Many of us in the business (at least the people I associate with) don’t like the Pick-A-Payment Mortgage plan, where every month borrowers get to choose from paying their loan at something like 1-1.5% (considerably below the interest rate), interest only, or based on a 15yr or 30yr amortization. Any guess what most borrowers choose?

The theory behind the loan is sound, and if you understand the loan, it gives you greater control of your finances and how to manage your debt. The problem is, most people who worked inside selling these loans didn’t quite understand… and that left many loan officer’s scratching their heads on how to explain it. If the LO doesn’t know how to explain it properly, how is the customer to understand? Furthermore, they got away with marketing these things as “If you are paying more than 1% on your mortgage you are paying to much,” or “Your mortgage payments as low as 1%!”. Of course neither of those are entirely accurate statements as the interest still accrued at a slightly higher than normal prevailing interest rate. But those statements aren’t entirely untrue either, and that’s how brokers, corespondents, and Wachovia itself sold the product.

So, unlike most of the other wholesale mortgage closings we have seen over the last 12 months, Wachovia leaving the wholesale business isn’t much of a surprise. In fact, this is the only one I could have even predicted, and honestly I’m surprised it didn’t come sooner. But don’t think its the mortgage broker who caused their 8.9 billion dollar loss. That’s a red herring, designed to focus the blame on others outside the company so you don’t focus on those within. It was Wachovia, not the mortgage broker, who chose to focus on Pick-A-Payment mortgage loans, who just until a few months ago, after everything had gone to hell, was still marketing the program (with huge potential negative-amortization possibilities) to brokers and their own customers. And it was Wachovia, not the mortgage broker, who made the bonehead decision to buy World Mortgage and others (including a subprime company or two) at the peak of the housing bubble to begin with. Of all people, shouldn’t bankers know you don’t buy something at the top… you wait to buy at the bottom so you can ride the curve to positive gains? I guess that’s where the real people on the ground are smarter than those in their glass skyscrapers surrounded by yes men with phony MBAs. But we’re the ones getting the blame for their 8.9 billion dollar loss. Yeah right.

The thing that sucks about this whole mortgage crisis, and the constriction in the industry, is how it will hurt consumers and our economy in the long run. The mortgage broker industry sprung up because there was a very large segment of the population not being served by their traditional brick-and-mortar bank. Whether it was the 9-5 hours, the fact that their deposits were elsewhere, the color of their skin, or a blemish on their credit… the banks didn’t or couldn’t help most Americans and another industry was formed. An industry that often offered better service, faster closings, and cheaper rates with less fees (keep in mind you can’t see most of the fees on a bank loan because the law doesn’t make them disclose them… but trust me, compare Good Faith to Good Faith and take into consideration what the Fannie Mae / Freddie Mac rates are for the day and you’ll find out that the bank’s usually charge more, they just get to play a little magic with the numbers).

The mortgage broker market was capitalism at its best. An untapped void was there, and people like me got involved tapping it. Once the banks began to realize that, they started searching for more ways to take back the pie they assumed was always theirs. From buying non-bank wholesale lenders to getting involved in alternative markets and opening up their own portfolios to loans outside their normal box. They even started being open later hours or Saturdays. And as they were adjusting their business practices to take some of the broker market back, they actively lobbied legislators for protections under the law. That is why banks/lenders don’t have to disclose yield spread premium (the money they make by selling you a higher interest rate) while brokers do. That is why the bank loan officers are not subject to loan officer licensing in North Carolina but everyone else is. That is why they are also not subject to fee caps, some disclosure requirements or even having an attorney present at the closing (as is required in North Carolina). Banks wanted to take the market back.

And they’ve been successful. The problem is, maybe they were too successful. At the same time they wanted a bigger piece of the pie, the pie began to sour. And now they are stuck having grown too late to have earned as many gains as they expected, and holding too much of the bag that they helped to fail.

But unlike the mortgage brokers, the banks will be back. Even though they are taking losses, it still plays into their longterm hands. And when the housing market rebounds (which it will), the only people left due to over-reaching government involvement and constriction in the market… will be the large banks. Who will successfully control the mortgage market once again.