Are the best home loans from big lenders or small brokers?by Peter Miller
There’s a lot of contraction going on in the mortgage-financing world, even though mortgage rates have held steady at around and sometimes even below 4 percent.
Major mortgage lenders moving on
MetLife recently announced it is “closing its home-mortgage origination operation,” and in the process will eliminate 804 jobs in Texas, a move that is expected to cost the company as much as $110 million. The company, however, will continue to market reverse mortgages to homeowners age 62 and above.
Citigroup, has just announced it will no longer accept loans from mortgage brokers, while Bank of America left the wholesale lending and reverse mortgage fields last year.
These are big companies with a lot of market power, so why would they leave major parts of the mortgage field?
While MetLife is downsizing, Citigroup and Bank of America are doing something different–they’re ending relationships with mortgage brokers, independent players in the mortgage field who sell loans to major lenders. In a sense, mortgage brokers can be seen as independent salespeople who get loans at wholesale and then resell those goods at retail.
Why get rid of brokers?
One reason to get rid of mortgage brokers is that big banks can continue to lend but keep profits in-house. Another reason involves the claim that too many flawed loans have been originated by mortgage brokers.
In 2009, for example, JPMorgan Chase CEO Jamie Dimon said that the biggest mistake in his career was not closing down the company’s mortgage broker business sooner. The reason, he said, was that losses from loans originated by mortgage brokers had “two or three times the loss rates of all our product.”
In other words, it’s not so much that big lenders want to leave the mortgage field, but rather they want better quality control and more of the revenue stream.
Why brokers matter
Friends of mine in the mortgage broker business say they deliver loans which adhere to underwriting standards and follow all required guidelines. They get business, they say, that big lenders cannot get without more manpower and cost. In effect, they represent a low-cost sales force for big lenders.
If there’s an argument here, there’s little doubt that mortgage brokers are losing. Each time they’re cut off by a lender they have one less mortgage pipeline and fewer products to sell.
Who offers the lowest mortgage rates?
For borrowers, the only question from this debate is whether you can get the financing you want at the lowest possible cost. Whether financing comes from a huge lender or a mortgage broker makes little difference to most, it’s the rates and terms that count.
It’s interesting that in the past I’ve usually engaged mortgage brokers to locate financing, but my last loan was through a major lender who approached me with a really good deal. And now, when I think about refinancing again, I’m open to either a giant lender or a mortgage broker, whoever turns up with the best offer.