Part 1 of 2: From the early days to the 1980s, mortgage brokering evolved into a recognized market force
In part one of a two-part series,
Alex Nackoul discusses the history of the mortgage-brokering industry. He looks
at the roles of mortgage brokers, savings-and-loan associations, economic factors
from the 1890s through the early ’80s and more. Part two will discuss the
industry in the ’90s through today. This history include his personal observations.
Mortgage professionals better chart their future by understanding
the history of their industry. In this examination of the history of the mortgage-brokering
industry, particular attention will be paid to the industry during the early 1980s,
when it began to transform into what it is today.
Brokers’ and bankers’ early days
Mortgage brokering evolved with the United States’ urbanization.
One of the first mortgage brokerages was Sonnenblick-Goldman. Founded in 1893
in New York City, Sonnenblick-Goldman started by arranging debt financing for
hard-to-finance real estate projects.
In the West, local real estate individuals also saw a business
opportunity in the abundance of land and need for mortgage capital. They started
arranging mortgage loans for people who were turned down by banks.
These “loan arrangers” brought together bank turndowns and
wealthy people to create private mortgages. The number of loan arrangers grew
because of a common lament: “The only time a bank will approve my loan is when
I prove to the banker that I don’t need the loan.”
This financial Catch-22 helped to create a new job
classification: mortgage brokers.
The Great Depression and the New Deal in the 1930s forever
changed our nation’s housing policies and real estate financing. The Federal
Home Loan Bank system (FHLB) was established in 1932. The U.S. Housing Act of
1934 created the Federal Housing Administration (FHA), while the U.S. Housing
Act of 1937 created a public-housing program that paved the way for the U.S.
Department of Housing and Urban Development. In 1944, the Veterans
Administration (VA; now the U.S. Department of Veterans Affairs) loan program
One purpose of these programs was to broaden borrower qualifications
for home mortgages. These government programs created another job
classification: mortgage bankers.
The roles of mortgage bankers and mortgage brokers were similar. Both
arranged mortgage loans for borrowers who could not get traditional bank
financing, and both sold their loans to investors. Brokers arranged loans to
wealthy individuals, and bankers arranged loans via government agencies.
The early 1980s: Who did what?
Within a few decades, the New Deal legislation found its place. The
mortgage industry’s financial markets became clearly defined at the start of
the 1980s. Conventional mortgage loans were the domain of savings-and-loan
associations (S&Ls), and government mortgage loans were the domain of mortgage
bankers. Mortgage brokers handled everything else, including second mortgages
and credit-risk first mortgages.
As the 1980s progressed, however, there were many changes to
mortgage brokers’ roles in conventional home loans, government loans, second
mortgages and more. Inflation and the deregulation of the lending industry in
the ’80s would further impact the mortgage industry.
Institutional lenders (banks and S&Ls) operated in a highly
regulated environment in 1980. The lending industry was still a “gentlemen’s
domain.” “Banker’s hours” were still in place, which meant that banks and
S&Ls were open from 10 a.m. to 3 p.m., Monday through Friday.
There also were no national lenders. Banks and S&Ls funded
loans only in the state where they were domiciled. Further, banks made
commercial loans while, S&Ls primarily funded home mortgages.
Legislation called Federal Regulation Q had a lot to do with
this. Not only were lending activities regulated, but the government also regulated
the amount of money that banks and S&Ls paid their depositors. In 1980,
Regulation Q authorized S&Ls to pay their depositors 5.25 percent, while banks
paid their depositors 5 percent.
Within this regulated environment, S&Ls continued the
traditional practice of making 30-year, fixed-rate portfolio loans from 8 percent
to 8.5 percent. As long as the government protected their costs of funds at
5.25 percent, it made sense. All of the large S&L lenders did this.
The S&Ls funded these 30-year fixed mortgages, which were
literally kept in the vault. In other words, portfolio lending was the standard
practice. These loans were typically 80-percent loan to value (LTV). Ninety-percent
loans were uncommon at the time, and 95-percent loans were even rarer. One-hundred-percent
conventional mortgages were nonexistent. Plus, when the LTV was greater than 80
percent, lenders required borrowers to get private mortgage insurance.
Further, to increase loan volume, S&Ls began to employ
commissioned loan representatives to originate loans — in-house mortgage brokers.
Conventional lenders sometimes sold their fixed-rate,
conventional mortgages, but that was not standard practice. The secondary-mortgage
market was evolving; it was not the dominant force it is today. Further, Freddie
Mac and Fannie Mae were just beginning to expand.
In fact, at the start of the 1980s, FHA and VA loans were still
the domain of mortgage bankers. They realized that all they had to do was
originate a government mortgage loan, fund it, sell it off in the secondary
market for a profit and retain the servicing rights. Thus, the secondary-mortgage
market began with mortgage bankers and the government.
