Mortgage Bankers and Loan Correspondents

SIC 6162

Industry report:

This industry covers establishments primarily engaged in originating mortgage loans, selling mortgage loans to permanent investors, and servicing these loans. They may also provide real estate construction loans.

Industry Snapshot

The mortgage loan industry differs from other industries in its passivity: whereas new products and services can create new markets in other industries, the mortgage industry remains at the mercy of homeowners and buyers, who almost never buy on impulse. Instead of creating new markets, mortgage bankers must respond to existing markets and anticipate marketplace changes, transforming their services in reaction to larger societal forces, such as population demographics and interest rates. This passivity forces the industry to shift to meet new demands, such as rising rates of first-time homebuyers, and to take advantage of new opportunities, such as e-commerce. The mortgage industry benefits from the fact that home ownership represents an enduring aspect of American life.

When average interest rates fell to historic lows in the early 2000s, the industry saw an unprecedented spike in refinancing activity, which fueled a record volume of mortgage originations. These low interest rates also sparked growth in new transactions, particularly by the growing segments of first-time homebuyers, low-income buyers, minorities, and immigrants. However, after peaking in January 2006, housing starts declined 46 percent by October 2007--and continued to fall. Loan performance also worsened, with the highest delinquency rate since 1986 and foreclosures at record highs as a result of defaults on subprime loans. By the late 2000s, the so-called subprime mortgage crisis was a major component of the economic recession that many compared to that of the Great Depression of the 1930s.

Organization and Structure

As liaisons, mortgage bankers are more than just loan brokers, because they maintain a responsible presence from the time mortgage loans are created until they are paid in full. The mortgage banker functions in a continuum extending from the seller/builder of the property to the seller's agent, to the mortgage borrower, to the mortgagee (the mortgage banker), and to the mortgage investor. Mortgage bankers specialize in the origination or production of mortgage loans for sale to the secondary mortgage market. Many mortgage lenders make or buy loans, while some sell loans, and others service loans. Mortgage bankers link the three functions.

The housing finance system in the United States includes many private and public institutions and several levels of market activity. The mortgage lending/investment process involves the provision of housing credit to borrowers by institutions and individuals who hold housing loans in their portfolios. However, a number of institutions may come between the ultimate investors, and the characteristics of the mortgage asset may be transformed along the way as insurance and guarantees are attached and as securities replace the original mortgage loans.

Residential mortgage loans are made (originated) in primary markets where lenders and borrowers conduct business. Borrowers get mortgage credit in these markets mainly from depository institutions or mortgage banking companies. Since the 1930s, mortgage loans made in primary markets typically have been long-term, fixed-rate instruments with level payments that pay off (amortize) the principal balance over the term of the loan. However, new types of mortgage instruments emerged in the early 2000s to serve the various needs of borrowers and investors. Most of the new mortgage instruments provided for adjustable interest rates, graduated payment schedules, or some combination of these features.

Institutions operating in primary mortgage markets may hold the mortgages they originate, adding them to their asset portfolios. In many cases, however, originators sell their loan production on secondary markets, thereby replenishing their supplies of loanable money. Transfers of outstanding mortgages among mortgage investors also take place in secondary markets.

Sales of mortgage loans from originators to investors inevitably involve some cost, but such transfers are often necessary for the effective functioning of the housing finance system. Secondary market transactions may be needed to correct interregional imbalances in the supply of and demand for mortgage credit, or to move mortgage assets from one type of institution to another within the same market area. The latter need arises within a system characterized by specialization and division of labor. One type of institution may perform a mortgage banking function, specializing in mortgage origination and servicing and selling assets to investors who choose not to perform these functions. Such a division of functions can be encouraged by federal or state regulations governing the activities of various types of institutions.

There are several types of loan instruments available to individual and institutional investors.

Fixed-Rate Mortgages.
Historically, 30-year fixed-rate mortgages have been the loan instrument of choice for many borrowers. In the 2000s, however, the changing conditions in the mortgage market, coupled with sharp fluctuations in interest rates, increased the demand for shorter maturities, more interest-sensitive loans, and nontraditional mortgage instruments.

