Mortgage brokers are defending themselves against accusations by politicians and consumer advocates that they are to blame for causing the meltdown in the mortgage industry by giving loans to borrowers who couldn't afford them.
Reacting to strong criticism, particularly from New York Sen. Charles E. Schumer, the brokers say it's unfair to paint the entire industry with the same brush because of the actions of a few bad players.
"Don't just keep labeling mortgage brokers as the bad apples," said Nancy B. Gascoyne, a broker at MultiSource Funding in Cheektowaga, and past president of the New York Association of Mortgage Brokers.
"There are things wrong in our industry, just the same way there are wrong things in our government," she said. "You've got to try to fix them as you go along."
"In many ways, the broker's misunderstood. We seem to be taking the brunt of the ire," said Gregory A. Krauza, a broker at Twinstar Mortgage and current president of the state brokers' trade group. "Most mortgage brokers are local business people who rely on referrals and reputation. We are what is right about this business."
Brokers say they're already subject to a good deal of regulation -- especially in New York -- but they are willing to accept more scrutiny if necessary. However, they want it equally applied across the industry, to include all mortgage loan originators at banks, finance companies and brokerage firms.
"In every industry, there are bad actors, and that's the reason we support the licensing of everybody at this point, whether it's a broker, a lender or a bank," said Harry H. Dinham, a Texas broker who is president of the National Association of Mortgage Brokers, which represents about 10 percent of the industry. "These people need to be weeded out of the industry."
Mortgage brokers have come under intense fire in recent weeks, as soaring loan defaults and foreclosures -- especially in "subprime" loans to borrowers with bad credit -- threaten to cause a housing crisis.
More than 13 percent of subprime loans are delinquent -- the highest in years -- and losses and foreclosures overall have spiked to record levels, as higher interest rates and falling home values leave borrowers unable to make payments or refinance their loans and unable to sell their homes. Banking regulators estimate that 1.8 million homeowners could lose their home in the next two years as loan rates reprice upwards.
Brokers are responsible for more than half of U.S. mortgages. They don't actually lend money, but act as middlemen to link customers with banks or mortgage finance companies. In exchange, the lenders pay the brokers fees that depend on the interest rate or other terms of the loan.
A particularly common fee is the yield spread premium, which is the difference between the wholesale rate the lender offers to the broker and the actual retail rate that a borrower pays. The higher the retail rate, the higher the premium. And federal law requires that it be disclosed in the loan papers.
However, that fee is a bone of contention for critics like Schumer, who accuse brokers of recklessly putting
borrowers into loans they can't afford simply to collect cash.
Schumer recently denounced "rogue" mortgage lenders and reckless practices, called subprime the "wild west of mortgage loans," and said it's "time we bring a sheriff into town." He said brokers interested in "padding their own wallets" are the "underbelly of society."
That irks brokers, who said Schumer should do his homework and work with them. "It is not a time for finger-pointing or grandstanding. It is a time for reflection, analysis and the development of solutions," Krauza said in an e-mailed statement. "This will not happen if grandstanding and knee-jerk reactions are the order of the day."
They also complain that such criticism loses sight of the complex factors that contributed to the growth of subprime lending and its breakdown, including the appetite of Wall Street for the industry's high profits.
"There are so many aspects of why the subprime world is having problems," Gascoyne said. "To blanket it across the world and say it's bad mortgage brokers, that is irresponsible."
But it's not just Schumer complaining. Consumer advocates, other leading Democratic lawmakers, and federal bank regulators have also criticized the mortgage industry for doling out loans that should never have been given to people who couldn't afford them. And they've expressed support for tightening the reins industrywide, including on brokers.
"The kind of regulation we want to put in would let the good ones do their job and put the bad ones out of business," Schumer said Friday. "What I want to do is extend the type of regulation we do with banks to the nonbanks and brokers."
They've also urged Congress to pass legislation requiring that lenders consider a borrower's ability to repay the full loan at the permanent rate, not just a lower starting or "teaser" rate.
But brokers claim all lenders get part of the rate as a fee for loans. However, only brokers are required by federal law to disclose the fee. That must change, Dinham said. "If everyone has to disclose them, then there's no problem. Everyone's on the same page," he said.
They also say a "suitability" standard would be inappropriate.
"Who's to say what's appropriate in any particular situation?" Krauza said. "It's absolutely not my role to tell a client what option they should take."
"Are we supposed to be responsible for sending the person down the street?" Dinham said. "It's a no-win situation."
Instead, Dinham suggested creating a form for consumers to sign, that clearly lays out in large print not only a loan's terms and payments, but also its risks. He also supports mandatory financial literacy classes in high school to teach finances.
"It's just as important as English and math," Dinham said.
In New York, mortgage brokers have been regulated since 1991, and must meet minimum standards and pass a criminal background check before being licensed. They are audited at least every three years, regardless of whether any complaints have been received. In the past, that audit included 17 items that brokers had to prepare in advance for examiners, but that list grew this year to 57.
New York brokers must also file a yearly Volume of Operations Report, and must keep a detailed log on every applicant. Examiners can then review the log and pick out specific borrower files at random to review for compliance with all laws.
Late last year, the state went further, passing legislation that established a mandatory statewide registration for every mortgage loan officer at a mortgage brokerage or mortgage bank. If an individual lender has a complaint against him or her or violates the law, he or she can be tracked to another firm.
The new law also requires every loan officer to take at least 18 hours of continuing education every two years, including a course in ethics. "It's going to elevate the loan officer into a more professional category and hold them accountable for their actions," Gascoyne said.
The legislation, which must be implemented by the state banking department by January 2008, was supported by the state's mortgage brokers for more than a decade, and is unique nationally, Krauz said. "Nobody has the law the way we have it," Krauza said.
Brokers say they would support the same model on the federal level, if it applies to everyone.
"When you look back at who's actually been fined for predatory lending, it's been Ameriquest, Citigroup, Household Finance," Dinham said. "Not everybody out there who does mortgages is a broker. The lenders are the ones that are actually approving and closing these loans."