As the criticism showers down on the mortgage industry, it seems the broker is increasingly being held accountable for the ruinous practices that destroyed mortgage lending and led to the current financial chaos. This conclusion has laid the mortgage broker business to waste with many of them out of business and the few that are remaining have been subsisting at best. The purpose here is not to defend the brokers as a group because I have seen many of the practices myself, it is more about suggesting that they were far from the only problem, maybe not even the largest. They had strong incentive to get loans funded at any cost because doing so paid such a hefty commission. Did they misrepresent loan files, commit fraud, coach borrowers, alter documents, and play mortgage lenders against each other to accept questionable loans? There is not much doubt from my experience that this was definitely happening on a large scale even though there were some reputable shops that conducted business ethically. It is important to remember that mortgage brokers did not underwrite the loans, they did not control the product or the decisions from the automated underwriting engines, nor did they actually fund the loans. These are functions that the lender controls therefore making it unreasonable to believe that brokers are the sole origin of the failure.

The poor execution of the mortgage broker channel by the lenders is where the true breakdown occurred. Mortgage brokers should serve as nothing more than an alternative marketing avenue to access loans, but the resulting product must be evaluated in the same manner as the product obtained directly by the lender through a retail channel. To execute meticulous underwriting and quality checks with retail loans and not put the same scrutiny on the broker loans is foolish. At the end of the day the lender acquires a loan in which they own the risk, so it seems obvious that quality is essential regardless of the origination channel used. The practice of handling the retail loans more strictly than that of the broker loans is the reason why it produced a fraction of the losses experienced with the brokers. The mortgage brokers were allowed to operate in a negligent and deceitful manner with little consequence, and this was not tolerated to the same degree on the retail side. How could there be any difference in performance if the origination, underwriting, and quality control functions were applied equally? The simple fact that a performance difference exists between the two illustrates the disparity in how they operated and what controls were in place.

A very prominent CEO of a major U.S. bank recently stated publicly that not terminating the mortgage broker business sooner was the biggest mistake of his career. It makes me wonder what gives him such confidence in the retail business that could not have implemented through the brokers if desired. Truthfully, they could have been applied equally, but lenders simply failed to create the procedures and the expectations of such. Proper management of the brokers by practicing product restraint and pricing discipline along with limiting broker approvals to a more select group would have produced the results expected. Putting all the blame on the mortgage brokers for the industry’s failures is not an honest conclusion of what occurred, and doing so is allowing lenders to excuse their own failures in the process.