a non-refundable $1,000 application fee, provide audited financials (brokers complained these cost from $7,000 to $10,000 a year) and show minimum net worth of $63,000. These three factors kept many small brokers away from FHA lending.
Now, "many brokers will be able to originate FHA loans who couldn't before," said WeissMalik. "We have seen some brokers moving from banking back into brokering" — a reversal of the trend in recent years when former mortgage brokers joined lenders.
Another potential monkey wrench is that lenders tend to rely on a broker's personal credit score as part of the approval process. Many brokers got caught up in the housing bubble and ended up in default or foreclosure.
"Many lenders claim it speaks to the issue of character," said Schroeder, who considers a business credit score to be a better indicator.
For all the discussion about what criteria to use in evaluating brokers, the question remains whether opening the door to more brokers will sacrifice quality.
"Some will say FHA is the replacement for subprime," McCue said. "But we know what brokers originated subprime, and when we talk to them we're very skeptical" about their qualifications to write FHA loans.