The real estate blog.

It’s interesting how different a story can sound based on the use of one word. “Commission” sounds like payment for expertise, but “kickback” sounds dirty.

Consider a recent article by CNN about the changes mortgage brokers are having to make because of the industry downturn. The article claims -

Instead, brokers pocketed kickbacks from banks in return for selling borrowers unnecessarily costly loans.

I’m not here to defend the practices of some unscrupulous mortgage brokers over the past few years. As a profession it is going away. I think it is unfair for the media to paint the entire industry as using kickbacks. It’s not true. It is a commission, a fee for service. If the media is going to call yield spread a kickback, they should also call service release

premium a kickback. Indeed, they should call any commission a kickback including those paid to their own ad salespeople, because after all, newspaper advertising can be “unnecessarily costly.”

For your information, service release premium is the commission loan servicers pay to originators to collect payments on mortgages. If you don’t make your mortgage payment to the lender that funded your loan, a service release premium was involved. That’s the way the business works.

The article in question suggests that mortgage brokers are going to have to be more transparent in order to survive, but also points out the number of lenders even operating wholesale divisions is decreasing -

A few large banks are cutting mortgage bankers out of the process. Bank of America (BAC, Fortune 500) and Wachovia (WB, Fortune 500), for example, have recently said they will make all loans directly to customers.

The list of retail only lenders is growing every day. Does this sound good for consumers? On it’s face, sure. Get rid of the unscrupulous brokers and you’ll get rid of overly expensive loans and fraud. The truth lies elsewhere. While brokers are required to disclose yield spread premium at closing, bank lenders are not. Further, brokers provide competition to bank lenders which is good for the marketplace. What we’re seeing happen is fewer choices for consumers, not more. I think this is a bad thing and will have equally negative consequences.

Congress wants to further limit brokers, but I think they’re doing it in the wrong way.

A number of bills before Congress would require them to disclose fees and take on a fiduciary responsibility - that is, represent their client’s best interest.

First of all, RESPA laws already require fees to be disclosed by brokers. Do you really want another page of confusing legal jargon added to the closing package? Secondly, the question of fiduciary duty requires a commitment from the borrower that doesn’t currently exist. The real estate agent has a fiduciary duty to their client. In return they get a written commitment of exclusivity. The title company/ settlement agent also has a fiduciary responsibility to their client. In return they can charge a cancellation fee if the deal doesn’t go through (but they rarely do). A mortgage broker has no such responsibility and they retain no such commitment from the borrower. Borrowers will drag a broker all the way to closing and still bail, leaving the broker responsible for paying credit pull fees and even appraisals.

If Congress wants to require fiduciary responsibility, borrowers will have to give up their freedom to change their minds at any minute. How many consumers want that?

What Congress should focus on instead is a minimum national licensing rule. As it stands today, only 14 states require individual mortgage licenses. This is the “low hanging fruit” that should be dealt with immediately. If the issue is unscrupulous mortgage brokers, the way to address the problem is to deal with those that won’t follow the rules. Instead of adding more rules that will cost everyone, paying attention to those that break them should be the first step.

Mortgage brokers are going to take a bad rap for this downturn. Some of them deserve it, most don’t. Regardless, the profession is going to suffer. Those that want to stay in the business will be moving to retail channels. That’s what I’ve done. I’m not a broker anymore, so I don’t have a dog in this fight any longer. If the goal is to get more transparency in the industry and better choices for consumers, the first step has to be to create minimum licensing standard for mortgage brokers. Adding more paperwork to the process and reducing freedoms for consumers is not the answer. Oh and, Mr. Mainstream Media, quit calling broker commissions kickbacks.