Mortgage brokers are down, but observers say they shouldn't be counted out just yet.

The brokerage business is suffering a crisis of confidence. Brokers' share of loan originations has sunk considerably from its peak and may never return to that level. Many brokers are fleeing the sector to become mortgage bankers.

But this adaptable niche has survived difficult periods before. And those most familiar with the wholesale business say brokers fill a need in the home loan market that is not being met by the big banking companies and servicers.

Nevertheless, those mortgage brokers that are still around could feel some pain in the short term, and their businesses might look different in the future.

"Our feeling is that the share is going to decline throughout the year. The ones that are left are paying the price for the sins of the rest of the industry," said Christine Clifford, a principal at Access Mortgage Research and Consulting Inc. in Columbia, Md.

The tougher regulatory environment is hammering those that remain — so much so that Access is having its "phone ring off the hook" from mortgage brokers looking to convert to mortgage bankers, she said.

Alan Rosenbaum, the president of Guardhill Financial Corp. in New York, said his company, which operates as both a mortgage brokerage and a mortgage bank, is doing well, but conducting business is "very nerve-wracking" right now.

"Trends come and go, but the well-capitalized firms are going to be around," Rosenbaum said. Those brokers were honest with their customers and always gave the best rates. "I think the good firms are going to be fine, but it is certainly going to be more challenging."

Lisa Schreiber, the chief strategy officer at NetMore America Inc., a Walla Walla, Wash., wholesale lender, said the mortgage brokerage business has "reset" — because brokers have been under fire, the standards in the wholesale channel have improved.

The challenges that are leading brokers to consider alternatives include the Home Valuation Code of Conduct, proposed changes to the Real Estate Settlement Procedures Act and a bill recently passed by the House that would ban yield-spread premiums.

Having to deal with all these changes at the same time makes it tough for a small business, Clifford said.

Rosenbaum said nobody on the broker side is happy with the code, which took effect May 1 for all single-family loans purchased or guaranteed by Fannie Mae or Freddie Mac.

One problem he and Clifford brought up is the portability of appraisals. If a new wholesale investor is needed after an appraisal has been ordered, a new appraisal might also have to be ordered, driving up the costs.

Pricing on brokered loans is not as competitive with retail ones as it historically has been, Clifford said.

Besides becoming a mortgage banker, other alternatives being considered by brokers are joining forces with retail mortgage chains, becoming part of a net branch outfit or entering some other joint venture.

Clifford said she knows of one case where a brokerage became the mortgage department of a depository that previously did not have one.

Rosenbaum said that being a mortgage banker has some advantages, but the scarcity of warehouse credit is making that business harder. Even though Guardhill has a high net worth, its warehouse line is one quarter of what it used to be, he said, and that might be in part because depositories see firms like his as competition.

One of the biggest problems mortgage brokers have to face is the exit of wholesale investors, Rosenbaum said.

Another option is merging with other mortgage brokerages. This can give a company enough net worth to receive Federal Housing Administration approval.

The mortgage brokers that will be most successful in today's market are those that can arrange FHA and Department of Veterans Affairs program loans, according to experts.

"These are talented salespeople," Clifford said. "If you are still in the business as a broker, you are good. You're not going to disappear. You are going to morph."

Schreiber said the brokers that are surviving this climate "are the best-quality brokers, because they have to be."

More of the process is out of the broker's control, she said, and the ones that are surviving are those that can educate consumers about to what is happening.

She and Clifford said that the current environment, in which lenders are struggling with increased loan applications, shows the need for mortgage brokers.

"We don't have enough originators for consumer demand. I believe originators are paying for the lack of brokers" in terms of higher fees and slower turn times, Clifford said.

Schreiber said consumers who are trying to refinance with a big banking company or servicer are going to have to wait several months to talk with a loan officer. This delay will give the mortgage broker the opportunity to conduct more business, since consumers will get frustrated and turn to someone in their local community, she said.

Rosenbaum said that there is a future for the mortgage brokerage business.

"When mortgages become attractive to banks again, we think the mortgage broker will be getting much more respect from the lending community," he said. "Thus they would be giving us good pricing to give to the consumer."

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