Reality Check – Are mortgage brokers the root cause of the housing crisis?

Much of the blame for the Subprime Housing Crisis has been disproportionately directed at Mortgage Brokers. As a mortgage broker/originator since 1993 and a member of a group that many blame for the housing crisis, my views are biased and probably a tad defensive. However, blaming mortgage brokers for the foreclosure problem is like blaming auto dealers for global warming.

The only way to truly understand what caused the housing crisis is to break down the mortgage financing process and understand it’s complexities; both upon consumers and amongst the industry participants needed to get financing in place.

The number of people, documents, & steps required to complete a transaction in order to obtain home financing makes the mortgage process one of the most complex transactions a consumer will face in their lifetime.  The process has remained difficult despite advances in technology. Increased workflow complexity is stifling production.

As with anything not understood & studied, incorrect conclusions have been drawn about the true cause of our housing malaise.  Mortgage brokers have been singled out as the primary culprit for the current state of affairs. I agree that some mortgage originators (bank-employed originators included) abused the system. Low professional standards, limited educational requirements, & fragmented regulatory governance allowed our ranks to swell with those only looking to make a fast buck.

However, other factors like cheap money, non-existent appraisal regulatory enforcement, irrational lending standards, and an industry challenged with sharing data are not receiving enough attention and scrutiny.

Why is this happening?

The media is ill-equipped to understand what has happened and exacerbates the misappropriation of information. Non-profit agencies, regulators, legislators, and the public-at-large are often influenced by these reports and react with haste. This results in additional well-intentioned but misguided burdens that inhibit lending activity.  For example, rules like HVCC, have decimated the independent appraisal industry and added millions of dollars of expense to consumer’s financing transactions. People want action. Unfortunately, they take action before understanding. Fire first, aim later.

Perhaps the biggest tragedy, large lenders, including many that profiteered from irresponsible mortgage loans (like negative amortization Option Arms), are now capturing market share at the expense of small less capitalized mortgage professionals. This independent class of originator, many of whom, did not participate in selling unsavory mortgage products are under pressure and quickly disappearing.

I’ve spoken to some industry watchers that believe mortgage broker numbers have shrunk by 65%. The problem, well financed banks, backed with taxpayer money, have large budgets for media campaigns & lobbyists. These folks work tirelessly to perpetuate the placement of blame squarely on the backs of small independent mortgage brokers for the US housing crisis. This strategy accomplishes two things. It removes the scrutiny of the media and public from the bank’s role in the crisis. It also increases the burden upon a once thriving class of originators as they are subject to an increasing set of special rules that bank-employed originators avoid.

It’s important to note, mortgage brokers didn’t create, incentivize, or securitize any mortgage products. Mortgage brokers didn’t benefit from the bailout when these bad loans went sour. Mortgage brokers aren’t buying up these bad loan assets at rock-bottom prices on Wall Street. Lending needs an overhaul. The mortgage process is unnecessarily complicated. All origination parties should be subject to and governed by an equal set of rules. Anything less and consumers lose.

Already, we are seeing signs of this. On any particular day, The J. Berman Group pricing on a 30 year fixed mortgage is .25% lower than Wells Fargo. With reduced competition, bank margins grow and it becomes easier to pass on higher rates and fees to unaware consumers.

I believe the subprime housing crisis can be summed up by one word, greed. Unbridled greed. We are all to blame. The crisis cannot be attributed to one group; the blame should be borne by realtors, appraisers, mortgage originators, and home owners alike. Pointing fingers at any group in particular is an unsophisticated approach that prevents diagnosing and correcting the real underlying problems.

It’s not rational to blame car dealers for global warming, and mortgage brokers are not the root cause of the foreclosure crisis. The lending industry is in danger of an entire production channel undeservedly disappearing. If this happens, consumers will pay more for their home financing and the US housing market will take longer to recover.

The opportunity to perform an exhaustive common-sense reform of standards & workflow is now. What do you think?