Tuesday, November 06, 2007

The Worst Job Today - Mortgage Broker

It was close, as I thought about declaring it to be a "real estate broker".

Not many brain cells are needed to realize that mortgage brokers have a perfect storm brewing.

For the next 5 years or so, they will be doing smaller loans and much fewer of them. They work on a pure percentage commission - 2% of the loan is a number I hear as standard payment. For example, if a mortgage broker sells a $300,000 loan to a homebuyer, he'll pocket a gross $6,000 off that deal. Needless to say, 2% of a smaller aggregate number means they'll be earning far less then they have been during the real estate bubble.

Now here's the salt on the wound. Not only are mortgage brokers dealing with shrinking loan flow, they are also dealing with cutthroat competition - from each other - 2% commissions are no longer "standard". A mortgage broker was telling me the other day that there are some brokers who will now do $1,000,000 loans for a mere .25% commission, i.e. $2,500 instead of a historical commission of $20,000. These guys are starving and the inexorable vice of competition is squeezing away their profit margins. There's even a book out titled - Guerilla Marketing for Mortgage Brokers - How to Steal Customers From Your Competition. Every clown became a mortgage (or real estate) broker in the past five years and it will take some time before the industry consolidates away that excess.

There's also a reactionary movement afoot to eliminate the third party broker altogether. Back in the 1990s, banks decided to outsource the mortgage origination business and now they are reining it back in. It's a cute little blame game they've got going on. These days banks are blaming the brokers for not properly vetting the finances of borrowers. Bank of America, Citigroup, HSBC, et al now wish to regain control over the whole loan process and more effectively manage their legal liability.

I heard the other day that Rhode Island just increased the bond it requires of mortgage brokers who operate in the state from $10,000 to $20,000 - no doubt this is some obtuse effort to crack down on "subprime" and "predatory" lending. Politicians haven't a clue what's going on and are really just grasping at straws. There's that tired expression - when someone's a hammer, every problem looks like a nail. Well, the political hammer is invariably more regulation. Again it begs the simple question - If the mortgage industry is already regulated and the government couldn't prevent the fraud and loose lending leading up to this point, what in the realm of evidence makes them think they can change anything by more regulation?

I am not sure whether mortgage brokers have to deposit these bonds in cash or if they can finance the bond. Regardless, it's still an increase in operating costs that comes when the powder is running dry. Imagine if you are licensed in four states that all raise their bond in this fashion. Where are you going to coming up with 40k to meet this obligation?

Summing it up, mortgage brokers are besieged by evaporating revenue, brutal competition, and rising operating costs. Furthermore, the big banks and econo-illiterate politicians have them in their sights.

I wouldn't lend a mortgage broker $10 today - their financial prospects are that dim.


Taylor Conant said...

Stop basing so much of your thinking on theory! So the government has screwed up in the past, it doesn't mean they necessarily will in the future too! Maybe it does just require more regulation. We'll never know until we try. Everything must be tried at least once, empirical results are all that counts and trying to use predictive theory is pointless.

CaptiousNut said...

Sometimes sarcasm doesn't transmit well over the internet.

This isn't one of those instances.

Anonymous said...

I haven't charged 2% ( nor received it from a lender) ever.

The margins are smaller than you think

CaptiousNut said...

In April 2001, the average "take" of a mortgage broker was 2.02%. (link).

This means brian brady is a diaper-wearing mortgage broker if he didn't "ever" charge 2%.

Furthermore, my entire post discusses shrinking commissions. Did he even read what I wrote?

Unknown said...

He added that the BBB complaints are a tiny fraction of the loans Altus handled in the past three years. mortgage calculator no down payment