Notes from an Outsourcee

I don’t know if “outsourcee” is a legitimate word or not. What I am trying to describe is the fact that someone else has outsourced a service to me. In this case, back in the 1980s the savings and loan (S&L) associations that dominated the mortgage marketplace found it expensive to add bricks and mortar offices and loan officers when business grew. They also found that it was difficult to cut back when the inevitable downturn came along.

For that reason, setting up mortgage brokers was an ideal solution. They didn’t have to rent space for us or hire anyone; they didn’t have to buy all that office equipment; they didn’t have any training expense; and they didn’t have to worry about reducing staff in a slowdown. Those were all someone else’s problems

In addition, it was cost effective. S&Ls would give us a 1-point discount off of their retail price sheet, which meant the cost to them to originate a loan through us was 1 point plus the cost of their wholesale loan underwriting and funding operations. The total cost was a lot less than what it was costing them to generate a loan using their own retail staff. Win-win.

When the S&L crisis hit and most of them went under, Fannie Mae and Freddie Mac became the big factors in the marketplace since they did business largely through banks and larger mortgage banking companies. Of course, those entities faced the same problems that the S&Ls had back in the ‘80s, except that the S&Ls were just in California. Most of the banks are national companies. How could they develop a nationwide origination network? It’s hard to do, and they could see all these mortgage brokers! Why not hire them? They did, but unlike the relationship we had with the S&Ls, who rigidly controlled pricing and compensation, the result in this case was a largely unregulated free-for-all.

Suffice it to say that many unsavory people got into the business, but all of them were approved by the lenders they were doing business with, and all of them delivered loans to them. Some were good loans, but as the standards of the people on Wall Street dropped, so did loan quality. It turned out loan originators would start any loan they could get someone else to buy, and if their funding sources could sell it, they would do the deal and pass the hot potato on to the next sucker. We all know what happened then.

When the deluge finally hit, a lot of lenders looked at the loan origination business and found that the performance of loans originated by mortgage brokers was lower than the ones originated by their own sales forces.  

As an editorial comment, they may have been right, but it was likely too that their own “sales force” really were telephone answerers at an 800 number. They could answer incoming phone calls, but that is not the same as out hustling loans in the marketplace. I also believe that there was a difference in underwriting standards between the retail and wholesale origination departments, but that’s just a guess.

Bottom line: The big lenders that had been big users of mortgage brokers all stopped or sharply curtailed their activities, including Bank of America, Chase, Washington Mutual, Wachovia, World Savings, and Citicorp. Wells Fargo is the only one left, and I understand that they aren’t eager. Thus lenders who represented 50 percent of industry capacity weren’t doing business with mortgage brokers.

Then along come lawmakers, who are wrestling with new financial regulations. The House Financial Services Committee stated that there ought to be "a mechanism for putting non-bank financial institutions out of everyone’s misery." Ooops! I think they are talking about me! So what kind of a future do mortgage brokers have?

To be honest, I think that more than half of mortgage brokers have gotten out of the business anyway. And I think that this included the worst ones, the ones that would help a borrower falsify documentation, who would pay an appraiser extra to push the value of a home, someone who knew that they were doing bad loans and would do them anyway because they paid better than good loans. Most of those guys are gone.

The ones who are left are the honest ones, the same ones who were always dedicated to helping their new homebuyers and their refinance customers, who knew how to solve problems and how to put a deal together, and who would not engage in fraudulent practices. From the consumers’ perspective, they were also the ones who really want to show you how to save money, not to enrich themselves.

I also think that the big banks will realize that the “inside” people they have now can answer normal “customer service questions” but are simply not going to be competent enough to lead their customers successfully through complicated real estate transactions. We’ll see.

Bottom line: I think that those big banks will ultimately want to outsource more of their loan originations again.

If you want to buy a home, I strongly suggest that use an honest, reputable mortgage broker. He can do something that no bank employee can do: He can shop your loan among a number of different lenders. That alone would be enough for any borrower, but you will also get much better advice from someone who is on your side.