With a renewed perspective on third-party lending, banking institutions and their customers in the United States are once again finding exceptional opportunity in mortgage loan products offered through wholesale lenders. Before the mortgage industry bust of 2007, brokers and lenders were assigned high up-front fees on wholesale lending packages as part of the agreement to sustain origination risk. Wholesale mortgage lending has been subject to much stigma, as these mortgages were proven to be unsustainable in the wake of the mass default of U.S. mortgage loans.
Since the Enactment of the Dodd-Frank Act 2010
The Dodd-Frank Act was enacted by Congress on July 1st, 2010, instituting protection for consumer borrowers in assumption of mortgage loan risk. Coinciding with the U.S. Federal Reserve’s plan to reform the nation’s financial system by way of a combined program of government bond investment, quantitative easing, and a near-zero-percent interest rates, the Act paved the way for the country’s recovery and eventual return to a market economy.
In 2015, subsequent to the implementation of the tapering policy designed to reduce the Fed’s cheap money strategy, proposed reform of the Act’s rules would reinstate the correspondent lender relationship so that wholesale mortgage lenders could return to a pre-crisis practice of subprime lending. Such a reform would protect correspondent lender agreements with legal immunity; eliminating the risk of high cost loans similar to the ones that triggered the 2007 crisis.
A New Breed of Third-Party Mortgage Originators
Many banking analysts are wondering if a repeal of Dodd-Frank’s protections would provide wholesale mortgage lenders with the leverage needed to bolster the housing market still suffering ramifications of the Act’s far tighter constraints. The proposed bill would usher in a new breed of third-party mortgage originators, and allow wholesale lenders increase compensation on mortgages so as to meet pre-crisis level revenues.
Will such a move subject banking partners and their mortgage borrower clients to a new era of predatory lending practice? Supporters of the bill say not so. The bailout of the financial system was global. Now that major consumer lenders are subject to Basel III stress test guidelines enforcing stricter controls on banking institutions, adequate controls on lending will continue with or without Congress. As the housing industry continues on an upswing, this can only be good news for banking partners and their mortgage borrower clients — a win-win scenario for all stakeholders involved.