US brokers in breach of trust

By BN | 07 Jul 2009

A study that found mortgage brokers in the US fed loans of deteriorating quality to the very banks they did most business with in the period immediately prior to the GFC, has turned on its head the long held belief that doing business with well-established partners carries the least amount risk, reported The Financial Times.

It revealed that brokers who put up the mortgages of decreasing quality did so partly because banks had grown to trust them, and were less careful in monitoring performance.

The study also found that brokers produced lower-quality loans as their volume grew, and that the quality worsened as the distance between the broker and a bank's headquarters increased.

"At the beginning of a relationship, the bank's natural intuition is to avoid fly-by-night brokers they barely know. The broker knows this, so they are on their best behaviour, but over time the broker gains credibility and each additional mortgage matters less," said Mark Garmaise, finance professor at UCLA Anderson management school, who conducted the research.

Such breaches of trust accounted for 22% of late mortgage payments and 28% of foreclosures, the study also found.

Banks in the US have criticised the role of brokers in the mortgage crisis, blaming them for instances of fraud and predatory lending.

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Commented by: Xerxes at 07 Jul 2009 04:35 PM

I never quite understand why so much is reported on US brokers & Banks. From an Oz brokers perspective it seems there is virtually no comparison between the two markets.

The comments above, that brokers when they first start using a lender need to be on their best behaviour & then once established, let their quality slip is just crazy & is certainly not the experience in Oz.

Every deal you put to a lender needs to be squeaky clean. Doesn't matter if its your 1st or your 100th.

In fact there seems to be a school of thought in Oz that your quality increases the more you use a lender (not that I agree with this thinking).

And what about those stats. If I understand them correctly (and they are reported in an ambiguous way). 22% of mortgages with late payments were introduced by brokers & 28% of loans being forclosed were introduced by brokers.

It might also be worthwhile reporting the % of loans written by brokers in US. As I understand, it is a higher % than in Oz. So are you reporting that US brokers are under represented in foreclosing & defaulting loans?????

If so, shouldn't you point this out & paint US brokers in a slighly less sinister way?

Commented by: BBB at 07 Jul 2009 04:45 PM

The US experience is very different and because of the banking structures, with many small banks and a lot of players , plus a lack of regulation imposed on the banks , it was bound to happen and did happen greed prevailed for the bankers as well as the brokers. Blame must be equally applied.

The trouble is no matter how much trust there was , why did the banks not apply the standards that applied at the beginning of the relationship . For that there must be blame on the actual lender as well as the brokers.

Could It happen here , it did not occur and hopefully licencing will help to make sure it does not happen.

Commented by: Xerxes at 07 Jul 2009 06:36 PM

Hi BBB,

Broker licencing will not help ethical, professional, moral or lending prudential standards. A lender without prudential standards will always get burned in a down turn.

Seems to me their banking system was so unregulated it was bound to go belly up. What was needed was regulation of lending standards (as you said). The brokers appear to have been operating in a banking system that was suicidal. The Ninja (no income, no job, no assets) loans their banks were offering bascially guaranteed a collapse.

Broker licencing is a government rort. It will achieve nothing other than a new government bureaucracy & more money for ASIC to pester people. It will offer no benefit to customers or brokers. It will just add extra (largely pointless) red tape and costs to the broking industry.

But Rudd and his mob will be able to spin that they have regulated & licenced Oz brokers. & we will then be ethical and professional just like licenced real estate agents & financial planners. lol.

Commented by: Jo at 07 Jul 2009 07:24 PM

I agree that the licensing system wont make good brokers any better but it may impede the opportunistic players if they have to prove an education first. Most opportunists are by nature less educated than those forging a career. At least by establishing a standard the consumer might at least regain some of the condifence in brokers that the past year of Big Bank propaganda and media hype has attempted to destroy.

Commented by: Xerxes at 08 Jul 2009 11:45 AM

Lets hope I'm wrong. But I think not. Licencing will do nothing good for the broking industry. We'll all look back in a couple of years and say what a lemon we were sold.

There is no quick buck to be made by the 'opportunist' in our industry. As you know, to make even a base level taxable income out of broking you need to spend years building a network & knowledge base (hundreds & thousdands of unpaid hours spent). An opportunist is not going to waste his time in the broking industry. There's not much money in it.

As for education, I did that rotten Cert IV & anti money laundering crap - a total waste of my time and money. No benefit to my customers or my business. Once licencing comes in, this type of time wasting rubbish will increase.

Plus you wait to see what the licencing fees will be in a few years (thousands of dollars / year).

Licencing is all bad news. No one wins but the bureaucrats. Us brokers will just have to struggle through the extra red tap.

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