Why mortgage brokers are a important aspect of the economic landscape.

This CNN article was brought to my attention by esteemed L.A. mortgage broker Justin Bayle. It summarizes the role of a mortgage broker, why we are important to the home-buying public at large and why the big banks are trying to squeeze us out of business.

Lenders drop mortgage brokers
Some big banks are cutting out mortgage brokers and having lending generated by their own people. That could be bad for consumers.


NEW YORK (CNNMoney.com) -- Some big banks have cut back on doing business with mortgage brokers - and if the trend continues, many mortgage brokers could close down.

That may be bad news for consumers because fewer brokers could lead to a less competitive marketplace and more expensive home loans resulting from consumers not being able to easily comparison-shop rates.

"The banks want to get rid of mortgage professionals to reduce competition," said Alan Rosenbaum, founder of GuardHill Financial, a New York City-based brokerage firm. "It's not good for consumers."

A few years ago, according to Rosenbaum, mortgage brokers were responsible for 80% of the mortgage-lending business in America. He said that's probably under 70% now and dropping.

The actions of two big banks have helped push that percentage down.

JP Morgan Chase (JPM, Fortune 500) announced in January that it would end its so-called wholesale operations. It will no longer fund loans arranged through brokers, instead it will make loans mostly through its own offices. And Citigroup (C, Fortune 500) said it will cut back the number of mortgage brokers it works with to 1,000 from 10,000.

"Our customers are best served when a mortgage officer works directly with them, explains our products clearly and then helps them carefully evaluate the choices in light of their personal financial situation," according to an internal Chase memo.

However, brokers say they perform a needed consumer service by monitoring offers from an array of lenders, picking and choosing the best deals. That helps keep rates low because lenders have to make their terms attractive to keep their volume flowing.

Borrowers going into a Chase branch for a mortgage loan would, on the other hand, only receive the terms available through Chase. If brokers disappeared, borrowers would have to shop all the individual banks to compare deals.

Marc Savitt, president of the National Association of Mortgage Brokers, suspects that banks like Chase may think they can increase profits by cutting out the middlemen, but the added costs of bricks-and-mortar operations will ultimately make the business less efficient. Loan officers may find themselves sitting around waiting for customers to come in rather than fielding applications from mortgage brokers.

Chase opened a slew of new branches lately, including 2,200 as part of the Washington Mutual acquisition it made this past fall.

"Five years ago, we had 600 branches, now we have 5,000," said Thomas Kelly, a Chase spokesman.

Despite Chase and Citigroup's actions, John Courson, president of the Mortgage Bankers Association, does not think all mortgage brokers will be driven from the business.

"Every lender has its own business model," he said. "Chase made a decision to only lend through its personnel, [but other large lenders] will still need loan production. Mortgage brokers will continue to be an important part of the mortgage channel."

Chasing higher profits
Chase took the step of discontinuing its wholesale lending for two main reasons, according to Kelly. For one, "The best people to originate the loans, we believe, are those working in our bank branches," he said. Secondly, Chase determined that loans originated by brokers defaulted at higher rates than did bank-originated loans.

The brokers scoff at that. "Mortgage brokers don't develop their own products, their own guidelines and parameters," said Savitt. "They take applications; Chase makes all the decisions."

"Mortgage brokers have been blamed for everything from tooth decay to global warming, and it's baloney," added Allen Hardester, a Maryland-based broker.

He pointed out that no mortgage broker ever underwrites a loan, creates a loan program or approves an application. Lenders always have the final say.

And, if the loans from brokers did perform poorly, it's because lenders encouraged, nay prodded, brokers into bringing them more and more poor-quality customers during the boom years. Subprime mortgages were very profitable, before they started to default at higher and higher rates.

"The lenders dangled large carrots in front of brokers," said Rosenbaum. "They told me, 'Unless you give us more subprime business, I can't improve your pricing for your good customers.'"

Now, he hardly deals with big banks at all. "We haven't done much business with them for more than a year. Banks are throwing the baby out with the bath water. They don't know the good mortgage brokers from the bad."

So far, the other big banks, Wells Fargo (WFC, Fortune 500) and Bank of America (BAC, Fortune 500), have not followed Chase and Citi's leads. "[These] lenders may be looking at this as an opportunity," Savitt said. "They said they were committed to the broker channel and would expand it," he said.

If that's true, it shouldn't affect the market too much even if two big-hitters drop out.

"It will remain a competitive environment," said Courson.

Plus, he said, the there will be a flight to quality. "I think even for banks that continue to take mortgage broker-originated loans, there will be much higher standards."

That includes requiring brokers to show greater stability by demonstrating higher net worth and posting higher surety bonds (a kind of performance guarantee).

Sky's quick and painless Mortgage qualifier.

Here's the quick and painless mortgage qualifier from Sky Minor, mortgage broker.

1. Have a credit score of at least 580.

2. Take your household's gross annual salary or taxed income and divide it by 12 to get your monthly income.

3. Take 1/3 of that monthly income number.

4. Divide this number by 666.

5. Multiply the answer by 100000. That is how much you will qualify for a 30 year fixed rate mortgage loan at 7% interest.

For an example, let's use a household earning an income of $100,000 per year.

$100000/12=$8333 monthly

8333/3=2777

2777/666=4.17

4.17x100000=$417000. This household will safely qualify for at least $417000 mortgage.

This is only an estimation but it's a good tool to know if you are ready to buy a property.

I am a fully licensed and certified mortgage broker in all 50 states for residential and commercial properties. Together with Rachel, my partner we have over 180 loans under our belt including all of our own purchase and refinance loans to build our own portfolio of properties. To leverage our experience and apply for your mortgage with us please click here.

Lenders have generally become more stringent with underwriting practices but they are still funding loans to borrowers who can show they have the ability to repay the loan. I have access to a program that does not require income verification for first time home buyers with a credit score over 720 and a 20% down payment. If you meet that criteria you can go here to qualify.

Buying income property one is allowed to use 75% of the properties' existing rental income to qualify for the mortgage. The buyer will need to have 20% down payment. It's an especially good time to be buying small income properties under 5 units in this real estate downturn. The pros are scooping up income producing properties at fire-sale prices.

It is said that "If you want something done right, you've got to do it yourself" and I believe that is very true in the process of financing real estate.

Always save your money.