Dallas Real Estate Round Up: Game Change for Mortgage Brokers, Maybe

Associated Press

Starting today, you might see more mortgage brokers hitting the bars or unemployment lines. April 1, that’s today, marks the day the rules change on how mortgage brokers earn their pay. Old way: mortgage brokers get discounted loans from big banks and they offer them to consumers. They charge a fee, which comes as a “yield spread premium”, to cover the costs of doing business. For example, a $200,000 home loan. The broker gives it to the consumer at 5% and makes about $4000 on the deal. Well starting today sort of —¬† more on that later — that broker can only make a flat fee on whatever he sells. Now when I first heard this, I immediately thought yeah! Cheaper loans, more transparency for the consumer — it’s Miller time!

But then I did some talking. And thinking.

What this very well may do is screw up the cost of loans for consumers. Why? More risk now falls on the companies offering the loans. Let’s say a loan officer promises a customer a lock in at 5%. If he doesn’t lock in for whatever reason, the broker honors that rate even if the market has moved up to 5.5%, ostensibly so he can keep a customer. The loan officer gets paid a flat percentage, but the mortgage broker now has to eat that cost. (I see how it could also reward incompetence!) If costs go up for mortgage brokers, what do they do? Not pay the rent? No, they raise prices.

So who is going to lose out? You and me.

Also in the past, brokers made more money on some loan products, and some might steer clients to these loans. Of course, any broker who did that wouldn’t get my business again. Also, as a consumer, I would do my research and say no way. Example: I am a 30 year mortgage girl, never have like adjustable rate mortgages.

There’s this great line in Michael Lewis’ The Big Short when a Deutsche Bank bond trader was trying to sell Credit Default Swaps to a mortgage biz savvy hedge fund guy, who finally asked, “what I am trying to figure out here is how you are going to ______ me?”

Me, I have always approached financial transactions this way, big or small. If someone’s going to make some money off the deal, that’s cool, just tell me. That’s why I am a bit concerned over this new “consumer protection.” It’s like a condom with a needle stuck in it. What I fear is the crippling of the small mortgage broker, a bonanza for the big banks (who need it the least) and higher lending costs for us all.

In fact, I’m told Wells Fargo et al is cheering this on. I talked to Wells about a re-fi the other day and they flat out told me they could not compete with a lower interest rate — you need to go find an independent mortgage broker, Wells said.

OK, up above when I said “more on that later…” here’s the deal. The National Association of Mortgage Brokers (NAMB) got a stay on this, so it is NOT in effect.¬† Late Thursday night their expedited appeal to the United States Court of Appeals for the District of Columbia was granted and a¬†stay implementation of the final rule on loan officer compensation, officially known as Regulation Z; Docket No. R-1366, Truth-in-Lending, was ruled¬†pending appeal. The stay delays the enforcement date of the LO compensation rule which was to take effect beginning Friday, April 1, 2011.

The Appellate Court stay was granted by Appellate Judges¬†Karen LeCraft Henderson, David Tatel and¬†Brett M. Kavanaugh, and a date of appeal was set for this coming Tuesday, April 5, 2011. This news breaks just one day after¬†Judge Beryl Howell of¬†U.S. District Court for the District of Columbia denied NAMB’s¬†request for a temporary restraining order (TRO) against the Federal Reserve Board’s loan originator compensation rule prior to its April 1st enforcement.

Complicated, yes, but really important real estate stuff. Stay tuned!