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   ARTICLE   |   From Scotsman Guide Residential Edition   |   November 2010

Brokers Through the Looking Glass

A recent study examines where the mortgage-broker and -banking industry stands today

Brokers Through the Looking Glass

In recent years, there has been much anecdotal discussion about how many mortgage brokers remain in the industry, how many have transitioned to mortgage banking and who is originating the most mortgage loans. Recently, lenders, regulators and politicianshave been seeking up-to-date data on the size and health of the mortgage-broker and mortgage-banker industries.

Based on these requests, Access Mortgage conducted a study with the goal of collecting and summarizing accurate mortgage-market data and of correcting misrepresentations about the mortgage industry. It is hoped that the study also will instill a greaterlevel of confidence in the mortgage-broker and correspondent channels among wholesale and retail lenders and encourage more investors to join the business. r_2010-11_olson_chart

Although the study showed clearly that the number of mortgage brokerages declined in the past few years and that many brokers have transitioned or are in process of transitioning to mortgage banking, the number of brokers will likely reach a trough thisyear. We expect the number to recover as many companies and brokers realize it's actually less risky and less costly to be a broker than a banker.

Summary of key results

The recent economic downturn clearly caused the biggest changes in the mortgage-origination industry since the 1930s.

In addition to decreased total mortgage-origination volume, which went from $2.8 trillion in 2005 to $1.5 trillion in 2010, the study's results indicate the following changes.

  • A large decline in the number of mortgage brokers and mortgage-origination companies. Based on this study, the number of mortgage brokerages fell from 53,000 in 2006 to 15,000 in 2009. For 2010, this number will decrease to about 12,000. Broker sharefell more than the market as a whole. In part, this is because the niche products many brokers specialized in, such as Alt-A and jumbo loans, declined massively, and the subprime market has virtually disappeared.
  •   Recently, many brokers have shifted to become retail loan officers at mortgage banks or retail banks to help manage compliance requirements. Brokers told us they believe they could earn more as a loan officer working for a lender. Given the upcomingregulatory changes to compensation, however, this may not continue to be the case. Brokers also believed that underwriting was more consistent and appraisal quality higher for retail lenders. The total number of companies originating mortgages also has fallen, however. The number of lenders has declined because of mergers and companies exiting the industry because of excessive loan defaults.
  • A substantial decrease in the number of available loan products and increased underwriting standards. The number of loan types is down enormously -- from about 2,000 in 2007 to perhaps 20 today.
  • An enormous increase in regulation. A big wave of new regulations will continue to hit lenders, brokers and other mortgage originators for the next few years. The volume of new laws hurt smaller firms more than larger companies because larger companiesand banks typically have the capital and the staff to comply.
  •  The Secure and Fair Enforcement for Mortgage Licensing Act (aka the S.A.F.E. Act), appraiser-independence rules, and changes to the Real Estate Settlement Procedures Act and the good-faith estimate have made it more time-consuming and expensive to dobusiness for all originators.
  • An increase in professionalism among mortgage bankers and brokers. The passage of the S.A.F.E. Act and its required testing, licensing and continuing education have made mortgage brokers and bankers more similar to stockbrokers and accountants. Barriersto entry have never been greater, so the number of companies likely won't increase rapidly again regardless of what happens to loan volume.

Analysis and future research

Based upon the study's results, about 2,000 mortgage banks today are originating most of the loans. Because the required capital, compliance and repurchase risks have increased, there likely won't be much entrance into mortgage banking. Some brokeragesmay continue to choose to operate as bankers.

About the Survey

This recent Access Mortgage study is an updated version of studies conducted by Wholesale Access Mortgage Research every other year from 1992 through 2007. Basing the current study upon those allowed us to provide time series.

There were 1,634 respondents, who were divided into two groups -- mortgage brokers and mortgage lenders. Responses were double-checked against our other research studies and via consultations with many outside mortgage analysts.

The study was divided into two parts -- Mortgage Brokers 2010 and Mortgage Lenders 2010. Our focus is mostly on the size of each market segment and the direction and cause of change in the market.

For more information on the study, visit accessmrc.com.

We may have reached the bottom of the decline in brokers at 12,000 this year. We think the brokerage industry will recover as companies discover it's actually less risky and less costly to be a broker than a mortgage banker.

It's difficult to calculate the exact number or each type of lender because there are so many hybrid firms, such as those using warehouse lines to fund only a small portion of their production. Also, many companies are currently in transition from brokerto banker.

Access Mortgage plans to conduct several follow-up surveys to clarify questions the current survey raised. Because there are so many hybrids in the market, the next survey may focus on clarifying more carefully the differences between brokers and bankers.

For instance, what are the current advantages of being a broker versus a banker? What affiliations are available with depository institutions? How is net worth calculated? What is the best way to originate Federal Housing Administration loans?

The past three years brought upon some of the biggest changes ever in the mortgage market. As a result, many more questions must be addressed to help the industry heal itself and recover its former prime position in the U.S. economy.


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