One attraction of the mortgage-banking business was its high
leverage. With little capital outlay, mortgage bankers could outfit an office
and get warehouse lines to fund their government loans. The challenge was in
David Loeb and Angelo Mozilo of Countrywide found hiring
commissioned loan reps to be less than cost-effective. They pioneered the
concept of mortgage-banking branch offices. They targeted paycheck borrowers
with excellent mortgage pricing and low points. The borrowers could then be
approved by a salaried branch manager.
Second trust deeds were a dirty word during this time. If
borrowers needed a second mortgage, they were seen as financial outcasts.
Mortgage brokers handled second mortgages. S&Ls did not make seconds. Third
trust deeds? Forget it.
There was no organized nonprime mortgage market, though some mortgage
brokers operated in this arena. The terms nonprime and subprime did not even enter
the mortgage lexicon until the 1990s.
The S&Ls did conventional A-paper loans, and that was it. If
borrowers did not qualify for a conventional or government mortgage, they had
- They went to a local
mortgage broker for a high-cost, short-term loan;
- They asked the seller
to carry the mortgage; or
- Their Realtor performed
There were no B- and C-grade mortgage loans in the early 1980s.
Borrowers had to have their incomes verified. There were no FICO scores. If a
borrower had many late mortgage payments, the loan was denied. Signed tax returns
and pay stubs were required to have a mortgage approved. Down-payment verification
was required. There were no “stated income” or “stated asset” loans.
Issues of the early ’80s: Inflation and deregulation
The appointment of Paul Volcker in 1979 as the Federal Reserve
Board chairman had a significant impact throughout the decade. The nation’s No.
1 financial problem in 1980 was inflation. The federal government’s spending
for the Vietnam War and President Lyndon Johnson’s Great Society social
programs had caught up with the nation.
To check inflation, Volcker instituted a monetarist policy in
which the amounts of dollars in circulation became the determining policy
factor rather than the control of interest rates themselves. Consequently,
interest rates skyrocketed.
The Wall Street Journal reported that
the prime rate hit 21.5 percent in October 1980. Thirty-year fixed mortgages
were written at 16.5 percent. Thirty-year U.S. government bonds were offered at
15 percent. Overnight, the financial world was turned upside down.
While the economy struggled with high interest rates, the federal
government changed its policy course. It would no longer regulate industries. They
would be free to compete, and thus, the spirit of competition would benefit
consumers with lower prices. First, the Feds deregulated the airline industry. In
1980, they turned to the lending industry.
Out went Regulation Q; banks, and S&Ls were free to pay their
depositors market rates for their deposits. Overnight, the tradition of fixed-rate
portfolio loans financed by short-term deposits was gone. The importance of a
secondary-mortgage market for conventional fixed-rate loans was immediately
S&Ls had to be inventive and entrepreneurial like their mortgage-banker
counterparts. Wall Street types such as Charles W. Knapp saw opportunities.
Starting with State Savings & Loan and then American Savings & Loan,
Knapp brought a mortgage-banking attitude to the S&L industry.
This mortgage-banking attitude was in stark contrast to the
traditional savings-and-loan culture. People such as Howard Ahmanson of Home
Savings of America dealt with this change by funding mostly variable-interest-rate
mortgages. S. Mark Taper of American Savings closed down his loan department
entirely and invested depositors’ moneys in government bonds.
The conventional mortgage market started to break in the early ’80s.
S&Ls closed their loan departments in response to deregulation and soaring
interest rates. Commissioned loan representatives at many S&Ls were
There was no national banking, but newly introduced legislation
allowed banking subsidiaries, including bank service corporations, to cross
state lines to fund mortgages. Numerous bank-service corporations moved to
California. Some of the first wholesale lenders, they were subsidiaries of
state banks that wanted a piece of California mortgage lending.
The service corporations were lightly financed, however, and
needed a cheap sales force to feed them conventional loans that they could sell
to Fannie Mae and Freddie Mac. A good portion of their sales force came from former
commissioned S&L loan reps. The ranks of independent mortgage brokers were
growing with this new breed, which brokered conventional, fixed-rate mortgages.
Mortgage brokers started to market their services to Realtors and
borrowers as being a “one-stop loan source” for conventional, fixed-rate
mortgage loans. They touted the fact that they represented lenders from all
over the country. Borrowers just had to complete one loan application, and brokers
would find them the best possible deal.
Consequently, the position of the mortgage brokers grew. Soon
thereafter, S&Ls opened their doors to this growing group of conventional mortgage
brokers. When commercial banks entered the home-mortgage market, they also went
after the mortgage-brokerage business.
• • •
For the mortgage industry, the 1980s started with turmoil and
change and ended as a different industry. Thirty-year, fixed-rate mortgages increased
to more than 16 percent in the early 1980s and steadily declined to greater
than 10 percent in 1989.
Federal Reserve began winning the battle to reduce inflation at
the end of the decade, but the market felt its effects.
By sheer growth in numbers, mortgage brokers created an industry
that the mortgage-lending community acknowledged by the end of the 1980s.
Mortgage bankers were poised to replace S&Ls.
Deregulation of the lending industry transformed it into a
competitive marketplace. Those who were willing to work hard and persevere were
rewarded — and mortgage brokers were more than willing.