Tuesday, August 24, 2010

Banks Face Less Competition as Brokers Exit

An interesting article by Jeff Swiatek:

Mortgage broker is becoming a vanishing breed: Market downturn, subsequent regulations have squeezed many out of the industry.

Aug. 24, 2010, By JEFF SWIATEK The Indianapolis Star

In Indiana, the number of licensed mortgage brokers has fallen by nearly three quarters during the past five years. The decline was precipitated by falling home values and rising regulations. Banks appear to be the beneficiaries of the fallout.

Ken Blaudow has felt the pain of the housing finance industry turmoil.

The owner of Indy Mortgage in Indianapolis had 85 employees originating home loans in 2003. Now he has three and is about to give up his leased office in Castleton and move his company into two bedrooms of his house.

"It's drastically down," he said of his industry. "And there are a lot of funky new rules."

At least Blaudow's still around.

Most of the mortgage brokers that seemed to populate every office building and commercial street in Indianapolis and many other cities just five years ago have vanished.

The number of Indiana mortgage brokers and loan originators licensed by the state has plunged 73 percent since 2005, from 4,008 to 1,080, according to the secretary of state's office.

Brokers and loan originators find lenders for people seeking a mortgage on a new home purchase and charge a fee for that service.

With a sharply reduced membership base, the trade group that represented them, the Indiana Association of Mortgage Brokers, is gone.

"The industry most assuredly has been thinned out," said Douglas Brown, an Indianapolis attorney and the trade group's former general counsel.

Much of the decline has been due to the implosion of the housing sector since 2007. Prices and sales plunged during the recession. Foreclosures hit record highs almost everywhere.

As government rushed in to respond to the crisis, caused in part by overselling of risky mortgages by brokers who got rich on exorbitant fees, regulations on the industry multiplied.

Indiana and other states in the past two years began requiring brokers to pass licensing exams and undergo background checks. A criminal record, even a past bankruptcy, can now prevent someone from writing a mortgage. If states don't already do it, a federal law coming in January will require licensing exams and criminal background checks nationally.

Many of the sometimes-exotic products that independent brokers used to push -- jumbo loans, subprime mortgages -- also have been restricted or banned.

The new industry that's emerging is much more conservative, regulated and, some would say, less consumer-friendly.

"I don't think (the changes) will be better for the industry. It costs more to do business. And the consumer has fewer choices. But those are the cards we have been dealt," said Al Thorup, executive director of the Indiana Mortgage Bankers Association.

One regulation in Indiana caps fees to brokers and others involved in processing a loan at 5 percent of its value. That makes lenders reluctant to give smaller loans, especially now that loan processing has become costlier and more time-consuming.

"I've got some lenders who won't go below $65,000," Blaudow said. "On a smaller loan . . . there's not enough money to go around" to pay closing costs, he said.

A study by Bankrate, a financial information supplier, found that mortgage fees are on the rise, jumping 23 percent in the past year alone. Nationally, the average fees that a homeowner paid for a $200,000 loan are $3,741, compared with $2,739 last year. This does not include fees for real estate agents typically paid by the seller.

Closing costs on a $200,000 mortgage in Indiana, with 20 percent down, average $3,465, slightly below the national average. But while Indiana ranked dead last among the states last year in closing costs charged by lenders, this year it came in 35th, suggesting its fees are rising faster than most other states'.

Bankrate says the jump in mortgage fees is due in large part to the increased scrutiny lenders must give every loan, under tougher guidelines from federal regulators and two quasi-government companies that guarantee loans, Freddie Mac and Fannie Mae.

"It takes five to six times the work to get a loan to close than it did two years ago," Blaudow said.

Credit histories must be dutifully compiled for all borrowers. And any number of new criteria can lead to a refusal to lend. One new practice closes the door on loans to anyone who's done a short sale -- a way of selling a house when the sale proceeds fall below the balance on the mortgage -- in the past three years.

Banks have actually fared well in the restructuring of the mortgage industry.

That's because many banks didn't engage in the riskier lending practices, such as granting adjustable loans at subprime rates to people with less-than-stellar credit, that some independent brokers and their companies did. Banks also have dodged some of the state regulations that have crimped brokers.

Brandy Schroeder, manager of the Greenwood and Plainfield offices for national lending giant Wells Fargo Home Mortgage, said she's looking to expand her staff of 22 loan officers "as quickly as I can staff up desks and space."

The new regulations on loan originators, who typically find buyers of mortgages and then broker the loans to banks or other buyers to hold long-term, "is taking away the competition" from banks, Schroeder said.

"You're happy because you're getting more business. But you feel bad for them," she said.

Banks also will be better able to bear a coming federal regulation that will require any company handling federal FHA or VA loans to have $2.5 million in assets.

Ron McGuire, president of F.C. Tucker Mortgage in Indianapolis, said the changes in the mortgage industry mean "we're back to the way underwriting was 20 years ago when you had to have a down payment, you had to have a job. And that's a good thing, there's no doubt."

But McGuire said he worries that the decline of independent brokers now gives a handful of large national banks more of a chance to dominate the mortgage industry in many markets, and that new government regulations, such as restrictions on the way loan officers are paid, are too heavy-handed and come too late to do much good.

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