The Real Deal recently asked me my thoughts on the state of the New York City real estate market. Because Commodore Property Group has both a real estate and mortgage brokerage, I think that we sometimes have a unique view of the market place. My opening antidote really speaks to the un-level playing filed that mortgage brokers compete on vs banks.
Most consumers don't know this, but banks do not need to reveal their yield spread on their paperwork, while brokers do. Yield spread is the amount of money a broker or banker makes on a deal by offering an interest rate that is above the lowest available. It is the spread between the cost of borrowing money by the bank and the rate that the consumer gets on a loan. It is no different than any other type of mark up in any other business...except that brokers tell their clients what is, and banks do not.
In the article below, I describe a scenario where disclosing yield spread cost me a client. The ironic thing is that the client ended up getting the same deal from the bank, but she felt like my loan was costing her more, because she saw yield spread disclosed on her good faith estimate.
Mortgage brokers jump ship
More independent loan providers leave for banks as their business dwindles January 01, 2010 07:00AM By Catherine Curan
Richard Bouchner, who co-founded real estate and mortgage brokerage Commodore Property Group in 2003, thought last month that business was returning after a tough year for mortgage brokers.
He'd gotten a referral for a borrower he described as a well-qualified, financially savvy New Yorker buying her first apartment. He'd arranged a 30-year fixed mortgage of around $480,000, at 5.125 percent with no points.
Then his client read the fine print, saw that he'd make $4,800 on the deal, and opted to get her loan from the bank instead.
"She said, 'Rich, I don't feel comfortable with this yield-spread premium,'" Bouchner recalled, referring to the money a mortgage broker makes for locking in an interest rate above par on a loan for a borrower. Banks don't have to provide similar disclosure on their profit on a loan.
Bouchner's experience reflects a massive shift in New York City, and nationwide, away from mortgage brokers, who have access to a variety of mortgages from lenders, and toward banks, which make mortgage loans directly to buyers.
Mortgage brokers saw their share of the business decline steadily in the first three quarters of 2009. In the third quarter, mortgage brokers accounted for just 12 percent of total mortgage originations -- their lowest share of residential mortgages in the 20 years that Inside Mortgage Finance Publications, a Maryland-based publisher, has tracked the industry.
Meanwhile, large banks' share has ballooned to 51 percent, the highest Inside Mortgage Finance has ever seen, according to publisher Guy Cecala. Correspondent lenders, including smaller banks, credit unions and larger mortgage broker firms, make up the rest.
"Generally that's the trend on a national basis, and on a more macro basis, mortgage brokers have become an endangered species," said Cecala. "There's a major onslaught [against them], and a serious question right now whether the mortgage broker industry will ever recover."
In New York, a Darwinian struggle is underway.
Independent mortgage brokers are decamping for the relative safety of big banks. Other mortgage broker firms are keeping staff lean to weather the downturn. Brokers still in the game face a long and growing list of hurdles: more regulation, disclosure rules and regulatory scrutiny, plus fewer loan products and less access to lenders.
These issues are capped off by the industry's poor reputation for originating mortgages during the boom, particularly subprime loans, which have since blown up, and for practices such as the controversial yield-spread premium Bouchner's client refused to pay.
"The tide has turned overwhelmingly," said Jeffrey Appel, who left mortgage brokerage Preferred Empire to join Bank of America in October. "As a [mortgage] broker, you are sort of out there on your own and subject to changing market forces that impact lenders' ability to offer wholesale loans."
Working at a bank, however, brings challenges of its own. Since he's only been with Bank of America for a few months, Appel declined to comment on industry chatter that some brokers who join big banks are closing fewer loans because each bank has a more limited spectrum of products than a well-connected broker can access.
As recently as three years ago, noted Cecala, there were over 100 loan products on the market, and many subprime borrowers turned to mortgage brokers to sort through the confusing cornucopia of options. Now that so many loans have gone into default or foreclosure, lenders are offering fewer products and banks have cut back on business with mortgage brokers in favor of originating loans internally.
Appel did admit to having to navigate his new employer's "strengths and limitations," adding that his five-person team has not lost a loan yet because of extreme care in prequalifying purchasers and establishing collateral.
Whether at banks or on their own, mortgage brokers are scrambling to cope with a raft of new rules. Last year, Fannie Mae and Freddie Mac created the Home Valuation Code of Conduct, essentially prohibiting mortgage brokers from ordering appraisals, while updates to the federal Truth in Lending Act require mortgage brokers and banks to disclose their fees well before a loan closes. What's more, the Federal Reserve was accepting comments last month on a proposal to ban yield-spread premiums for brokers.
Julie Teitel, senior vice president at Guardhill Financial Corp., said she's had to relearn the business.
"You have to work almost triple the amount of time to bring in the same amount of dollars," she said.
In the second half of 2009, business picked up for Apple Mortgage Corp., Guardhill and Commodore. But the big question is whether an uptick for the mortgage broker industry from the doldrums of 2008 -- right after Lehman Brothers' bankruptcy -- can translate into sustained, profitable business based on successful loans.
Bouchner said his firm used to have 15 loan officers working on commission, but now he only has five. He hopes to benefit from decreased competition as others bail out of the sector.
Apple Mortgage owner Eric Appelbaum is bullish. Claiming he is among a select group of local mortgage brokers with solid, profitable relationships with Citibank and Wells Fargo, plus a range of smaller lenders, Appelbaum said he is attracting clients who fail to close loans at banks.
"Why do other brokers feel like they have to jump ship and go to a bank? Just put a gun to my head, I would never do that," said Appelbaum. "You're stuck with that bank and that bank's pricing on all types of loans, that bank's process and corporate culture."
Rich Bouchner
Managing Director
Commodore Property Group
Commodore Property Group's home page: www.cpg-nyc.com
My blog: www.gotham-realestate.com
Current Listings: CPG's Current listings
I am the owner of Commodore Property Group. l live in Harlem and work through out all of New York City. If you are looking for a condo, coop or brownstone in Harlem or any section of Manhattan or Brooklyn, please feel free to contact me.
