The current weak state of the economy traces back to the collapse of the subprime mortgage market in late 2006. There has been a lot of finger pointing by law makers, financial professionals and citizens about who is to blame for this mess. Mortgage brokers have received a big part of the blame and, recently, banks like Citi and Chase have pulled out of the mortgage broker market all together.

Add to that the fact that many of the top mortgage insurance companies have restricted the use of third party originators and it begs the question, does this mark the beginning of the end for mortgage brokers?

Let’s examine the reasons why banks have stopped allowing brokers to originate mortgage loans on their behalf. Chase released a statement in January which outlined the reasons for this. Among them were:

• Borrowers are "best-served" by a bank loan officer, who can explain the bank's products and help borrowers evaluate their loan choices.
• Loans originated by retail-focused bank professionals and loan officers have "performed better" than loans originated by mortgage brokers. In lender-speak, "performed better" means those borrowers were less likely to make late payments or default.

Let's look at these in a little more detail.

Borrowers are “best-served” by a bank loan officer. I would argue that is not the case for a few reasons. Banks only offer their products while a mortgage broker offers the products of dozens—even hundreds of different banks -- giving the borrower the greatest possible opportunity to get the lowest rate and most favorable terms.

Many of these banks do nothing else but underwrite, package and secure mortgages. They do not take deposits, nor do they have traditional branches—they rely completely on brokers for their business. This brings the cost per loan down significantly which ultimately translates into lower rates and fees for borrowers. This point is backed up by a study completed in 2005 headed by Georgetown University's Gregory Elliehausen. Elliehausen's team examined more than 500,000 "subprime" first mortgages from 10 of the largest lenders in the field, and studied more than 590,000 closed second mortgages from the same lenders. For the time period covered by the study, the 1 million-plus loans in the analysis accounted for more than 40 percent of the entire subprime marketplace.

The results of the statistical analysis: On average, total costs on broker-originated first mortgages were 1.13 percentage points lower than loans originated by employees of the lenders themselves, and 1.98 percentage points lower on second mortgages. 

Anyone who has ever gone through the process of obtaining a mortgage knows how much paperwork is involved in the process. It is very inefficient and impractical for a borrower to go through the full application process with multiple banks so borrowers tend not to do it. A mortgage broker can shop literally hundreds of  different lenders on behalf of the borrower with only application and deliver multiple options allowing the borrower to choose which works best for them and their budget. This makes the shopping process much more efficient and convenient for a borrower.

I think Chase mis-spoke—they might have better explained this point by saying: “Chase SHAREHOLDERS are best served by keeping Chase products in front of borrowers so we can effectively limit their choices."

Loans originated by bank loan officers have “performed better.” For the life of me I cannot figure this one out. Banks have 100% control over the guidelines, the underwriting and the funding of loans originated by brokers. This is like Calvin Klein blaming Macy's for selling jeans that turn out to have a faulty button fly. I would really like to see the data on this one.

I do not see mortgage brokers going away any time soon. As a mortgage broker myself, if I even thought for a minute that this was going to be the case, I would change my business model or find something else to do. In the end, mortgage brokers provide borrowers with 3 distinct competitive advantages over banks.

• Service - Have you ever tried to get a hold of a bank loan officer after 5pm? What about on weekends when you find your dream home and you want to know if you are qualified? Chances are the first words you hear on the other end of the phone are: “You have reached the voicemail box of…” Brokers on the other hand are independent business owners who have a vested interest in the outcome of the process. Brokers only get paid when a loan closes and will work extra hard (including nights and weekends if necessary) to make sure that you are satisfied and that your financing closes.
• Price - As discussed above, mortgage brokers can often deliver significantly better pricing than retail bank branches because of the ability of  brokers to find the most competitive price on any given day.  
• Efficiency - Because a borrower can fill out one application and shop multiple banks at once with a broker, it is much more convenient than going to Chase, Citi, and Wells Fargo and filling out 3 different applications, dealing with 3 different personalities, and having to provide 3 different sets of documents.

When you add it up, I would say that even though a few of the big banks have pulled out of the wholesale mortgage business, there are significantly more that are committed to the mortgage broker model because in the end, it is a very consumer friendly business model.

Sure there are some challenges for mortgage brokers in this market, but all financial institutions are having difficulties.