Jun. 8, 2007: Are mortgage bankers going back to being brokers?

“Marriage is a relationship in which one person is always right, and the other is the husband.”

Do you think that the “office plant guy” has bad days? Do you think that he goes home, and tells his wife, “I need a beer…I think that the poinsettia on the second floor is on its last legs…”? A bad day in the mortgage business is when 30-yr A-paper prices plummet by almost a point, and you were waiting to lock for a client. Or you told them that you had locked earlier in the week… and now rates went up by .250! And the move is continuing today, with the yield on the 10-yr currently up to 5.18% earlier. The only economic news was the Trade Balance, which shows a deficit of $58.5 billion.

In spite of the Bush administration lowering its U.S. economic growth forecast for 2007, rates worsened considerably yesterday. The White House said it expects real gross domestic product (GDP) to expand 2.3% this year, down from its earlier projection of 2.9%. Despite the slow first quarter, the White House said growth should be solid for the rest of 2007 with strong growth in the labor market. On the inflation front, the White House expects the consumer price index to rise by 3.2% this year, up from the previous estimate of 2.6% due to higher energy prices. It didn’t matter yesterday, as the 10-yr shot up to 5.15%, current coupon 30-yr rates hit 6.75%, the DOW sold off almost 200 points, all due to the general consensus that rates around the world are poised to move higher. If there is any good news in the slightest, it is that the yield curve steepened, which would help ARM prices relative to 30-yr fixed rates.

What are the differences between being a mortgage banker versus a mortgage broker? As a banker, you can control your own underwriting and closing process, create your own product set and guidelines, sell directly to Wall Street or conduits, set your own rates and manage your own rate lock policies, and sometimes see better price execution by hedging your own pipeline or benefit from volume incentives. But this year many smaller firms have been forced to reconsider the costs & risks of the decision to move from broker to banker. Why?

• A lender may have lost money due to credit risk: the underwriting guidelines changed mid-process, or an entire investor’s business line (subprime) was eliminated during processing but before locking.
• Repurchases have driven many mortgage banks either out of business or taken a large chunk out of their balance sheet. Third party originators have especially “tasted the lash” from investors when misrepresentation, errors, or fraud appear.
• Warehouse lenders have moved from monitoring lender’s business practices to almost being a partner with the mortgage banker. Haircuts have increased, and policies and procedures have come under increased scrutiny.
• Price gains by bulking product, rather than selling loan-by-loan, have diminished. And while you’re waiting for a bulk pool to come together, your hedge may not behave as you expected, and you may suffer a negative spread on your cost of funds! Buying individual loans gives the investor more control over the loans that they’re purchasing, as opposed to bulk deals where sampling is more prevalent.