Adjustable-Rate Mortgages (ARMs).
Because of the thrift crisis in the late 1980s, lenders began offering adjustable rate mortgages. Lenders, buffeted by interest rate risk, looked to shift the risk to the borrower. In exchange, they offered borrowers a lower initial rate. What was once an instrument designed to keep housing affordable during periods of high interest rates turned into an interest rate gamble for a growing number of borrowers. Borrowers that opt for fixed-rate loans anticipate stable or increasing interest rates. If they are wrong, they can supposedly refinance later. Borrowers that choose adjustable plans believe that rates will decline. Many consumers who obtained such mortgages in the early 2000s found themselves in trouble when this did not happen.

Convertible ARMs.
These instruments have been available for years but have been marketed aggressively only during high interest rate periods. This type of mortgage vehicle gives the borrower the benefit of a low initial rate with the option to refinance to a fixed-rate mortgage at about half the typical refinance cost. The convertible ARM may be attractive to lenders with loan-servicing portfolios, since they would be less likely to see refinance business go elsewhere. If the borrower switches to a fixed-rate mortgage when rates are low, however, the lender ends up with a portfolio of low-rate, fixed-rate loans.

Shorter Term Mortgages.
Fixed-rate mortgages with terms shorter than the traditional 30-year instruments became very popular beginning in the early 1980s. Part of their popularity comes from the value of mortgage interest deductions as consumers move into lower tax brackets. Moreover, during periods of low inflation, borrowers can pay down their principle in cheaper dollars. The 15-year loan historically has had rates between 40 and 50 basis points (a basis point is equal to 0.01 percent) below the 30-year loan and has lower overall financing costs. The higher monthly costs make the 15-year loan available mainly to affluent borrowers. It has been a good intermediate term asset for portfolio lenders and attractive to investors. In the late twentieth century industry estimates placed default rates on 15-year loans at about half that of 30-year mortgages.

Bi-Weekly Mortgages.
Bi-weekly mortgages are similar to 15-year or 30-year mortgages except that the borrower pays half of the scheduled monthly payments every two weeks. This creates the equivalent of 13 monthly payments a year, resulting in a much faster pay-off. A 30-year mortgage would be paid off in 19 years with this instrument. Virtually all bi-weeklies are fixed-rate loans, and much of the bi-weekly volume is generated by refinancing. Borrowers take advantage of declining rates to lock in a fixed-rate, shorter term loan with slightly lower monthly payments. Lenders target sophisticated, second- and third-time homebuyers for this product. The loan usually is tied to a checking or deposit account from which payments are debited directly. Delinquency rates on this instrument are extremely low, especially in cases in which the financial institution requires one or two payments to be kept in the deposit account at all times.

Home Equity Loans.
Since the passage of 1986 tax reform legislation, home equity loans have become increasingly popular. These loans generally are tied to the prime rate and may be tax deductible. They are usually revolving lines of credit with little standardization. Traditionally there has not been an active secondary market for home equity loans, as investors were wary of potentially high default rates, as well as how legislators might respond to the collection process. However, home equity lines of credit became tremendously popular during the early and mid-2000s, as historically low interest rates made home equity loans a much more attractive means to procure funds than high-interest credit cards.

Portable Mortgages.
A loan for movers, the portable mortgage traveled to the United States from Canada (as did the bi-weekly). With a portable loan, the lender hopes to keep the mortgage loan even in the event of relocation by the borrower. A borrower who moves to another house may take this loan without paying additional points. In the event that a borrower needs additional money, the funds are added to the loan at the prevailing rates, making a portable blend.

Background and Development

For most of its history, the mortgage banking business was made up of a relatively small number of independent firms who acted as intermediaries between borrowers and permanent mortgage investors. The major part of their activities concentrated on residential loan origination, and most of that consisted of Federal Housing Administration (FHA) and Veterans Administration (VA) loan production. Savings and loan associations dominated most of the conventional residential market, and there were few sources of mortgage capital besides such traditional mortgage investors as thrifts and life insurance companies. It was, for the most part, a private market in which available capital disappeared when interest rates rose and capital availability tightened.

