Big National Banks: Open up the Wholesale Lending Channel
Closing wholesale mortgage channel by big banks is like killing the messenger because they did not like the message. The mortgage bust of 2008 was not created by wholesale mortgage brokers, but as elegantly depicted in the movie, The Big Short, everyone but the brokers. Brokers did not have their own money to lend. They were just a channel by which money was pumped in the housing market by unscrupulous bankers and secondary mortgage backed securities markets and the rating agencies.
Safeguards put in place to monitor the individual brokers since the crises, including vigorous testing and licensing and extensive back ground checks including criminal and most importantly credit checks to make sure those peddling credit can at least manage their own credit, have weeded out the dishonest and incompetent brokers out of the business. Only 6% of those brokers in business in 2008 remain in business today. This is the cream of the crop that consists of knowledgeable, caring, informed, honest and hard-working professionals who understand their clients’ needs on a personal basis and can suggest better options. Moreover, compensation caps instituted by Dodd-Frank limit what the brokers make, thus dis-incentivizing hard sell pitches.
Therefore, besides opening the alt-a loans, as discussed in my post of a few days ago, the big banks need to re-open the wholesale channel. This a win-win situation for all. Banks will save the massive overhead expenses they incur in opening and managing big facilities and brokers who have a more direct relationship with the consumer can provide better service and a menu of options. With the new safeguards in place, this channel is critical to providing credit to a large swath of borrowers. This is good for the consumer, the housing market and the overall economy.