Where did GMAC go?

Big news today: GMAC is closing all of its mortgage offices.

In my area over 350 mortgage brokers did not or could not comply with a new law and shut their doors.

These changes show that the mortgage lending business is not out of the wood yet. It appears to me that we will have more failing giants in the business while local and regional banks will flourish. This in the long run will be good for all of us.

With these types of changes you will see more mortgage brokers leave the business. This will happen due to the way the mortgage business is set up. You have three types of lenders: you have direct lenders which are banks and you have two types of brokers.

The first type of broker is one that does not have the financial wherewithal to fund a mortgage. When they close on a mortgage it is immediately sold or usually closed in the investor’s name, if XYZ mortgage broker closes on a mortgage they have a direct lender like Countrywide fund the mortgage and the broker is paid for bring the customer to Countrywide.

Then you have brokers who have what is called warehouse lines. These lines allow the broker to close the loan in their name and take a little time usually less then 30 days to sell it to an investor. Brokers do not service the loans and at the end of the day need a direct lender (Bank) to stay in business. If the banks decide not to buy loans from the brokers they have no choice but to close down.

You must be wondering why an investor would stop buying loans from broker. That is a great question. Let say you own a business and 50% of your business comes from a company you pay when they sell your product. One day you decide to look at the delinquencies on the sales your company makes and the sales the outside company makes, you find that the outside company has a delinquency rate 100% higher then yours direct sales. Then you look into the reason why and find that it is due to misleading or inaccurate information given to you by the outside company. You would sever the relationship.

That is some of what has happened in the mortgage business and we are seeing the results. The unfortunate part of this scenario is that there are many honest and trustworthy brokers however, as the saying goes “one bad apple ruins the bunch”.