Before 1970, the Federal National Mortgage Association (Fannie Mae) provided one of the few national secondary markets through its whole-loan purchase and sale program. Even that program, however, was limited to government loans. The establishment of the Federal Home Loan Mortgage Association (Freddie Mac) in 1970 and the entrance of Fannie Mae and Freddie Mac into the conventional secondary market in 1972 initiated the expansion and rise in importance of secondary market activities for all mortgage lenders. This factor manifested itself through the standardization of loan documentation and underwriting criteria and a consistent market presence that the private secondary market had never achieved.

The 1980s were a transitional period for mortgage bankers. The first great challenge was the high level of interest rates that all but shut down origination volume. Creative lenders took advantage of liberalized lending regulations, and the result was a vast expansion in the menu of mortgage banking products, including more than 200 types of adjustable rate mortgages and a sometimes bewildering profusion of graduated payment, growing equity, shared equity, wrap, and second mortgage loans. As so often happens, the wishes of consumers and investors were diametrically opposed: investors demanded loans that would adjust immediately to the market, while consumers sought loans that looked as fixed as possible (with lower interest rates of course). For a long while mortgage bankers despaired as thrifts dominated the origination market with teaser rate adjustable rate mortgages.

The marketplace eventually winnowed the product menu down to a few manageable choices, and the lower interest rates of the late 1980s increased the popularity of fixed rate loans. The competitiveness of mortgage bankers was enhanced not only by the return of a fixed rate environment, but also by two other factors that dramatically changed the industry: the savings and loan crisis and the rise to dominance of mortgage-backed securities (MBS).

The thrift industry was at once a blessing and a bane: while thrift investors were primary outlets for whole loan products, thrift originators were frequently unbeatable competitors. However, the same shortsighted impulse that led thrifts to aggressively push market teaser rate ARMs (some of which had caps below the prevailing level of fixed rates) led to a multitude of other dubious business decisions that sealed their fate. At the same time that thrifts were diminishing in importance as investors, the MBS was coming into its own. By the late 1980s, even ARMs and jumbo loans were being packaged into generic MBS and resold through Wall Street to institutional investors, many of whom would never dream of investing in a whole loan product. Early fears that the thrift investor base could never be replaced proved groundless. The MBS products provided an ongoing source of capital.

By the mid-1980s, government deregulation, lax underwriting standards, and some of the more dubious products offered earlier in the decade were producing catastrophic results. Lenders passed risks to mortgage insurers, many of which failed to monitor the situation adequately. Losses mounted because of the growing number of loan defaults. Industry analysts pointed to payment shock or equity erosion or other factors as the reason. It eventually became clear that equity was the most important determination of credit risk. As underwriter ratios were tightened, many underwriters complained that the insurance companies were punishing them for the borrowers' sins. Gradually, insurers analyzed the delinquency and default experience of millions of loans and arrived at sensible standards that protected the interests of borrowers, lenders, insurers, and investors.

Just as the early 1980s were dominated by the effects of high interest rates, the second half of the decade was strongly influenced by declining interest rates. This had several profound effects. Origination and refinance volume soared, and this opened up many profitable opportunities for mortgage bankers. As a result, new products began increasing the investor base for mortgage loans, while at the same time dampening the volatility of most mortgage bankers' earnings.

As a result of economic fluctuations of the 1980s and early 1990s, mortgage banking and the mortgage finance industry began to undergo fundamental changes that altered the role of traditional participants, opened the market to new players, saw Wall Street emerge as a major provider of mortgage capital, and radically changed the nature of the secondary mortgage market.

The dramatic changes in mortgage banking have been driven by a series of developments that have affected all financial services. Each development would have been significant in its own right, but in combination they have altered mortgage financing beyond recognition.

Mortgage Securities and Wall Street.
Mortgage lenders recognized long ago that the original secondary market lacked the ability to provide mortgage capital consistently in the amounts needed or the geographic distribution required to meet the housing needs of the nation adequately. With no central marketplace, an awkward and nonliquid investment vehicle, and nonstandard documentation, mortgages could not compete in the capital markets when demands for capital exceeded the available supply from thrifts and other portfolio lenders.

