Mortgage Payment Program

We are starting to see the ripples of change come from the mortgage crisis. (See the blog on Mortgage Meltdown). One of the changes is that mortgage lenders are changing how they compensate brokers for the loans the broker originates. Since brokers have been a party to nearly 7 out of 10 mortgage transactions, any impact to brokers is likely to trickle down to the consumers getting loans. The question up for debate is how will these changes impact consumers who are trying to get mortgages.

Some quick background in case you are unfamiliar with the roles of lenders and brokers. Mortgage brokers act as independent sales agents in the transaction. They sell lender’s loan products and use funds from the lender or a line of credit from a mortgage banker in order to fund the loan. The broker is paid a commission for their role in the transaction. The commission the broker earns is based on (1) fees paid by the borrower including points and junk fees, (2) the rate the broker charges the borrower (in some cases the rate is higher than market rates and the broker earns a yield spread premium commission), and (3) pre-paid penalties (if any) often earn additional commissions. Typically people with lower credit scores, or who have had bankruptcy and/or foreclosures (those classified as subprime) will payer higher points, higher rates, and be subject to pre-payment penalties – a trifecta for brokers looking to maximize their commissions.

New mortgage broker requirements have been adopted by a number of lenders in response to the subprime crisis. Companies such as Wells Fargo & Co. and Provident Funding Associates LP both mandating that brokers disclose upfront how much borrowers will pay in fees as well as the yield-spread premium to be paid by the lender. Additionally, Countrywide Financial Corp. lowered its maximum broker compensation to 4 percent of the mortgage amount, down one percentage point.

How will these changes impact consumers? The disclosure requirements should make the fees charged clearer to the borrowers, especially fees, like yield spread premiums, that were difficult for borrowers to identify. The lower cap on fees paid may bring mixed results to borrowers. On the one hand there, it reduces the maximum fees a borrower will have to paid to obtain a loan making the loan more affordable. On the other hand it reduces the brokers incentive to help borrowers in smaller loans. Since many of these loans are the result of consumers identified using data sets for direct marketing campaigns, brokers may raise their minimum loan requirements on these data sets meaning many of these consumers will have to proactively seek out loans on their own rather than get offers via phone and mail. It could also increase the brokers sales attempts to raise the loan amount by selling the borrowers on paying off more debt and taking out more cash than they need to in order for the broker to make an acceptable commission.

We are already seeing a drop in the percent of loans created by brokers – down now to approximately 40% of all mortgage closed. Less broker loans could mean less competition which, as the theory goes, could mean higher fees to consumers. Only time will tell if these changes are moving things in the right direction for consumers or not.

So, what’s behind the mortgage crisis? Who is to blame? The current mortgage crisis was caused by a series of things that all went wrong and in a chain reaction continued to cause problems throughout the entire industry. It is hard to find a single area of blame – instead errors were made by most of the players in the mortgage transaction. Here is just one example of many where things went wrong.

One of the biggest culprits to the current crisis was the use of reduced document loan programs – specifically the Stated Income, Stated Asset (SISA) products. The underwriting requirements for these products allow borrowers to state their income and asset but did not require the lender to confirm them with pay stubs and tax returns. This left open the possibility for loans to get approved for people who would not otherwise qualify for them. In many cases it was crafty Loan Officers who gamed the system by taking the application and filling in the income and assets required to get the loan approved. Sometimes borrowers were complicit in allowing this to happen so they could get the loan and in other cases the borrowers were unaware because they didn’t carefully review the huge stack of documents they were signing.

But these SISA loan products existed because there was a market place for them. Mortgage Insurance companies would insure them, the ratings agency’s would rate them high enough to be marketable, and Wall Street was buying and selling them. How could they possibly understand the true risk without having all the information necessary to assess it? Hindsight being 20/20 tells us they really couldn’t. But when everyone in the process was making money along the way, it is hard to shut something down that “seems” to be profitable. And in many cases they were making money again and again with many borrowers continuing to refinance to pull out cash and keep teaser rates as home values continued to climb. That is until values started to drop and they could not refinance any more. Today we see a lot of the SISA loans originated in the last three years going into foreclosure and a return to stringent documentation requirements on loans.