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This is your wake-up call.

You can buy pretty much anything on the Internet these days, and that includes a daily wake-up call. For about five dollars a day, someone will call you every morning at a time you specify, and even follow up with "snooze" calls for an additional charge. Mortgage originators, and especially the independents among them, can save their money; wake-up calls are coming in from all directions at the moment, and you can expect them to continue for months to come. Your government and your funding sources are doing their best to get your attention, and their best is enough to put your profession at risk of extinction.

Hyperbole? The NAMB doesn't think so. A recent bulletin describes the current environment a "Now or never fight to keep the mortgage broker profession alive." These are strong words from an organization that is traditionally circumspect in the way it phrases things. They are also accurate, for even the most news-jaded pundit will admit that there have been few times in industry history as dangerous as the present for non-bank lending professionals. You are not alone, if that's any comfort. Mortgage banks are threatened as well, but from another direction. More on that momentarily, as we look at some of the factors that constitute this unprecedented wake-up call.

Your control over transactions is eroding and will continue to do so. You won't be able to order appraisals any longer, for one thing. Too many appraisers were unduly influenced by brokers during the meltdown months, and overstated values are a pet subject among regulators. Though people in the industry understand the competitive disadvantages of losing the control to pick preferred service providers, appraiser selection is dead, despite vigorous protestations from NAMB. Deal with it, move on, and warn your borrowers about the delays this will cause in their transactions. Another obstacle is the potential of some mortgage insurance companies either refusing to insure broker-funded loans or becoming much more restrictive in the types of loans they will cover with PMI. It is not clear what will be next to go beyond your control, but you can expect more reductions in influence to come.

Brokers will continue to he "whipping boys." It's the fashion at the moment, but there have been some positive (though subtle) developments in public perception. When bailout stories dominated the news, broker unpopularity reached its highest levels as Wall Street desperately attempted to deflect blame for the crisis. Since then, things have quieted down significantly, as voices have been raised in the defense of brokers and stories of investment banking's greed took over dominance of the news. Brokers began to be viewed less as villains (other than the ones who truly were, of course), and more like overly aggressive salespeople, many of whom helped people into loans that weren't a good idea when the housing market crashed. The notion of "unscrupulous mortgage brokers preying on unwitting consumers" has faded dramatically. As NAMB president Marc Savitt says, "Brokers don't underwrite loans. Brokers don't approve loans. Lenders do that." Though the rhetoric has faded and people in high places are more versed on the roles of the players in the crisis, brokers are still an easy target.

Examples include Senator Barney Frank's recent comments that he intends to reexamine in detail the concept of yield spread premiums and origination fees for fairness and appropriateness. One assumes this means there aren't any more banks to topple with careless comments. The new RESPA language will leave lender-affiliated origination fees and compensation largely untouched, but will require more detailed disclosures about broker compensation This will further confuse consumers and hamper non-bank mortgage originators from offering competitive choices to borrowers, but lawmakers aren't much concerned with that. The new presidential administration can be expected to propose greater regulations in partnership with Congress, and there is no reason to expect them to go easy on brokers at the expense of the banks they are bailing out with your money.

The wholesale business is in jeopardy. Actually, it is gasping for air like a mackerel flopping on the fishing dock, struggling for oxygen in the form of warehouse funding. Without warehouse lines, there is no wholesale lending. For that matter, there is no lending apart from banks that can fund their own interim requirements out of deposits. Remember that just because your lenders sell their loans, that doesn't mean they receive their funds at the same time you do. They need many millions of dollars in credit to fund loans until the line is "swept" by incoming funds from investors. So if they can't obtain warehouse lines, they simply cannot fund loans. The lines have been drying up over the last 18 months as companies have exited the business. Lately, the situation has become critical, with only a handful of companies left, and their funds are spoken for. The large money center banks are traditional sources, but they aren't lending much either. But wait, you ask, what about all the federal bailout funds? Aren't those dollars meant to be put back in circulation in the form of loans, including warehouse lines?

The short answer is yes, they are meant to stimulate things by being lent, but it's not happening. One of the reasons is that the Troubled Assets Relief Program was launched hastily, without fully thought out conditions for the monies. Banks basically sat on the relief funds, replenished their reserves, acquired ailing banks to bolster market share and funded executive compensation-not what Congress had in mind. While most in finance would agree that keeping the nation's banks in business was paramount, they would also say that using public funds for these purposes rather than to stimulate the economy is not desirable. Congress is reviewing ways to force recipient banks to lend rather than hoard, but warehouse lending may be at the bottom of the pecking order because lawmakers don't understand its importance. So the wholesale business model is in trouble, and that means mortgage brokers are in trouble.

The refinance boomlet will he less robust than originally hoped. The shortage of warehouse funds and increased strictness in investor guidelines means that even though rates are down and more people can benefit from refinancing, not as many deals are funding. This is due in no small part to the fewer lenders actually looking for business and the reduced number of wholesale lenders competing for your business overall. You have been living it-loan approvals are more difficult and slow because lenders are asking for, well, weird stuff. Forget low credit scores and high LTVs; even loans that were a slam dunk a year ago with a 50 percent LTV and an 800 FICO are being questioned with nit-picky conditions that leave brokers scratching their heads. Lenders are simply reluctant to lend at the moment, not only because of their own shrinking corporate values, but also due to the air of uncertainty among investors, including Fannie Mae and Freddie Mac. While demand is high for refinances, fundings remain low.

Of course, wholesale departments are a low priority at the big money center banks, too, even though they don't have the warehousing issues causing mortgage bankers to break out in hives. Chase's exiting wholesale is indicative of many banks' sentiments: they'd rather be in retail, and they would like to recapture the point of sale from mortgage brokers. It appears they are being successful in doing just that, based on market share figures. Reported estimates of broker market share drop is indicative of this, with some being around 20 percent currently, as opposed to over 60 percent in early 2008.

As the old typing class phrase goes, "Now is the time for all good men to come to the aid of the party." For the mortgage brokerage industry to survive, it must mobilize, and quickly, before all the air goes out of the wholesale funding system and brokers are left without places to send their loans. It is time for the mortgage origination business to unify behind an industry leader who will take them "Once more into the breech, dear friends." The NAMB seems to be leading the charge, so it is high time to follow that lead and get involved. Local chapters are already mobilizing, and if you are not a member of your local association, you should join immediately and actively participate. There are letters to be written, congressmen to be called, meetings to attend and political action committees to be funded. It is not an understatement to say that in the history of professional mortgage origination there have never been as many challenges to threaten your business as exist at this moment.

If you're not awake by now, chances are even those Internet services won't be of much help. The business could be gone by the time your next wake-up call arrives.

JAMES HENNESSY has over 25 years experience in the mortgage industry and is managing director of Strategic Vantage Marketing & Public Relations. San Diego, Calif., 858/793-0950, e-mail:
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Author:Hennessy, James
Publication:Mortgage Originator
Date:Mar 1, 2009
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