The reports of my death are greatly exaggerated,” Mark Twain famously declared after reading an obituary of his death that ran prematurely. Today’s reverse mortgage brokers could say the same thing. Since the subprime crisis began in 2007, followed by the “prime” crisis that continues today, the mortgage broker has taken the lion’s share of the blame.
And why not? Mortgage brokers surely played a role in the crisis. Add to that their lack of true national cohesion (by definition!) and absence of an effective, well-funded lobby, and you have the perfect scapegoat.
Beginning in 2008 the voices against the mortgage broker began their quest to discredit, then to regulate, then finally to destroy. By 2010 it was a full-blown assault. Amazingly, the broker not only survived but seems to be thriving. And this is seen most clearly with the reverse mortgage broker.
Since the credit crisis, the forces aligned against the reverse mortgage broker have been legion, and have included two presidential administrations, more than a few federal and state senators and congressmen, the Mortgage Bankers Association, the Board of Governors of the Federal Reserve (most notably under former FHA Commissioner David Stevens) and even HUD and the FHA. And through all this, the reverse mortgage broker somehow continues to thrive.
The Opening Salvo One of the earliest anti-broker moments was the MBA’s issuance of a white paper to Congress called “Mortgage Bankers and Mortgage Brokers: Distinct Businesses Warranting Distinct Regulation,” written to educate regulators and lawmakers that mortgage bankers and mortgage brokers should be regulated differently. It made the argument that mortgage brokers, as opposed to others lenders, need to be heavily regulated. It described in detail how yield spread premium (YSP) works, and how the broker’s greedy desire to earn more YSP caused the mortgage meltdown.
But the MBA conveniently left out a few items, namely the way retail loan officers, net branches and the ownership of operating subsidiaries are compensated. Call it service release premium or whatever else, but that payment looks, feels, and purchases outlandish McMansions and BMWs just as well as YSP. Additionally, retail lenders and banks would increase the commissions and other forms of payment depending on the product and its different options, just as with a mortgage broker. Further, the paper forgot to mention that several of the largest retail lenders (and their subsidiaries, often paid in the same manner as a broker) produced much of the worst products and shoddy underwriting.
It also omitted the most common argument for the mortgage broker’s innocence, or relative innocence: The investment banks and other financial institutions themselves created and underwrote these products and processes of paying more for seemingly worse. But I’m not blaming anyone. We mortgage brokers wished that wasn’t the MBA’s purpose either. Upon reading this paper, I shook my head, filed it away, and made a note to quit the MBA.
More Shots Fired Many mortgage brokers did not recognize the opening salvo, as it wasn’t new legislation and didn’t get too much run with the press. But the next salvo was clearly seen and heard.
The SAFE Act was passed in 2008 and designed to regulate the mortgage business more stringently. The Act’s main focus was to regulate and require stricter licensing for mortgage brokers and mortgage originators. It also established the NMLS, or Nationwide Mortgage Licensing System, which contains information about every licensed mortgage broker and mortgage originator. This came with tremendous costs of time and money for every non-bank mortgage entity. Each mortgage lender or broker now needed mandatory education and would have to pay steep licensing fees for each loan officer they employed, often costing these institutions well into the thousands of dollars per loan officer. Bank employees, however, to this day, only require a background check and to be registered in the NMLS, a total cost of only $75 per loan officer.
Some would argue that the SAFE Act was not aimed at mortgage brokers more than other parties. But Senator Christopher Dodd, Chairman of the U.S. Senate Banking, Housing and Urban Affairs Committee, clearly stated what he and other lawmakers meant by the “loan originators” covered by the bill, calling the Act a “new mortgage broker and lender licensing requirement … that will begin to address many of the abuses of the mortgage process that have been perpetrated by mortgage brokers.”
Regardless of the intent of the legislation, most agree that the SAFE Act has largely been a successful piece of legislation and regulation. While some parties have had an increase in licensing costs and time spent, the act clearly defined who can originate mortgages, forcing many of the bad players and part-time loan jockeys out of the business. For many brokers, this weeding out of other players meant less competition overall, and an increased sense of purpose.
The politicians had now joined the fight against mortgage brokers. However, it still couldn’t be a regulator pile-on without FHA entering the ring.
The Law of Unintended Consequences In 2009, the newly appointed FHA commissioner, David Stevens, announced that the agency would be cutting the Correspondent Mortgagee license, also known as the FHA Mini-Eagle. In somewhat layman’s terms, the Mini-Eagle license gave brokers the ability to broker FHA loans through a licensed FHA mortgagee, or Full-Eagle. With the Mini-Eagle, a broker could put his or her stamp on FHA mortgages and reassure customers they were approved by the federal government to do these loans. All of this came with annual fees, strict employment and state branch requirements, as well as annually audited financial statements with strict net worth requirements.
