The Great Recession did a number on small and midsized mortgage firms. They trimmed their staff and put up for sale signs. When the real estate crash did not relent, most of them closed up shop at a rate never before witnessed in years. By midyear 2017, data from the Conference of State Bank Supervisors show that these firms had let go of about 11,000 workers.
The non-bank-lending sector had enjoyed years of growth before the economic downturn. They were nimble and knew the local markets by hand. In 2006, for instance, they originated over 56% of all home loans. During the economic recession, at least 75% of them closed shop. Today they hold 16% of the market share, a far cry from their once huge lion’s share.
Factors that led to the decline of the mortgage broker sector
The 2008 real estate and credit crisis caused by amongst other factors, a subprime lending environment almost drove the mortgage agents to extinction. Larger banks went into protection mode and stopped lending to these brokers. The rush to subprime loans had to be halted, and banks were wary that such risky lending would end up in foreclosures.
Banks then began to market to the agent’s customers directly, cutting out mortgage brokers. Subsequent mortgage reforms made it harder for these intermediaries to compete with banks. The costs and time needed to complete the mandatory education as well as to attain a license further them away. Bank employees, on the other hand, did not have to face such steep regulations to operate. All they need to approach a customer was a background check and a low registration fee.
With the market at the palm of their hands, banks began their operations by cutting out the weakest link. This is the borrower deemed the least creditworthy. It did not take much time for most American families and businesses to fall prey to this limitation as the credit crunch bit harder.
The direct lenders since then have been making massive profits since they have been without competition from brokers. They, for instance, were blamed for selling 30-year mortgages at a 3.55% charge, when a few years earlier, they were content with a 3.05% rate for the same product.
The re-birth of mortgage broker services
However, while their numbers were decimated, their appeal to customers is as strong as ever before. Mortgage brokers have a superior customer service comparable to none other in the market. They set out to win your business, and they, therefore, create an environment of reliability and trust.
These facilitators will hold your hand through the whole home purchase process and steer you away from common but costly mistakes. Their influence is beginning to show by the amounts of profits that these firms are turning in. In 2018, for instance, led by the larger mortgage broker firms, they netted 52% of the $1.26 trillion in originations made.
The return of these firms is a good sign for the recovering economy. First, the real estate and its lending market provide a significant source of employment to the nation. The growth in the sector is also a good indicator of potential economic upsurge. Secondly, these brokers have a substantial value to the real estate market.
Most homebuyers find their presence calming in the otherwise very stressful home purchase process. Most buyers say that their face-to-face relationship with their broker was a catalyst to their final purchase decision.
First time home buyers, as well as mid-income families, prefer the mortgage broker. Why? Banks tend to focus on the wealthy. They represent less risk when it comes to lending. They also are in a better position to borrow more, which gives the lender more returns in the long run.
A bank’s mortgage officer is there to sell the bank’s business and products. A bank’s employee may, therefore, have an increased incentive to recommend an unsuitable mortgage product. A mortgage broker, on the other hand, does not have that incentive. They survive in business through referrals and repeat business. Their motivation, consequently, is to pair you with the most attractive offer so that you have an incentive to speak well of them to another buyer.
The return of the mortgage broker is therefore, great relief for homebuyers. Association of Independent Mortgage Experts has set goals of raising their market share from 16% to 25% by 2020. AIME is going to approach the issue first through technology.
With technology, mortgage underwriting can now be done in minutes. The association also plans to hire more underwriters, which should increase the competition in the market. The competition will, in turn, dial back the lender’s prices.
Eventually, you will save more money. Direct lenders will have to enhance their underwriting times and prices to stay competitive. They will also need to be more flexible and offer innovative, tailored mortgages.
Direct lender vs. mortgage broker
Direct nation 21 lenders use loan officers to sell a bank’s mortgage products. The loans officer job is to match you up with one of their programs. They afterward, ask you for your documents and information then take you through the underwriting process. Afterward, they will assist you, too in closing the deal.
These lenders profit from selling you the loan, then collecting the interest and principal at the end of each month. They can also gain by selling the loan to a different institution, later earning a service release premium.
Mortgage brokers, on the other hand, can be termed as the direct lender’s sales department. They, however, are not tied to a single direct lender. They sell different products from varied wholesale lenders. They benefit more by finding a low-cost credit line that you qualify for easily. Their primary source of income, nevertheless, is the origination fee you pay to them. Sometimes this fee could also be paid by the bank in the form of a yield spread premium.
Benefits of a mortgage broker
- Access to different types of products
An agent deals with hundreds of products from different direct lenders. An experienced agent with an extensive network will have better credit opportunities with affordable interest charges to suit your pocket.
- They represent your interests best
The agent makes a profit only when you make a borrowing decision. They also are highly dependent on word of mouth marketing and referrals. This is why they rather than sell loans; they also act as consultants and problem solvers. Since they have a wide range of products, they can help pinpoint the one that enables you to make a home purchase easier and faster.
- They do the leg work
In their endeavor to please their customers, an agent will steer you away from risky lenders. Most onerous payment conditions are often hidden in mortgage contracts and at times can be missed by home buyers. It is essential to do your due diligence, but the assistance of a broker is also beneficial. They will also save you time by giving you a formal comparison of loan products.
- Personalized service
The mortgage broker’s purpose is to help smooth things out during the home purchase process. They will be available and offer advice until the process is closed. It is critical, therefore, to have an experienced agent by your side. Ask for their references from a real estate agent, accountant, attorney, or financial planner.
Disadvantages of mortgage brokers
- Their interests may not align with yours
Find a reputable and highly recommended broker, who will not be sorely focused on their compensation. Some unscrupulous brokers may propose a mortgage that you can afford over time to reap its benefits. This behavior is partly what led to the 2008 market crash.
- You may have to pay a broker fee
An agent is either paid by the lender or buyer. If the lender is responsible for the cost, ensure that your broker does not steer you to an expensive product for the high commission. If you are, nonetheless paying the fee yourself, factor into it your purchase costs. Ensure that you land the best deal.
Over to You
A mortgage broker can save you both cash and time when purchasing your home. It, however, pays to compare the services of each lender to ensure that you only get the best deal for your money can buy.