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Brokers still approving bad loans

Loan application

TEXT OF INTERVIEW

Tess Vigeland: You heard mention in that last story of the FHA's inability to monitor the thousands of lenders who are apparently still handing out mortgages to people who can't afford them. That's led to an astounding number of defaults on new loans. The Washington Post reported this week that in the last two years more than 9,200 FHA loans have gone into default after missing the first payment, or never paying at all. Many of those lenders are mortgage brokers. And this is far from the first time they've been on the hot seat. Alyssa Katz is a journalist who's been investigating the mortgages business for Salon. com. I asked her to remind us how mortgage brokers operated in the recent real estate boom.


Alyssa Katz: During the 2000s, according to their trade group, they sold four out of every five mortgages. Most brokers have relationships with a number of different lenders, and the idea in theory is to have them work with a borrower to find the cheapest loan that's best suited to their needs. You know, some brokers specialized in subprime. Others worked primarily with prime lenders. But there was usually a menu, and is usually a menu of options that they can offer.

Vigeland: And what do mortgage brokers get out of this transaction?

Katz: Well, they get fees. And those fees can be paid a couple of ways. One way is cash that the borrower has to put up at closing. But increasingly they can also take what's called a yield spread premium. The borrower can take their compensation by basically arranging to have the borrower pay a higher interest rate than they might otherwise pay. The broker is permitted to take an additional fee for that arrangement, which profits then the broker and the lender. And brokers in the industry more generally defends the practice as a way that a borrower, who can't put cash upfront for a broker's fee, can essentially pay it off over time through higher interest rates.

Vigeland: Now, when someone's bought a house, and they can't even make the first payment, or perhaps they just make one and then no more, that's usually a sign of mortgage fraud. Now we know what happens to the family; They go into foreclosure. What, if anything, has happened to the people who wrote those loans?

Katz: I mean, nothing. Brokers have -- they basically collect their fees immediately, and then the loan is then out of their hands. And if anything happens to the borrower down the road, that is not immediately the brokers' responsibility. It's only if that borrower were to sue, and make the case that they were set up with a loan that is illegally made, then the broker could be held accountable. But that is very unlikely that a borrower going into foreclosure is going to do that because they don't have the money to pay a lawyer. That's why they're going into foreclosure.

Vigeland: Let me ask you this. You know, as the housing market collapsed there was a lot of talk that people who had these bad loans, you know, they were victims. At this point, if people are getting into loans that they shouldn't be getting into still, how much of that should be really buyer beware? I mean, haven't we learned our lesson at this point?

Katz: Absolutely. And I think that right now a borrower who wanted to take out a risky loan -- let's say that somebody was intent on being reckless -- would have a fairly hard time doing it through a mortgage broker. Brokers are now making just one in six loans. And I think I mentioned earlier, I think the number was something closer to four in five.

Vigeland: Right.

Katz: I think buyers should beware with many of the FHA lenders out there. Many subprime brokers moved into either FHA or into sort of a whole other universe of lending called correspondent lending, which is something in between a broker and a bank, when the subprime industry started running into trouble.

Vigeland: It all just sounds like a big game of whack-a-ball. I mean, you close off one avenue to bad loans and another one just pops up somewhere.

Katz: That's absolutely right, and I think that the fundamental challenge here is that as a way of getting mortgages to borrowers, these guys can just set up storefronts. Of course, many of them just do business on the Internet. They don't have a lot of overhead; They don't have to build a big bank with pillars. We've got to move back to something with a more institutional model to help make sure that there's more accountability and you don't have kind of rogue actors all over the place trying to just get their fees in and outflank the competition.

Vigeland: Alyssa Katz teaches at NYU. And her upcoming book is "Our Lot: How Real Estate Came To Own Us." Thanks so much for helping us out.

Katz: Thank you, Tess.

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I have appreciated the comments of the broker professionals on this forum. I specifically wonder two things about Mr. Kopec's comments.

Regarding Reason #1: Who is prosecuting cases of fraud?

Regarding Reason #2: Are lenders exercising this option to require a broker to repurchase a loan?

Thanks

I am surprised at this article. I have been a long time NPR listener. I am also a 12 year veteran loan officer. You have done your listeners a grave dis-service with this poorly written article. Makes me think the the banking industry PR firm got to you. There is very little truth to what you have in this article. Shilling for the banking industry is the last thing I expected to see or hear from you. Shame on you!!

Speaking as both a long time NPR listener and a 20 year mortgage professional, I have to say I'm disappointed with this presentation.

The notion that mortgage brokers are not accountable is a fallacy.

Reason #1 - There are federal laws against loan fraud. Both the borrower and the loan interviewer are responsible for the information provided on the application. If that information has been intentionally falsified by either party, it is a felony offense.

Reason #2 - Most (if not all) lenders sign an origination contract with their mortgage brokers. Under the terms of that contract, should any information in the loan file be deemed a purposeful misrepresentation, the lender may require the mortgage broker to repurchase the loan. The prospect of having to repurchase a $417,000 mortgage would be the financial equivalent of a death sentence.

I won't dwell on the misconceptions involving yield spread premium; prior comments have already covered that.

As I mentioned, I've been involved in this business for 20 years. I started in an entry level position right out of college, and then gradually, gained experience in processing, underwriting, loan originations, and management. Finally, when I felt I was ready, I opened my own small business. I decided to do this because I could offer rates and fees to my longstanding customer base at a significantly reduced cost than when I was working for a "big box" national outfit. Also, it gave me access to a much wider range of loan products to help my clients out. Of course, with the more competitive rates and fees, and wider loan product offering, I was able to generate more income through my business and thereby better support my growing family. That is how the wholesale lending business was meant to function. Unfortunately, small, independent, professional operators have enough on their plate with their customers and business operations to mind what is going on at the national level.

