Interest rates shot way higher today, and I will explain why below.
I. “2005 Mortgage Man” will be studied by anthropologists for centuries.
This is because there has never been a more confused, obnoxious, ostentatious, and non-self-aware human being.
After the 2008 meltdown, there were myriad news articles and podcasts devoted to the downfall of “2005 Mortgage Man,” as most of the demographic crashed from high six-figure incomes, mansions, and Lambos into near-poverty in their moms’ basements.
These are the conditions that fostered “2005 Mortgage Man:” (1) insanely loose lending standards made almost everyone eligible for mortgage financing, irrespective of income, assets, or credit; (2) loan volumes hit record levels that we’ve never come close to hitting again, with almost 24 million mortgages originated in 2003 alone; (3) barriers to entry for becoming a “mortgage man” were extremely low; and (4) interest rates were falling every year while home values were fast increasing every year.
Under those conditions, that “2005 Mortgage Man” thought would last forever, it is almost impossible NOT to make a ton of money. And given that many mortgage guys were previously selling yellow-page ads, water filters, or car detailing (or similar) for $40,000 per year, all that success went wildly to their heads.
When the music stopped (because, of course, it did), these guys all crashed and burned.
Sidebar #1: A lot of “Mortgage Men” came to me for their own mortgage financing because I was notoriously honest and did not tell secrets. The reason they did not do the loans themselves is that they did not want their staff/firms to see their incomes – but it was not because their incomes were too high. It was usually because they were lying about their incomes in public, and I was always bemused to see that they usually made about 50% of what they claimed.
Sidebar #2: They loved their Lamborghinis and fancy offices, convinced they were the justified trappings of very special and successful people. But post 2008, an enormous number of mortgage men walked away from their car and office leases, making me think they might not have been so special after all.
Sidebar #3: They often convinced themselves they were akin to Wall Street traders. I was sitting quietly in a ski gondola once with seven other people when a young, ridiculously overdressed mortgage broker pulled out his cell phone to tell his assistant to lock in a mortgage rate. Instead of just saying, “please lock Smith with a 2.4% margin,” he went on for five minutes dropping nonsensical jargon (basis points, float-downs, yield spread premiums, secondary hedging, mandatory delivery, salability, etc.), clearly trying to impress a bunch of strangers. Unfortunately for him, several of us were in the industry, and sadly…we all laughed.
I am sharing all this because I love to tell these stories and because I thought of those guys today when thinking about the titles mortgage loan officers give themselves today- which I discuss below. Many of those guys referred to themselves as “President” or “CEO” on their business cards, even though their “companies” often only consisted of themselves and a loan processor – and even though they were just “mortgage loan officers.”
II. What Is a Mortgage Broker?
A mortgage broker is a mortgage loan officer who originates, packages, and submits mortgage loans to third-party lenders – outside of his own firm – to underwrite and fund mortgage loans. Mortgage brokers do not have in-house underwriters or the ability to fund mortgage loans themselves.
III. What Is a Mortgage Banker?
In this context, a mortgage banker is a mortgage loan officer who works for or under a “mortgage bank” that underwrites and funds loans in its own name, with its own warehouse lines of credit (used to fund loans) and underwriters. “Mortgage banks” only originate, underwrite, and fund loans, remember, they do not do any commercial bank activities, e.g. offer checking accounts.
IV. What Is a Mortgage Loan Officer?
Mortgage loan officers include mortgage brokers, AND mortgage bankers, AND loan officers who work for commercial banks and credit unions, who do not fall in either the broker or the mortgage banker bucket.
V. What Is a Direct Lender?
A direct lender is a mortgage bank that underwrites and funds its own loans – to be sold on the secondary market.
VI. What Is a Portfolio Lender?
A portfolio lender is a lender that underwrites and funds loans that it will retain on its own balance sheet; it will not sell the loan on the secondary market like mortgage banks do.
VII. Can Commercial Banks Do Mortgage Banking Too?
Yes, many commercial banks underwrite and sell conforming (Fannie/Freddie) loans just like mortgage banks do. Commercial banks can also be portfolio lenders (especially for jumbo loans), but pure mortgage banks are rarely “portfolio lenders,” as regulations and capital requirements make it too difficult or too risky. Commercial bank loan officers almost never submit loans in the broker channel.
VIII. What Is JVM Lending?
JVM is both a mortgage bank/direct lender and a mortgage broker, as we often broker loans to third-party lenders (about 10% of the time) if they offer better terms for a borrower than we can find internally. Many “mortgage banks” prohibit their loan officers from brokering because it is less profitable for the mortgage bank. That is unfortunate, though, as sometimes the broker channel is a better option for borrowers. JVM never does portfolio lending.
Why Did Rates Shoot Up Today?
Rates shot up today because the European Central Bank, the Bank of England, and a dovish Fed member (Waller) all openly discussed rate increases to fend off inflation. As usual, the market likely overreacted to what are just comments and not actual economic events, so I suspect this will be short-lived.