Mortgage-backed securities, which offered access to the broad investor base and capital formation abilities of Wall Street, were revived with the creation of the Government National Mortgage Association (GNMA, or Ginnie Mae) in 1968 and the issuance of the first GNMA pass-through securities in 1970. Mortgage-backed bonds had once been widely used in the 1920s but had a dismal record in the Great Depression of the 1930s. With the government guarantees on the underlying mortgage collateral and on the securities themselves, GNMA securities traded on Wall Street began to attract nontraditional mortgage investors. At about the same time, Freddie Mac initiated pass-through securities backed by conventional residential mortgages. By the mid-1970s, residential mortgages, government and conventional, had been accepted as viable security collateral by the investment community. The result was a rapid growth in the volumes and types of mortgage securities in the marketplace.

In addition to reaching a huge investor base and new sources of capital, the securities markets offered a speed of execution and efficiency of pricing that the traditional secondary mortgage markets could not match. As a result, the securities markets were outlets for increasingly large percentages of residential mortgage production. Securities markets drove mortgage pricing nationwide, heavily influenced mortgage product design, and reduced the mortgage finance industry's reliance on mortgage portfolio lenders.

Economic Influences.
Beginning in the early 1980s, as mortgage securities were assuming a major role in mortgage financing, changes occurred in the basic economics of all financial markets that forced major alterations in the way mortgage banking operations were planned and managed. The magnitude of interest rate movements and the speed with which they occur have reached levels unknown and unanticipated before the 1980s. The collapse of mortgage security prices in the spring of 1987 illustrated the potential volatility of the market, which can be influenced by factors unrelated to mortgage rates or the housing capital markets.

This volatility made the mortgage banker's job of risk management much more complex and difficult. Mortgage bankers put together strategies and operating procedures, which included sophisticated reporting systems, to monitor and control the risk exposure of their operations.

Further complexities were added to the business with the wider variety of mortgage products offered to borrowers, whose preferences often shifted from one loan type to another as the economic climate and expectations changed. This tendency is illustrated by the changing market share of originations by fixed-rate, adjustable-rate, and balloon loans. As mortgage rates fall, fixed-rate products and balloon loans tend to dominate the market. As rates rise, lower initial rates bring adjustable products a larger share of the market. The mortgage banker's risk position changes with each shift, and swift action is required to maintain prescribed risk exposure limits.

As the economics of the marketplace changed, so have the economics of mortgage banking. The industry has become a complex financial services business requiring analytical skills, financial modeling, and forecasting abilities far beyond the levels necessary in the past. The resources required to compete effectively made it challenging for the small, independent firm to survive, and nearly all of the medium and large mortgage banking operations became subsidiaries of larger diversified institutions.

With the dominant role of mortgage securities and the impact of economic changes felt in all sectors of the mortgage finance industry, the composition of the participants in the industry also changed. Wall Street firms, commercial banks, nonfinancial corporate giants, and traditional portfolio lenders played a part in mortgage banking with various degrees of influence and success.

Securities dealers became the primary market makers as the bulk of residential mortgage originations were used to collateralize mortgage securities, primarily through secondary loans originating from Freddie Mac, Fannie Mae, and Ginnie Mae. Many major Wall Street firms ventured into primary, or direct, mortgage banking activities in the 1980s, establishing their own mortgage banking operations, and buying and selling mortgages and loan servicing rights. Most of these ventures disappeared or served small, specialized markets at the time, and Wall Street's emphasis returned to mortgage securities and the derivative securities that developed as the mortgage security markets matured. Some of the industry leaders in this area included Goldman Sachs, Salomon Brothers, and The First Boston Corporation.

Thrift institutions and the thrift industry were decimated by the consequences of the excesses, incompetence, and fraud of the 1980s. Their market share dropped from 41 percent of the loan origination market in 1987 to 24 percent in 1992. About 2,000 viable institutions remained after the cleanup was completed, but their presence in the market was severely diminished. By 2009, only about 1,173 thrift institutions remained.

Commercial banks, particularly such large national banks and bank holding companies as Fleet National, Chase Manhattan/Chemical, and Bank of America, emerged as major players in mortgage banking. Many of the nation's largest mortgage banking operations were subsidiaries of these institutions. The banks viewed mortgage banking as a natural extension of their mortgage lending operations and as a cross-selling opportunity, while the mortgage banking operations benefited from the credit facilities and financial presence of the parent institution in the marketplace.

Nonfinancial corporations and holding companies acquired or built some of the largest mortgage banking operations in the country with mixed results. Some operations did very well, but others struggled. As in the case of commercial banks, the parent organization has to understand the business of mortgage banking and the operating disciplines that it requires if the mortgage banking operation is to succeed.

