Federal rules go into effect this week to cap the pay of mortgage brokers -- people who connect borrowers and lenders -- in a move that has industry groups howling and consumer advocates smiling.
The question is whether there will be unintended ripples that could squeeze first-time home buyers with limited credit histories and also make mortgages more expensive for everyone else.
Advocates for the brokers say they’re being made out as scapegoats for the failure of the housing market, which brought the broader economy down when it tanked.
Though they acknowledge there were some bad actors during the run up of the housing boom, brokers say the changes are putting reputable firms out of business and assuring consumers will pay more when there’s less competition.
Consumer groups and some independent mortgage lenders cheer the new regulations, saying they bring a new level of transparency to the marketplace.
They say the rules, which restrict compensation for brokers and also require more rigorous licensing, will protect consumers from unscrupulous brokers who might have profited in previous years by putting homebuyers into exotic loans or loans with higher interest rates when they qualified for lower ones.
“It creates a perverse incentive for the broker to get somebody into a home loan at a rate higher than they’d otherwise qualify for,” said Danny Orrock, a deputy director with consumer group Georgia Watch.
Marc Savitts, president of The Mortgage Center in Martinsburg, W.Va, and president of the National Association of Independent Housing Professionals, said brokers work for the borrower to find the best loan.The new rules, he said, limits competition that benefited borrowers.
The changes will do little to protect consumers and will cost homebuyers more, Savitts said. His group and the National Association of Mortgage Brokers each sued the Federal Reserve Board to stop the new rules, which Savitts said is contrary to the idea of the free market.
A hearing Tuesday in Washington, D.C., was scheduled to discuss a temporary restraining order against the Fed from enacting the rules as scheduled April 1.
Savitts said the Fed’s decision will reward the big mortgage lenders. Brokers accounted for more than 50 percent market share during the housing boom, a figure that’s dropped to around 10 percent today, he said.
The ranks of independent brokers have reduced dramatically from 450,000 during the boom years to 120,000, because of the economy’s collapse and the coming compensation rules and stricter regulatory licensing requirements, he said.
One point of dispute over pay is called the yield spread premium.
Borrowers pay brokers for their services with upfront fees, but at times lenders would compensate brokers for putting home buyers in higher interest loans. Borrowers can also chose higher rate loans to reduce upfront costs.
But the new rules would eliminate compensation based on an interest rate or other terms.
The Fed said in its findings that borrowers often weren’t aware of this conflict.
The changes in broker pay and licensing join other wholesale regulatory changes designed to make sure banks and other lenders have “skin in the game” when they securitize mortgages and sell them off.
The Fed said today regulators have proposed requiring lenders that originate loans and sell them off to investors to put into reserve 5 percent of the loans for all but the safest ones, called qualified residential mortgages. Qualified mortgages are considered to be safer because they require a 20 percent down payment and other stricter credit qualifications.
If the cost goes up for lenders because of the reserve mandate, they'll pass that along to consumers, or hedge their risk, and restrict lending, insiders say. .
“What started as consumer friendly regulation is actually the opposite,” said Mark Dodson, a former independent mortgage lender who now is a private mortgage lender with Cornerstone Bank in Atlanta. “We’re paying for the sins of a few.”
Mark Boyer, CEO of mortgage lender Foundation Financial Group, said the new requirements will ensure borrowers can afford the homes they’re buying, he said.
“It’s the right way to do things,” Boyer said.
