This week, MortgageOrb takes a view of the industry from the broker's side of the equation. Our person of the week is Don Romano, president of Shelter Rock Mortgage Corp. in Lake Success, N.Y. , and vice president of the UpFront Mortgage Brokers Association (UMBA).
Q: For those who are not familiar with your organization, what exactly is an ‘UpFront Mortgage Broker’?
Romano: Mortgage brokers conduct business through one of two models. The vast majority of mortgage brokers operate as independent contractors. They do not represent the best interest of the consumer, even though many consumers assume they do. The typical mortgage broker operates like a merchant that buys at one price and sells at a higher price.
The same can be said for loan officers that work for a mortgage banker, a credit union, or a bank. All can increase their personal compensation based on whatever they can induce the borrower to pay for a loan. And they can often increase their compensation based on the type of loan they can convince the borrower to take.
The alternative business model is that of the UpFront Mortgage Broker (UMB). A UMB operates in a quasi-agency manner. A broker conducting business through this model is offering his services to the consumer for a set fee (compensation) that is agreed upon between borrower and broker at the very start of the process. He agrees to act in the best interests of the customer, guaranteeing that the fee quoted up front will be the total compensation for services. The broker enters into a service agreement with the applicant, which states that for the agreed upon compensation, a bundle of services will be provided to the applicant.
Because the UMB's fee is established up front, the UMB has no incentive to place a consumer in anything but the best loan that fits the consumer's needs. The consumer knows that the information and counsel that they receive from a UMB is objective and impartial.
Q: Many mortgage bankers have a poor view of brokers, and more than a few industry leaders initially blamed brokers for much of today's crisis environment. How is UMBA working to improve relations between the mortgage banking and mortgage broker sectors?
Romano: If you look closely at pending legislation on the federal level and in various states, you will see that the trend is to legislate all mortgage brokers to conduct business as UpFront mortgage brokers do. Our brokers have been conducting business in this manner for most of their careers and organized themselves into an association back in 2000 to encourage more of the industry to conduct business in the same manner. We have in effect created the working model for the future of the industry.
Speaking on behalf of the industry, mortgage brokers are taking more blame for today's crisis than they deserve. To begin with, we make an easy target for the lenders. We are small businesses who are totally dependent on the lenders to place our mortgages.
In order to protect their own creditability in the marketplace, it became beneficial for lenders to deflect blame towards us. Third-party originated mortgages may be the most profitable channel for a lender, but we became collateral damage, as they protected their images.
We also can't lose sight of the fact that the programs and pricing options were designed by these lenders and then were underwritten by these same lenders. The mortgage broker was offering to the public what was being presented to them by the lenders.
Every entity involved in the mortgage market, from the regulators right on through to the consumer, share in the responsibility in what happened. This mortgage crisis will end only when everyone recognizes what went wrong and each one of us works to correct the errors.
Getting back to your question – we're working to improve relationships between bankers and brokers by example. We feel our business model better serves the community and therefore is a more professional way of conducting business. We are doing whatever possible to encourage all brokers to embrace our business model.
Q: The UMBA recently sent a letter to the Federal Reserve Board expressing disappointment in the final rule amending Regulation Z. What was UMBA's problem with this amended rule?
Romano: In the original draft of the rule change of Reg Z, there was a requirement that mortgage brokers commit to their compensation at the start of the application process. This was, in effect, the UMB model of operating. This requirement was eliminated in the finished version of the rule change.
Since we believe that the UMB model is the best way for consumers to shop for a mortgage loan, we felt that the Federal Reserve would have better served consumers by leaving that requirement in the rule change.
Q: How do you see the current housing crisis evolving? And what effects will this have on the mortgage broker sector?
Romano: The industry has learned a very expensive lesson. As much as we would like every American to own a home, there are certain minimum standards that an applicant needs to meet in order to afford that home. The industry has overcompensated by making mortgages unavailable to many Americans.
Underwriting standards will move back to a condition of common sense underwriting, where the average American can buy a home they can afford and one where they can raise a family without going deeper into debt. A mortgage broker will need to provide the services of a trusted advisor to the applicant if he wants to continue in this business.
The business of being a mortgage broker will need to evolve into being the profession of mortgage advisor. There is a definite need for this profession in the housing market.