Life insurance companies and pension funds have long been viewed by mortgage bankers as prime sources of mortgage funds, but tapping these sources has not been easy. Life insurance companies returned to residential mortgage investment in the 1980s, after effectively leaving the field 20 years earlier, but most did so by setting up their own mortgage companies. By the 2000s, most of these operations had been closed or shut down, although several life insurance companies, such as Prudential Home Mortgage and Metropolitan Life, had success in the mortgage banking segment. Pension funds rarely provide mortgage bankers with direct access to money and tend to invest in mortgages through mortgage securities.

Investment in mortgages by individuals grew faster than all expectations. Individuals generally preferred Ginnie Mae securities and often invested through mutual funds. As with pension funds, individual investors funnel money directly to the mortgage market. In doing so, individuals receive a higher yield on their investment than they would by depositing their money in savings institutions.

Like the broader financial services industry, the mortgage industry continued to be swept by changes during the 1990s. These changes were driven by deregulation, competition, and technological advances. Since the 1980s, private mortgage companies that do little but originate loans have become the main source of mortgage lending. There were approximately 4,000 of these companies in the United States in 1996 (out of about 12,000 total organizations making mortgage loans), and they accounted for nearly 60 percent of all new mortgage loans, or originations. This is nearly double the share that mortgage companies had in 1987. The next-largest source by volume of mortgages was commercial banks, followed by the thrift industries, which as recently as 10 years earlier had dominated the industry. Other mortgage lenders included credit unions and life insurance companies. During 1996, some $784 billion in one-to-four-unit residential mortgage loans were originated in the United States. That was somewhat below the peak of just more than $1 trillion worth of loans originated in 1993, but the record year had been strongly influenced by a wave of refinancings as mortgage rates dipped to their lowest point in years.

The mortgage financing industry experienced record-high results for combined purchase and refinancing transactions of $1 trillion in 1993; 1998 results surpassed this watershed mark, and a record of $2.3 trillion was set in 2001. Double-digit interest rates still existed in 1993, thus refinancing fueled that year's record transactions. In 1998, refinancing still accounted for some transactions, as borrowers took advantage of low interest rates to decrease their mortgage payments from above 8 percent to below 7 percent.

While the cost of entry into loan origination continued to be low in the late 1990s, the financial sources necessary to compete and succeed as a full-service mortgage banker increased dramatically. As a result, the industry was increasingly dominated by the largest players, including behemoths like General Motors Acceptance Corporation (GMAC), which in 1996 originated more than $3.4 billion of new residential loans representing more than 30,000 home loans.

A number of the largest mortgage bankers grew very quickly in the 1980s and 1990s through bulk purchases of loan portfolios. The secondary market for mortgage loan securitization fueled the growth in origination volume. Although the volume of mortgages sold into the secondary market tends to vary with changes in the volume of fixed-rate lending (as opposed to variable rate loans), the percentage of home loans sold through the secondary market in 1996 was 56 percent. That was down from a peak of 65 percent during 1993, but it represented a sizable increase over the 33 percent level of 1988, when the market was not as mature.

Consolidation transformed the mortgage loan industry in the 1990s. Between 1980 and the late 1990s, 7,000 banking institutions merged, though few of these mergers centered around mortgage financing. However, the consolidations did affect the industry: in 1990, 28 percent of home loans originated from 25 lenders; as of September 1998, the top 25 lenders accounted for 53 percent of home loans.

The process of consolidation did not always create more efficiency, though. Often, newly consolidated companies experienced growing pains, and the quality of their service declined. In this climate, niche lenders and small, local specialists thrived. For example, companies responsive to the Hispanic market stood to gain from the demographic and economic growth of this sector. Whereas Hispanics made up 11 percent of the population in the late 1990s, this population accounted for 18 percent of all new homeowners from 1996 through 1998. In the first half of the decade, Hispanic owner-occupied housing units increased 34 percent. The U.S. Bureau of the Census forecasted the Hispanic population to grow to 15 percent of the total U.S. population by 2015 and 25 percent by 2050. Companies such as Countrywide Home Loans, Inc., of Pasadena, California, benefited from these demographics by employing bilingual employees and translating loan literature into Spanish.

