A war has broken out between lenders and mortgage brokers, two groups that used to play nicely together so they could make loans for people who wanted to buy a home or refinance an existing mortgage. The fallout from the battle could result in fewer choices of loan products and higher loan fees for borrowers -- or at least that's the argument of the brokers, who so far appear to be on the losing side.
Brokers still control a very large share of mortgage applications; however, a number of lenders, most notably JPMorgan Chase and Citi, recently announced they will no longer accept loan applications that are submitted through brokers. Instead, these lenders have decided to take applications and fund loans only through their own retail and other in-house operations. As a result, brokers have found themselves out in the cold.
Are borrowers 'best-served' by lender or mortgage broker?Chase decided to exit the broker-based loan business and focus instead on loans originated through the bank's branches and other direct-to-borrower (e.g., telephone or online) programs primarily for three reasons, according to a Jan. 13 letter from two Chase executives.
- Borrowers are "best-served" by a bank loan officer, who can explain the bank's products and help borrowers evaluate their loan choices.
"We think (the best approach) is when we sit down with a borrower across the desk and say, 'Tell us your financial situation and let's match you to a loan that makes sense," says Tom Kelly, a Chase spokesman in Chicago.
- Loans originated by retail-focused bank professionals and loan officers have "performed better" than loans originated by mortgage brokers. In lender-speak, "performed better" means those borrowers were less likely to make late payments or default.
- The lender's network of bank branches has grown from 600 locations in four states five years ago to more than 5,000 locations in 23 states today.
Some 2,200 of those new bank branches were added as a result of Chase's September 2008 acquisition of Washington Mutual, also known by the nickname "WaMu." That acquisition brought Chase many more branches in four "high-growth markets" (California, Florida, Georgia and Nevada) and four other "important markets" (New York City, Chicago, Texas and Arizona) according to the letter.
"The market has evolved away from brokers," Kelly explains. "But for us, more importantly, the coverage that we had of the country and of what we can do for borrowers is so much different from what it was five years ago."
Borrowers will still be able to shop around for a mortgage and costs will still be competitive since many banks will continue to offer loans, Kelly says. He suggests that borrowers will be better off with the bank's own loan officers because, as he says, "there is some contention that brokers put people in the wrong loans."
Not all lenders have cut off mortgage brokers. Among those that say they still welcome broker applications is Wells Fargo. The lender is still committed to the mortgage broker loan origination channel, says Debora Blume, a spokeswoman for Wells Fargo Home Mortgage in Des Moines.
"Our goal is to work with brokers who are aligned with our fair and responsible lending principles and diligent about managing to the economics of the mortgage industry," Blume says.