As part of this rule, FHA then allowed brokers to put loans through a sponsoring FHA mortgagee, with guidance suggesting that the sponsoring lenders would have the burden of overseeing the brokers. FHA and Commissioner Stevens said they would no longer oversee brokers in order to increase oversight of the industry, which many found a little puzzling.
For the reverse mortgage broker, this new rule seemed awfully detrimental to credibility. Many reverse mortgage customers, especially the more senior ones, buy on trust and security. No longer could the reverse mortgage broker say he had an FHA license.
Upon reading this, the brokers’ first thought was that they would just become lenders. However, FHA also largely shut off the broker’s ability to make the leap to lender, requiring vastly increased amounts of net worth to become a lender. With most of this rule set to take effect on January 1, 2010, it seemed pretty bleak for the reverse mortgage broker.
The rule was implemented, FHA broker licenses were stripped away, and lenders began the staged process for higher net worth requirements. However, we soon saw that all was not lost. Quite to the contrary, these rules had the unintended (one may assume) consequence of freeing the reverse mortgage broker from the cumbersome annual fees, employment requirements, state branch requirements, net worth requirements and expensive annual audited financials, at least insofar as they pertain to FHA licensing. Today, brokers must still comply with many of these requirements to satisfy their sponsoring lenders, however the fees, rules and time spent are far less onerous. Since that time, customers have barely noticed that the reverse mortgage broker doesn’t have an official FHA license.
The Big One Enter Ben Bernanke and the Federal Reserve Board. For many years before the Dodd-Frank Act, the Fed managed the Truth in Lending Act, with Regulation Z as its set of rules and requirements. Following the credit crisis, the Fed began a program to implement rules, changing the way mortgage originators, especially mortgage brokers, were compensated. Harking back to the MBA’s white paper, everyone seemed to think the method of compensation for the mortgage broker was a significant cause of the mortgage meltdown.
The Fed’s rule is quite simple: For closed-end mortgages (which excludes home equity lines of credit), a mortgage broker or originator can only be compensated from one source, and the size of the loan is the only loan term that can affect commission.
For years, message boards were littered with comments from nervous mortgage brokers about this rule, which went through several iterations before being settled. Currently, for non-reverse mortgage brokers, this rule covers most every mortgage they originate and dramatically changes the way they can do business. For reverse mortgage originators, the change only affects fixed-rate reverse mortgages, where the source of income is generally only from the bank and not the customer. And most fixed-rate reverse mortgages have the same exact rate and similar size-based compensation. In other words, this rule, implemented with little fanfare in April 2011, did not crowd out reverse mortgage brokers or add all that much increased regulation.
Another key piece to this rule was how all mortgage originators were affected by it. Banks and mortgage lenders ended up with the same rule, as they were bound to compensate their loan originators in this manner. Never mind the anti-broker statements by the MBA or Senator Dodd, the regulatory playing field had been leveled for all participants in the mortgage origination business.
The Battle Isn’t Over Finally, we’re now watching the staged implementation of Dodd-Frank. The fledgling Consumer Finance Protection Bureau (CFPB) is now in charge of many of the mortgage regulatory concerns. Dodd-Frank has also called for studies on reverse mortgages, and there may be more changes to Regulation Z and the compensation rules. The SAFE Act and the NMLS are still growing in scope, with mortgage call reports now all the rage.
The Mortgage Broker is Dead! Long Live the Mortgage Broker! Through all this and despite its detractors, the mortgage broker community, that great American institution that has helped so many Americans find affordable mortgages, persists and remains relevant. Compare rates with brokers and the best lenders and banks, and you’ll often see more affordable mortgages from the broker.
And the reverse mortgage broker is alive and well. Of course this is difficult to prove with real numbers, since FHA stopped reporting on the now-defunct Mini-Eagles, but it’s clear to those of us in the business. The anecdotal evidence shows reverse mortgage customers have a renewed interest in working with brokers. The big mortgage lending banks, Wells Fargo and Bank of America, have left the industry, meaning more business for the smaller institutions. And while there was an initial fear of the new license testing and requirements, many loan officers who went with a bank to avoid licensing requirements have changed their minds and come back to lenders and brokers.
Many of the new rules are actually tougher on the smaller lenders than they are on brokers, forcing them to merge with larger lenders or become brokers. Thus, the mortgage broker has not only survived, but some say their numbers have even grown.
If you need more proof, just talk to the large wholesale lenders still in the business, the successful new entrants to the wholesale business, and the new crop of reverse mortgage brokers and they will all agree: We’re back and we’re here to stay!