A rocky path ahead.

Reduced overall loan volume is affecting mortgage brokers more than retail loan officers, according to one veteran industry researcher. Broker market share has plummeted by more than half, now claiming just 30 percent of residential loan originations, estimates David Olson, president of Access Mortgage Research & Consulting Inc., Columbia, Maryland. "It's not a pretty picture for the brokers," he says.

Lenders also continue to leave the wholesale lending channel. New York-based JPMorgan Chase, previously the nation's largest mortgage wholesaler, announced earlier this year that it would discontinue working with brokers. Citigroup Inc., also based in New York, recently said it will reduce the number of mortgage brokers on its approved list from 10,000 to 1,000. Wells Fargo & Co., San Francisco, apparently now is the sole lender with a national retail presence that has retained its wholesale mortgage business.

Choosing to focus on their retail system is one reason given by banks for leaving the wholesale arena. Emphasizing in house originations is sensible, given the industry's lower total volume. Banks also claim loan quality is better on retail originations than with wholesale submissions. "Chase determined that loans originated by brokers defaulted at higher rates than did bank-originated loans," explains CNNMoney.com.

Such criticism is deserved, agrees Olson. "Lenders are furious," he explains, because of early prepayments on broker originations and low pull-through on locked loans. Hedging costs have risen for lenders, and if just 5 percent of brokers lock a loan with multiple wholesalers, it taints the entire industry in lenders' eyes, he says. Some wholesale lenders now insist on performing loan processing after acquiring a loan application from a broker. However, that reduces compensation received by the originator.

As a result, the universe of brokers has shrunk to between 25,000 and 30,000, Olson says. Many of those, he notes, "are not doing much business."

Olson says lenders that remain in wholesale are adding requirements such as making brokers use appraisers they've approved, or having brokers sign agreements giving lenders recourse on defaulted loans. Providing surety bonds to back up their performance and giving evidence of substantial net worth are other assurances banks could seek from brokers, adds CNNMoney.com.

Some lenders that have remained in the wholesale mortgage business are unable to fund transactions because their warehouse lines are maxed out. Warehouse credit lenders have pulled back as they've seen mortgage assets fall in value over the past two years. Availability of warehouse lines "is down 90-plus percent" from its peak, Olson says.

Having more wholesale lenders competing for business also would be helpful, says Paul Mattila, president of Cascade Northern Mortgage Inc., Vancouver, Washington. Six-week turnarounds from understaffed wholesale lenders make it difficult for mortgage brokers to provide the service they'd like to. Some lenders aren't locking rates until loans are ready to close, notes Mattila.

Lenders aren't the only group with a somewhat strained relationship with brokers. The PMI Group Inc., Walnut Creek, California, possibly started a trend when it quit providing mortgage insurance on broker originations in February. Higher defaults on brokered loans were the reason behind PMI's change.

MGIC Investment Corporation, Milwaukee, plans to continue working with brokers. However, broker loans require a down payment of at least 10 percent, along with a minimum 720 FICO[R] score. MGIC also has lenders tracking how broker loans perform.

Back to the future

In the past, brokers could turn to a new product to help them expand the marketplace and increase their volume. Brokers were at the forefront as the industry moved from providing funds primarily to salaried employees into lending to self-employed and other non-traditional borrowers. Now their role in the marketplace is undefined as lenders go back to traditional underwriting standards.

One positive scenario for mortgage brokers lies in the move by the Federal Reserve to purchase long-term Treasury bonds and agency mortgage-backed securities (MBS). Doing so could drive mortgage rates below 5 percent and spark a refinancing boom. Brokers then would be needed to help lenders absorb the expected inflow of loan applications.

Although changing conditions will shift the competitive landscape, they don't mean an end to the broker business. Mortgage broker Mattila compares today's situation with that of the early 1990s, when fewer loan products were available, yet brokers still were able to do business.

It appears residential lending may be going back to those times, when consumers worried about maintaining their good credit and saved a healthy down payment before venturing into a home purchase. Fannie Mae and Freddie Mac announced they would raise fees effective April 1 while also "toughening credit score and down-payment rules," notes syndicated columnist Kenneth Harney. Brokers looking to anticipate the future should review industry history and rediscover the importance of basic underwriting skills in the mortgage business.

Howard Schneider is a freelance writer oased in Ojai. California, He can be reached a: [e-mail].