Another niche market in the late 1990s was the emergent trend of the so-called money-back home loan, which allowed borrowers' monthly payments to be placed in an insurance policy rather than against the principal of the loan. At the end of the term, the value of the policy could potentially exceed the principal of the loan and provide the borrower with a cash payment of the surplus. This method was common in international markets such as the United Kingdom but was still relatively new in the United States.

The Board of Governors of the Federal Reserve pegged the total outstanding mortgage debt at $4 trillion at the end of 1997; this figure grew to $7.5 trillion in 2001 and $7.9 trillion in 2002. That year, according to the Bond Market Association, mortgage companies accounted for approximately $4 trillion of that debt, commercial banks $1.9 trillion, savings institutions $740 billion, individuals $721 billion, federal and state agencies $396 billion, and life insurance companies $245 billion.

What most forecasters did not predict were the record low interest rates that the prolonged economic downturn fostered in 2002. In September 2002, the average fixed interest rate on a 15-year mortgage totaled 5.31 percent, compared to 8.25 percent in May 2000. Over the same period, the average fixed interest rate for a 30-year mortgage fell from 8.55 percent to 5.92 percent. With mortgage rates at their lowest point since the 1960s, one-to-four family mortgage originations exceeded $2 trillion for the first time in history, reaching $2.03 trillion in 2001. Refinancing accounted for 57 percent of that total, compared to the 19 percent of one-to-four family mortgage originations it had secured a year prior. The number of new homes sold grew from 877,000 in 2000 to a record 908,000 in 2001 and 976,000 in 2002. Despite a weakening economy, along with growing levels of unemployment, the historically low interest rates helped propel the average sale price of homes in the United States to a peak of $226,700 in 2002.

Another factor affecting the industry was the advent of electronic commerce via the Internet in the late-1990s, which significantly transformed mortgage financing by allowing customers to apply for loans online and receive responses much more quickly than in the past. One of the first Web-based mortgage companies, E-Loan, was founded in 1997. Over the next two years, the concept of transacting mortgages online gained credence, prompting other major lenders to set up their own Web sites. One popular site, LendingTree.com, allowed customers to submit a single application for which three or four lenders would compete. According to Massachusetts Mortgage Bankers Association Executive Director Kevin Cuff in the October 2002 issue of Boston Business Journal, "Obviously, the online application process in the last 12 months has skyrocketed, and the reason for that is the interest rate is dropping and the refinance rate is rising. It's the only way for people to keep up."

During 2003, mortgage originations hit a record high of $3.81 trillion, with $2.59 trillion coming from refinancing transactions. For the three years from 2001 through 2003, conventional single-family mortgage originations totaled almost $8 trillion, more than the combined total for the previous nine years. However, during 2004 mortgage originations dropped off nearly 30 percent to $2.653 trillion, of which 44 percent were refinancing transactions. According to the MBA, during 2004 there were 1.97 million new housing starts, of which 82 percent were single-family dwellings. Existing home sales totaled 6.78 million and new home sales equaled 1.2 million. The median price of a new house was $217,800 and an existing house cost an average of $188,000. The average interest rate for a 30-year fixed mortgage was 5.8 percent and a one-year Treasury ARM was 3.9 percent. Thirty-four percent ($1.13 trillion) of all mortgage originations in 2004 were ARMs.

According to the MBA's 2005 National Delinquency Survey of 39.4 million loans (29.4 million prime, 5.1 subprime, and 5 million government loans), seasonally adjusted delinquency rates for one- to four-unit residential housing was 4.31 percent at the end of the first quarter of 2005, down 15 points from the first quarter of 2004 and down 7 points from the last quarter of 2004. The number of households meeting their mortgaging payment on time rose to 96 percent. Still low interest rates and low unemployment helped the industry, but some analysts worried that ongoing high oil prices, a gradually rising interest rate, increasing consumer debt, and waning consumer confidence could lead to a rise in the number of defaults.

Indeed, loans entering foreclosure in the third quarter of 2007 hit 1.69 percent, the highest mark since 2002. Moreover, the delinquency rate, referring to loans 30 days past due but not yet in foreclosure, reached 5.59 percent, the highest mark since 1986. Subprime adjustable-rate mortgages constituted the bulk of the problem. Subprime ARMs were 6.8 percent of loans outstanding, but they made up 43 percent of foreclosure starts in the third quarter of 2007.