There is a role for all parties - the borrower is supposed to understand their budget. The loan originator is supposed to take a factually-accurate application. The underwriter is supposed to determine whether or not the information in the loan meets product guidelines. The investor is supposed to craft product guidelines that result in profitable returns. The regulator is there to ensure that everyone is engaged in conduct appropriate to their roles and in accordance with the law.

I suppose I'm not surprised by the tone of this piece; the die has been cast about who is to blame, regardless of the actual facts.

Hey guys--I do enjoy your show, but I need to take exception to the interview. While it is true that a majority of loans are originated by brokers, that is not the same as saying that brokers are the culprits for these defaults.

Brokers only originate loans that banks will buy. Brokers do not underwrite or fund loans. It is the guidelines of FHA loans which determine eligibility and those are set by HUD. I write for Filife.com about mortgages and would be happy to discuss this in more detail.

shame. on. you. marketplace.

i'm not even sure where to begin with the one-sided-ness and misinformation in this story.

every single practice described here (such as “buying the rate down”) as being the evils of brokers are practiced by big institutional banks.

however, banks don't have to disclose the same way brokers and correspondents do, and can legally disguise the practices in different ways, because they have better lobbyists and more money. money they got charging fees and points and rates while most brokers were giving expert, individual, and painstaking, time consuming, one on one service to our clients – clients that pay rates and fees that are very similar to what they would pay at a bank.

why would you infer that brokers "make" loans? banks make loans. brokers (and correspondents) shop the same big institutional banks Ms. Katz admires to get the best loan for the best price for each of our clients.

a client going to a bank gets one banks rates, fees, loan programs, and loan parameters. brokers use our experience and understanding of the loan terms and parameters of several banks to direct our clients to the one with the best rates and loans for their specific circumstances.

basic research on your part, such as gathering a few different good faith estimates from banks and brokers would be basic due diligence.

i would bet my career that you would find brokers with similar and even better rates and fees than banks. and I have ABSOLUTELY NO DOUBT that, on the whole, the brokers you spoke with would be infinitely more knowledgeable and efficient than the banks’ customers service reps.

like most brokers, i care about my clients - their respect for me (not to mention my own integrity) is a million times more valuable than any commission.

so lately, when my clients come to me for a refinance, i suggest that they first ask their current bank to do a cheap or no cost rate renegotiation with them. if the bank won't, i ask them to get a good faith estimate from the bank that so we can compare my rates and fees to theirs. when I began suggesting this, my thinking was that, if the banks rates and fees were considerably better than mine, the client should go to the bank; if they were only slightly better, I could make a case for our history and my excellent one-on-one service being worth the nominal extra rate or fee.

i have to admit, i was surprised when the banks came back with fees and rates the close to and even higher than mine.

what wasn't surprising was the amount of time it took my clients to get information and a good faith estimate from those banks (when i first directed them toward the exercise of getting rate and fee quotes from their bank, i was in fact counting on that to be a selling point for me).

my clients spent hours on hold and the customer service reps they spoke with had less than a basic understanding of the loan process.

on two different occasions, i personally sat down with my client to help them talk with their banks about modifying or refinancing their current mortgages.

i sat down with them, but i never talked to the customer service agents at these institutional banks, because on each occasion, with two different institutional banks, we were on hold for 45 minutes before we finally gave up.

in 45 minutes, not one human being spoke to my clients.

why would a client pay a huge institution that put them on hold for 45 minutes the same amount as they would pay for the loan i find and "broker" for them?

and guess what? on more than one occasion I’ve gotten my client, better rate and fees through the wholesale arm of their mortgage holder than they can get through the retail side.

and guess what? my clients rarely go to voice mail, and never wait in an advertising and muzak cue or have to know my extension or what button to press before they can enter my extension..

i have educated myself about what effects rates, watch market conditions like a hawk and advise my clients when to lock their rates and why. its my job, a service my commission pays for, and what my clients deserve. my doctor goes to medical school so I don’t have to. i have a thorough understanding of mortgages and rates and markets so my clients don’t have to.

my clients' colleagues (who do not make their living through understanding mortgages and how markets move mortgage rates) must use their best laymans judgment to tell their banks when to lock their rates - hopefully they aren’t in an important meeting at their work when markets move drastically in the middle of the day, and hopefully they can actually get through to the customer service rep and said rep will be able to lock their rates in before they change for the worse.

for the most part, banks are institutions with 100’s and 1000’s of employees, working with 100's and 1000's of customers at once.

banks service providers are salaried with small, if any incentives.

Brokers (and correspondents, which, by the way, were around long before the subprime meltdown) have comparatively less over head, have 5-15 clients at a given time, and spend a significant amount of time per client and transaction.

brokers are for the most part, their own “boss” and their success is tied to their clients trust and satisfaction

yes, we’re basically on full commission and we make much more per transaction – this is a great motivator, and, as i can personally attest to, often at no more or even less cost to the client than a bank.

yes, sometimes a bank might be a better option for my clients.

i’d be happy to give you the name and number of one client I recently sent to a bank.
I had a loan for him, but I knew the bank had a better one.
even when it resulted in NO commission on a loan I’d spent hours on and had viable options for – I not only sent him to a bank I set him up at the bank, so he wouldn’t have to redo loan stuff he’d already gone through with me.

yes, there are dishonest and slimy mortgage brokers.

there are similar “dishonests” and “slimies” in every profession.

shame on you for not telling the whole story.

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