The death of the mortgage broker?
New rules about how mortgage brokers are paid will start next year
The mortgage broker’s days may be numbered.
Starting next year, mortgage brokers, who serve as middlemen between homebuyers and lenders, will be subject to new rules that experts say could push many to leave the business. Issued by the Consumer Financial Protection Bureau last week, the new rules prohibit brokers from raking in more compensation in exchange for placing borrowers in more expensive mortgages; they also disallow brokers from getting paid by both the borrower and the lender on a mortgage transaction. While the rules will make working with a broker safer for consumers, experts say they may also leave them with fewer brokers to choose from. “It certainly does put some of the more marginal players on the fence,” says Keith Gumbinger, a vice president at mortgage-info website HSH.com.
For borrowers, this unintended consequence may make shopping for a mortgage more difficult. Brokers tend to have access to a large number of lenders and are able to quickly determine the best loans and rates available. Without brokers, mortgage applicants have to contact banks themselves, going from institution to institution until they have a list of mortgage products and rates they qualify for. They can also search mortgage-shopping sites, but many of those sites only provide referrals, without giving consumers enough information to comparison shop.
Of course, there have also been plenty of risks to working with brokers as well. Critics contend that brokers were among the main causes of the housing crash, putting borrowers into risky mortgages that they couldn’t afford because they had a financial incentive to do so—a big reason why the new rules were created.
But now that a lot of the shadier brokers have left the field and the new rules wipe away much of the risk to working with the brokers who remain, the bigger challenge for consumers will likely be finding a broker who can give them access to many lenders. Over the past few years several large banks, including Wells Fargo and Bank of America, have announced they’re no longer working with independent mortgage brokers. (Some of those banks have said that mortgages originated by their own loan officers performed better while others have cited difficulty in controlling negotiations between independent brokers and clients.)
The decline of mortgage brokers has been underway for several years. That’s been largely due to the real-estate downturn that pushed many of them out of the market and earlier regulations for the industry that made it costlier to be a broker. The National Association of Mortgage Brokers currently has roughly 5,000 members, down from 25,000 in 2006, says Don Frommeyer, president of the association. Experts say the disappearing broker has made things harder for mortgage applicants. “Consumers are already having a difficult time getting a mortgage,” says Brad Hunter, chief economist at Metrostudy, a housing market research and consulting firm. And if the number of brokers does decline further, he adds, “that could have an impact, making it more challenging for borrowers to get loans.”
Mortgage brokers’ share of home loans has also dropped as their numbers have declined. During the last two years, mortgage brokers accounted for about 10% of total mortgage originations, compared to 20% in 2008 and more than 30% from 2004 through 2006, according to Inside Mortgage Finance, a trade publication.
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Those figures could decline further due partly to the rising costs that accompany the new rules and declining profits, says Mark Goldman, senior loan officer with C2 Financial Corp., a San Diego-based mortgage brokerage firm. New players are also unlikely to emerge. “They’ve raised the barriers of entry into mortgage brokerage,” he says.
Going forward, borrowers who use brokers will soon have more protections than in the past. It’s less likely that they’ll be steered into a mortgage with a higher interest rate or fees or one that charges a penalty for paying it off in advance. Also, brokers won’t be able to make more money by sending a client to buy title insurance from an affiliate.
Those who have difficulty finding a broker should consider checking out LendingTree.com, which finds lenders within its network that will consider your loan based on your personal information. Separately, consumers who have a relationship with a bank—whether it’s a deposit or brokerage account or wealth management ties—should consider asking the institution if it offers any discounts on rates, closing costs or other mortgage fees.
For their part, most mortgage brokers who are still around say they’ve already implemented most of the new compensation rules, which were initially announced in the Dodd-Frank Wall Street Reform and Consumer Protection Act that was signed into law in 2010 and a Federal Reserve compensation rule that kicked in the following year. (The CFPB’s announcement finalizes those regulations.) Brokers who haven’t done so yet will need to change their practices over the next year to comply with the new rules.