In an effort to combat further difficulties, the Federal Reserve Board made changes to Regulation Z (the Truth in Lending Act) to protect consumers from unfair or deceptive home mortgage lending and advertising practices. The rule required certain mortgage disclosures to be provided earlier in the transaction. Other provisions included: creditors were prohibited from engaging in a practice of extending credit without considering borrowers' ability to repay the loan; creditors were required to verify the income and assets they relied upon in making a loan; and lenders were prohibited from compensating mortgage brokers by making payments known as "yield-spread premiums" unless the broker had previously entered into a written agreement with the consumer disclosing the broker's total compensation and other facts.

Total mortgage production dropped in 2007, down from $2.73 trillion in 2006. Residential purchase mortgage originations also declined from $1.4 trillion in 2006. These figures continued to fall throughout the rest of the decade. On the other hand, foreclosure rates rose. Housing prices dropped as interest rates rose. Thousands of Americans were not able to make their higher house payment and defaulted on their loans. The investment packages that included these mortgages that had been sold earlier in the decade to the investors on Wall Street began to lose their appeal. Also, because large investors were in charge of thousands of these home loans, "negotiations over late mortgage payments were bypassed for the 'direct-to-foreclosure' model of an investor looking to cut his losses," according to Ryan Barnes of Investopedia, and foreclosures increased to record highs. In 2009, about 3,000 homes a month were foreclosed on. In addition, "Scores of mortgage lenders--with no more eager secondary markets or investment banks to sell their loans into--were cut off from what had become a main funding source and were forced to shut down operations." The FDIC reported 25 bank failures in 2008, 140 in 2009, and 143 in 2010 as of mid-November. Many of the lenders that did survive incurred enormous losses.

The U.S. government made several attempts to stop the downward spiral occurring in the banking industry, first through the Emergency Economic Stabilization Act of 2008, which the Insurance Information Institute called "a $700 billion rescue plan for the U.S. financial services industry." This included the government takeover of Fannie Mae and Freddie Mac, which together were facing more than $1 trillion in debt from subprime mortgages. Another attempt to promote economic recovery came in 2009 from the U.S. Treasury Department with the implementation of the Financial Stability Plan. In 2010 Congress approved the Dodd-Frank Wall Street Reform and Consumer Protection Act, which called for a massive overhaul of financial services regulation in the United States.

Current Conditions

In 2009, more than 2.8 million houses were foreclosed, an increase of 21 percent from 2008. Mortgage bankers and other lenders were given the nickname "robo-signers," referring to their tendency to sign hundreds of foreclosures a day without properly reviewing the files. Many called on the federal government to take some kind of action to stem the tide, even though foreclosure rules varied from state to state. In October 2010 Bank of America announced it would halt foreclosures in all 50 states; previously that company along with JP Morgan Chase and GMAC had stopped foreclosures in the twenty-two states hat required a judicial closing process.

Although they continued to deal with bad press due to the foreclosure situation, by late 2010 the future was looking a little brighter for mortgage bankers. According to the Mortgage Bankers Association (MBA), third quarter 2010 mortgage loan originations in these categories were 32 percent higher than during the same period the previous year and 15 percent higher than during the second quarter of 2010.

The MBA predicted that total mortgage originations would fall from an estimated $1.4 trillion in 2010 to just under $1 trillion in 2011 due to a decline in refinancing. However, purchase originations were expected to rise, as the economy slowly recovered. According to MBA's Jay Brinkmann, "Economic growth in 2010 has been subdued and this trend will likely continue for most of 2011. Households remain cautious given the weak job market. On top of that, uncertainty regarding tax rates for next year, and the potential for tax withholding to increase at the beginning of the year, lead us to forecast that consumer spending will remain weak, particularly in the first half of 2011."

© COPYRIGHT 2018 The Gale Group, Inc. This material is published under license from the publisher through the Gale Group, Farmington Hills, Michigan. All inquiries regarding rights should be directed to the Gale Group. For permission to reuse this article, contact the Copyright Clearance Center.

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