Bank of America (BofA) has announced it will bow out of the wholesale mortgage lending business, confining its funding of loans to direct-to-consumer lending from its mortgage centers and community banks. BofA insists this decision was not made in light of the recent discovery of faulty foreclosure documents and the ensuing public relations fallout. Rather, the decision to focus on retail lending purportedly stems from a passion for personalized customer service.
BofA is not the only banking giant to cease the funding of loans generated by mortgage loan brokers (MLB). JPMorgan Chase announced last year that it would only be dealing in direct-to-consumer lending through its mortgage centers as well. This means Wells Fargo & Co. is currently the primary source of all wholesale mortgage-lending funds.
Regardless of whether or not BofA has closed its wholesale lending department as a personal relations maneuver, the effect on the real estate market (and the economy as a whole) is of great concern.
first tuesday take: As thousands of BofA mortgage customers suffer through protracted foreclosures, this veiled attempt to appear dedicated to consumer protection is an effort to reassure homebuyers they should borrow from BofA since their paperwork will not get lost in the mortgage loan application machine. [For more information on foreclosure delays in California, see the October 2010 first tuesday article, 2Q California foreclosure data.]
While BofA receives considerable financial benefit by halting wholesale lending and funding of broker-generated mortgages, borrowers will suffer the consequences of the Secure and Fair Enforcement for Mortgage Licensing (SAFE) Act, the actual effect of which is to eliminate MLBs from the highly lucrative consumer loan market. By subtracting the MLB from the loan origination equation, BofA will retain a greater profit on each loan that would otherwise be shared with a MLB who packaged and sold them the loan.
Although borrowers may potentially save as well (if BofA is benevolent enough to pass these savings on), there will simply not be as many choices on the mortgage loan market since the system for distributing mortgage money to buyers is reduced by eliminating the MLB and the Federal Deposit Insurance Corporation (FDIC) closing the small, politically impotent banks. As we have already witnessed, this will drive up loan charges as the effect of the SAFE act and barring MLBs kills competition.
The Federal Reserve (the Fed) is now using new strategies, untested in the U.S., to pump fresh cash into the economy via quantitative easing (buying 30-year T-bonds), which will ostensibly drive mortgage rates down even further. BofA’s strategy to lock MLBs out undermines the Fed’s efforts to introduce greater quantities of cash into the mortgage market and stimulate money lending.
As the Fed purchases billions of dollars worth of BofA’s stockpiled T-bonds, the nation’s largest private bank has decided it will be the sole administrator of those funds, opting to consume a bigger piece of the pie (comprised of front-end fees) while elbowing the MLB away from the table and interfering with the distribution of funds to California’s vast and geographically widespread homebuyer market. [For more information on the Fed’s new strategy to stimulate the economy, see the October 2010 first tuesday article, The Fed purchases treasuries, fights inflation.]
The hurdles to Real Estate Settlement Procedures Act (RESPA) MLB activity, which lenders placed in their way by guiding the SAFE Act into law, have been raised even higher by refusing to fund or purchase the loans they package. It looks like those of you who just earned your Nationwide Mortgage Licensing System (NMLS) registration and endorsement may not need it after all. Lenders do not want your assistance in locating homebuyers and homeowners who need financing.