Alex Brandon, Associated Press
Mortgage brokers feeling squeezed
- Article by: WALKER MOSKOP
- Star Tribune
- August 12, 2012 - 12:01 PM
When Wells Fargo & Co. paid $175 million in July to settle federal allegations of discriminatory lending, it blamed independent mortgage brokers for selling the loans and it shuttered its entire wholesale mortgage operation.
For the brokers, who make their money connecting borrowers with lenders, this meant a key stream of income had just dried up. Wells Fargo, the nation's largest wholesaler, was the last major bank to work with them.
"We were very blindsided by this," said Scott Zak, who runs Capital Finance Inc., a one-man operation in St. Paul. "It changes things for us dramatically."
The decision is the latest setback for mortgage brokers, who already are ailing from the housing downturn that led many other banks to end wholesale lending. Since 2007, the number of people who facilitate home loans in Minnesota went from 4,074 to 325 this year. The drop came as tighter licensing requirements pushed out many brokers who were independent contractors.
Even more may leave the industry now that Wells Fargo is out of the picture, analysts say. In the first quarter of 2012, Wells Fargo funded $7.4 billion in wholesale loans, accounting for 14.5 percent of all broker-originated lending, according to National Mortgage News.
Most brokers will now have to turn to smaller lenders who might not be able to handle the volume of mortgage applications Wells Fargo leaves behind. Some home buyers prefer brokers over dealing directly with banks because brokers can offer loans from multiple lenders and provide rates that are priced below retail lenders. The number of brokers grew during the housing boom, and has shrunk significantly since. They've also received much of the blame for the subprime mortgage crisis.
"By eliminating that channel, we can really better ensure our commitment to fair and responsible lending," said Wells Fargo spokesman Tom Goyda.
In Wells Fargo's case, federal regulators accused it of steering black and Hispanic borrowers into subprime mortgages and charging them higher fees and rates than similarly qualified white borrowers.
"For many brokers, they view the environment for the last three or four years as death by a thousand cuts," said Rob Chrisman, a mortgage industry analyst in San Rafael, Calif.
Nationally, brokers originated 27 percent of total loan volume in 2008, according to National Mortgage News. Now, that figure is down to 10 percent.
For the past several years, more than 75 percent of the loans Capital Finance originated went through Wells Fargo. The bank offered good pricing and service, Zak said, and he hadn't found other lenders to be as reliable.
Still, Zak is confident he'll find another wholesaler or increase dealings with lenders he already works with, but worries he won't be able to find one that is as consistent as Wells Fargo and has the same level of customer service.
"Wells Fargo was another arrow in the broker's quiver," Christman said, and not having that option will lengthen the time it takes for capacity-stretched lenders to complete a loan, and could raise costs for borrowers.
At Brookstone Mortgage in St. Paul, broker Erika Dragich hadn't expected Wells Fargo's pull-out to affect her business. After all, her firm didn't even carry Wells Fargo products.
But she was surprised when, two weeks after it made its decision, underwriting turn times jumped for the lenders Brookstone works with. "I'm calling my lenders," she said, "and they're saying, 'We just got a huge influx of files. Now we're backed up.'"
Fewer loans being closed hurts broker revenue, Dragich said, but ultimately, borrowers will be affected most.
"There aren't enough underwriters," said Robert Carter, president of the Minnesota Mortgage Association. "Staffs are swamped right now. This just further impedes the ability to get a loan sold and closed."
While slower loan processing times are a concern for brokers, several said they are more nervous about what's next. A bigger concern would be for Wells Fargo to end or limit its ties to correspondent lenders, an action other major banks already have taken.
Correspondent lenders approve and fund mortgages in their own name before selling the loans to a lender. They take on more risk than brokers, a likely reason why Wells Fargo still does business with them.
Wells Fargo dominates the correspondent channel, and through those lenders, brokers still can offer Wells Fargo loans to clients. If the bank cuts off that avenue -- through which it funded $60.3 billion in loans in the first quarter of 2012 -- it would create problems for many people who originate mortgages for a living.
"The more cynical of us tend to expect that this announcement is a harbinger of more to come," said Peter Boyle, a correspondent lender in Plymouth.
Goyda said Wells Fargo will continue working with correspondent lenders. But after the Justice Department brought the discriminatory lending case against Wells Fargo, other lenders could be wary of potential litigation. "I suspect that regulators have other little lenders that are under their microscope," said Jeffrey Babcock of Stratmor Group, an industry consulting firm.
Walker Moskop • 612-673-4265
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