Miriam Bernstein wrote a post on mortgage brokers that cited a recent New York Times article on the problems facing mortgage brokers. I’d summarize the post as pointing out that now isn’t the best time to be a mortgage broker as well as pointing out that brokers are not fiduciaries. Miriam’s presentation was flawed in that it came across as unkind to brokers in my view, and judging from the comments, I’m not the only person to feel this way. For the record, I don’t think Miriam wanted to knock anyone.
Full disclosure: I am technically still a loan officer for a mortgage bank and have worked as an LO for years for both brokers and lenders (in NY they are referred to as mortgage banks). There are advantages and disadvantages to both.
The top-producing mortgage originator in the US for the past 15 years is Melissa Cohen, founder of the Manhattan Mortgage Company. MMC is a mortgage broker. They could become a bank in the State of New York easily, but they don’t. Why not? Because Ms. Cohen feels strongly that brokerage is better for the consumer. She must feel pretty strongly about this, because she’d make more money as a banker.
But why is brokerage necessary? Here’s my take.
- It gives retail banks competition. And competition is good. As banks close and consolidate, consumers have dwindling options. If your only 2 choices were Citi and Chase you’d be in the middle of a de facto monopoly. Brokers give consumers an option they wouldn’t otherwise have.
- It gives borrowers more choices. When you walk into your local bank, your loan options are limited to what that bank has in its loan portfolio. An application placed with a broker can be placed with literally dozens of lenders.
- It serves the niches. Larger lenders scoop the cream off the top of the applicant pool. They don’t need to bend over backwards for a hard to find loan. Brokers are more like boutiques. Before I worked with a broker, I never heard of Ohio Savings Bank or Flagstar. I know brokers that are responsibly placing loans with obscure programs like the Department of Agriculture and other seldom considered but highly useful sources.
- Personal service. I’ve had too many rate shoppers forego using a local source whose office they could sit in and whose hand they could shake for some nameless, faceless Internet operation that promised a lower rate. When the 11th-hour bait and switch occured, they had no recourse. Worse, they had no time to switch lenders. The brokers I know value their reputation more than their fee. That matters. Moreover, they work harder than the Internet drones. And don’t get me started on banker’s hours.
- Higher standard of disclosure. Do you know what a bank makes when your mortgage closes? It isn’t disclosed on the HUD-1. Brokers, on the other hand, have to disclose on the HUD-1 exactly what their Yield Spread Premium (YSP, or commission in layman’s terms) is for all to see. The higher the rate, the higher the YSP. That is transparency.
Mortgage brokers may not be fiduciaries, but neither are bankers and direct lenders in New York. It doesn’t matter. They are bound by confidentiality and won’t get repeat business or referrals if they don’t do right by the borrower. Brokers may have challenges right now with PMI and some some lenders have closed their wholesale channels, but that’s the market cycle. Don’t count brokers out. The race goes to the swift, and my money is on the guy whose good name is on the line over some monolithic, top heavy companies whose eye is on Wall Street instead of the ball.