If a buyer wanted to purchase a home with a mortgage in 2006, often all he or she needed to do was sign on the dotted line. And, if they couldn't manage that, an "X" would have sufficed. Either way, a mortgage pro likely was pocketing a healthy commission.
"In 2006, if you could fog a mirror, you could get a mortgage," said David Shefsky, president of Advanced Mortgage Solutions of South Florida Inc. "You could get 100% [loan to value] in the wink of an eye."
Fast-forward four years: Vetting a mortgage is much more difficult. New federal laws and industry changes now require strict credit verification and proof of income. This tightening has resulted in an increase in the quality of loans, a reduction in their volume and, most importantly for mortgage brokers, changes in commissions on origination.
Before the subprime mortgage crisis, no-doc mortgages were common. In June 2006, a person making $60,000 a year could walk away with a $400,000 mortgage without proving income or credit, said mortgage originators FINS spoke with. They could receive an option adjustable rate mortgage with no down payment. And the broker might get 4% to 5% the value of the loan as a fee -- $16,000 to $20,000 in this scenario.
The initial monthly payments would start at an affordable rate for the borrower but "would skyrocket in later years the longer the borrower paid only the minimum," said Greg McBride, a senior financial analyst at Bankrate.com, an aggregator and publisher of financial rate information.
Many of those exotic loans simply don't exist anymore. To qualify for a mortgage in 2010, an applicant has to be able to present verification of income, good credit and, often a 20% down payment.
As a result, loan applicants who cannot meet these new requirements, (but who would have been able to purchase a home in 2006 under the old guidelines), are turning to Federal Housing Administration loans, which require only a 3.5% minimum down payment. That number is expected to go up, according to FHA spokesman Brian Sullivan, to 10% for borrowers with credit scores under 580. FHA loans, which comprised 3% of the market four years ago, now account for up to 40% of current loan originations.
What Can You Get on $60,000 Annual Income?
It's 2006. A prospective home owner with a $60,000 a year income might be steered toward a $400,000 mortgage. To make this a reality, a mortgage broker could offer an option ARM with no down payment and an initial interest rate of 1%, said McBride. With a 4% to 5% commission, the payout for the broker was lucrative.
In 2010, the situation is different. A prospective home owner with $60,000 annual income wants to purchase that same house, which now might cost $250,000 due to depreciation of the market, depending on the region. After verifying income and credit, the mortgage broker would likely require a $50,000 down payment and offer a 30-year fixed mortgage for the remainder of the purchase price. This means less payout for the broker.
New laws require brokers to disclose the commission they may earn on the back end from lenders, effectively giving prospective home owners the ability to comparison shop. Brokers have typically been charging 1% to 2%, said David Shefsky, meaning that for originating a loan on the same house to the same prospective borrower, a mortgage broker today would pocket only $2,500 to $5,000.
By the Numbers
-- $60,000 annual income
-- $400,000 home
-- Option ARM mortgage
-- $0 down payment
-- 4% to 5% broker fee
-- $16,000 to $20,000 in commissions
-- $60,000 annual income
-- $250,000 home
-- 30-year fixed rate mortgage
-- $50,000 down payment
-- 1% to 2% broker fee
-- $2,500 to $5,000 in commissions
Looming Regulatory Changes
New regulations could spell less lucrative commissions for brokers.
Democrats recently voted to add a section to the Senate finance reform bill similar to the House's Mortgage Reform and Anti-Predatory Lending Act of 2009. It would seek to ban predatory lending and forces lenders to retain stakes in the loans they originate. The bill would also add an amendment to the Truth in Lending Act to prohibit yield-spread premiums -- a form of compensation based on bringing in loans at higher interest rates -- from being paid to brokers. Compensation based on the terms of a loan (other than principal amount) would also be eliminated.
Write to Julie Steinberg