Mortgage brokers have lost the ability to shop around for as many lending options for their clients, because banks are no longer working with mortgage brokers with many of their products. The shift will put many brokers out of business, and possibly limit consumer choices.

Mortgage brokers, already suffering from a loss of business, now face a new and perhaps greater threat. The banks they depend upon for loans-and rely upon for their livelihoods-are beginning to shut them out. In fact, banks now compete against many of the same mortgage brokers who used to be their partners.

Squeezing mortgage brokers

JP Morgan Chase, for instance, no longer accepts loan applications processed by mortgage brokers. The powerful Mortgage Bankers Association also hopes to raise the amount of net worth that mortgage brokers need to have before they're allowed to offer increasingly popular FHA loans. The limit was $63,000, but they want to increase it to $150,000. That would disqualify many independent mortgage brokers from participating in the FHA loan market at a time when the volume of FHA-backed loans is breaking all-time records.

Banks-their own mortgage boss

To the banks, it makes perfect sense, because they've grown more conservative about their lending. Instead of accepting loan applications that mortgage brokers have filled out, bankers now want more control-especially since many mortgage brokers accepted applications from completely unqualified borrowers during recent years. The lenders want to set their own underwriting and loan application guidelines, oversee the details of the application process, screen potential borrowers with a fine-tooth comb, and avoid the potential for making bad loans that can lead to delinquency and default. As the saying goes, "If you want something done right, you have to do it yourself." Bankers who are cutting mortgage brokers out of the process to eliminate the middleman defend their stance as a prudent business strategy.

Mortgage brokers, the consumer's champion?

Mortgage brokers, however, see it differently, and protest that they're being unfairly marginalized in a trend that's not just bad for them, but is also detrimental to consumers. They point out, for example, that they're not the ones who control underwriting standards and ultimately make decisions regarding which loan applications get accepted and which ones are turned down for lack of adequate credit, income, or assets. That responsibility, they argue, has always belonged to the banks. If banks made bad loans, it wasn't the fault of mortgage brokers, and they feel as though they're being used as scapegoats by bankers trying to deflect criticism by pointing a finger at the mortgage broker industry.

They also explain that eliminating mortgage brokers will only make it harder for consumers to find a variety of competitive loans-especially in rarified markets like those for jumbo mortgages. At a time when credit is already tight, borrowers may discover that they have fewer choices and less help when it's time to shop around for an affordable loan.

Published on March 6, 2009