Is the Mortgage Broker DOA?
Just a question but I am starting to think that the mortgage broker model may be broken. Forever. That’s a shame too because most of them are good, honest business people. The recent problems in the mortgage business are a case where a few bad apples have ruined the bunch.
Conceptually the mortgage broker, appraiser, real estate agent really have little to no investment in the long run success of a mortgage loan. These 3 main players are paid at closing on a per transaction model - they are paid to find clients, close deals. Lather. Rinse. Repeat. If the mortgage loan goes sour in 3 or 6 or 12 months later they don’t have to refund their commissions. They did their job and have been paid, in full. The mortgage broker is typically paid based on an expected YTM over the life of the loan. Instead of taking their commission each month over the life of the loan, they are paid in present value, meaning the get the “lump sum” payment rather than payments over time (yes sort of like the lotto payouts).
Image source: http://www.realestatejournal.com
Especially in the case of the mortgage broker - the loan is originated then goes who knows where? Traunched and re-traunched and securitized into tiny slivers - the mortgage broker lassos the cow but once sold at the meat market, the butchers render the cows unrecognizable, even to their original owners. The problem in the mortgage broker model is all the risk is shifted to the loan holder. The loan holder buys the loan with an expected yield to maturity and expects to get paid. When they don’t get paid by the homeowner there is little to no recourse back to the mortgage broker. In many cases the mortgage broker may have changed companies or even retired or gotten out of the business. So lately the loan holders have been busy shifting risk to investors that want to buy bonds from Mr and Mrs Joe America using the market of mortgage backed securities. But what if Mr and Mrs Joe America are the equivalent of junk bonds? And what if their payments have been sliced up and sold to thousands of investors who didn’t think they were buying junk bonds?
Perhaps we have gotten too far from the idea of community lending? Is the mortgage backed security the brainchild of Lewis Ranieri ultimately a flawed idea? Or is it a good idea that like everything else on Wall Street has been taken too far by the PHD/MBA/math majors (aka eggheads) ?
Perhaps someone lending the money should drive past the property, get out, walk around and maybe even shake hands with a buyer?
Is that too antiquated for our high-tech low touch world?
The technology vendors push iPhone appraisals and speed of light closing times and all kinds of efficiencies but at what cost?
The golden goose has been cooked perhaps and the real winners may be the big ole boring banks and their downpayment requirements and their rules and regs….. how old school.
The real elephant in the room is how many American homeowners will BECOME junk bonds? Nobody knows and all the fear is built into the market already thanks to our US based corporations that control NBC, CNN, ABC, CBS and the rest. Would you buy Tylenol if you knew that .005 (one half or 1 percent) of all Tylenol on the shelf MIGHT be poisoned? What would the daily news headlines be? Tylenol scare and so on. Would you buy any? Would you give it to your kids? This is what the media has done to our mortgage market.
To sell newspapers, magazines and ratings the mainstream US News Media leads with sub-prime mortgage meltdown stories and continues the constant drumbeat designed to sink the US economy before next year’s election (read more) . The result is spooked US consumers and overseas investors that are scared to invest a dime into US Mortgage backed securities. That stops the liquidity, stops the loans and therefore stops the real estate “ponzi scheme” and everything grinds to a halt rippling into everything from carpet installers to truck dealers. Demand reduces, supply increases, prices drop and the the US consumer’s main and many times only real tangible asset is devalued. Home equity shrinks and people tighten belts. Builders layoff workers and it all trickles down.
The first step to get the liquidity back is to reduce the risk of buyers of mortgage backed securities. We must find a way to remove the risk which has been in many ways encouraged and fueled by the current transaction based commission only models used by mortgage brokers, appraisers, and real estate agents.
Filed under: Foreclosures, Sub-prime Meltdown
