At last week's National Association of Mortgage Brokers conference in Reno, consultant Tom LaMalfa spoke to several hundred brokers and lenders about the state of the industry.

Mr. LaMalfa, who has 20 years of experience analyzing and reporting on the lending business, proposes several solutions for a business that he says is "losing its luster."

The main problem, he says, is that the wholesale production channel needs improvement.

He spoke at a time when brokers' reputations are on the line. The Department of Justice recently made a commitment to investigate the broker business for fraud and unfair charges to borrowers. Additionally, several class actions involving broker/wholesaler lending are circulating, making some lenders think twice about originating through third parties.

Excerpts from Mr. LaMalfa's "prescription for what ails the broker business" follow.


My first recommendation is for continuous communications between NAMB and the top 25 wholesalers. ... The easy way to accomplish this would be for NAMB to adopt a strong ethics code and outsource its enforcement.

The code would address ... fraud, churning, and training. The outsourcer would maintain a data base of the good, the bad, and the unknown. These actions would demonstrate responsibility, would substantially reduce the cost of wholesale production, and would enhance the economics of the business. In exchange, wholesalers would agree to not sign up non-NAMB members as broker correspondents.

Strategy 2: NAMB should join its wholesale sponsors in pushing for prepayment provisions in fixed-rate mortgages. This is a critically important consumer issue. Fixing this flaw could lower mortgage rates 10 to 25 basis points. Call protection will improve the mortgage's investment characteristics and performances. That's pro-consumer. Mortgages with prepay provisions will be more competitive with corporates, municipals, and other debt instruments

Prepayment safeguards will help mortgage-backed securities regain lost allure. Mortgagers win. What's more, servicers don't lose. Seven states outlaw prepayment penalties. Brokers should work with other interested parties to remedy this, in these states, and with Fannie and Freddie.

Recognize that completely uninhibited prepayments - as found in mortgages - are not found in any other markets. None.

Strategy 3: to work diligently to end the government-sponsored agencies' dominance of the mortgage market. Together Fannie and Freddie skim off nearly $5 billion of net income from the mortgage and investment industries. They monopolize the secondary market, and now they want to extend their reach into the jumbo and B through D markets.

With four reports on the agencies and their role coming out this month, and with Congress peering in again, now's the time to stake a position. The mortgage market has outgrown the need for the agencies. The private sector can now fill the gap.

There you've got it, my prescription for what ails the business. Take some good old-fashioned values, toss in two reforms, and presto, a new dawn emerges.

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