http://www.msnbc.msn.com/id/32902573/ns/business-real_estate//

We see this as great news because that was the whole intention of the tax credit in the first place. The 2008 Tax Credit didn’t move first time home buyers like the 2009 Tax Credit has mainly because this year’s tax credit does not have to be repaid. Also, interest rates have remained low and home prices have been reduced substantially. First time home buyers are recognizing that for the price they are paying in rent, they can be owning a property. This is the best news for young adults ages 20 to 35 who were taken out of the market a couple years back due to the huge increase in prices. This is also good for older adults who have never owned a home or haven’t in a while to get back into the market.

If you would like to take the first step to own a home, contact Lissette Cancio at 866-790-7883 x101. If you have any comments or questions, please do so by blogging with us or giving us a call.

Walking away from mortgage is costly
By Leslie Geary • Bankrate.com

Call it the fast unraveling of the American dream.

Americans are losing their properties at an alarming rate. The national foreclosure rate now stands at 3.3 percent, and more than 11 percent of all mortgages are either delinquent or in foreclosure, according to the Mortgage Bankers Association.

In most cases, homeowners end up in foreclosure because of a job loss or a gimmicky mortgage with a rate that resets so high the homeowner no longer can afford to make the payment.

However, some homeowners who can afford their mortgage — even if they struggle to make the payment — may be tempted to abandon their dwellings simply to get a financial fresh start.

Such a decision can have dire and lingering financial ramifications, experts say.

“Unfortunately, people can often be most victimized when they’re scared about their financial well-being,” says Stephanie Bittner, community education and outreach coordinator for Consumer Credit Counseling Service of Delaware Valley.

Credit killer

A homeowner’s credit score is among the biggest casualties of any foreclosure, whether voluntary or otherwise.

Missed mortgage payments and defaults wind up on your credit report, where they remain for seven years, says Barry Paperno, consumer operations manager at Fair Isaac Corp., which computes credit scores for reporting agencies Equifax and TransUnion.

The negative impact is huge.

An individual with previously super credit who walks from a home can suddenly find his or her FICO score plummet “by at least 100 points,” Paperno says.

Defaulting homeowners with lackluster credit won’t shed as many points because they don’t have that far to fall. But the net result will be the same.

“Either way, you’ll wind up at the bottom,” Paperno says. “In a nutshell, it’s serious.”

To avoid the credit damage of a foreclosure, some homeowners look to an alternative known as a “short sale.” Under a short-sale agreement, lenders allow borrowers to sell their homes for less than their loan amount — say, $250,000 instead of the $300,000 mortgage balance — then forgive the difference.

In some cases, short sales will not damage the homeowner’s credit profile.

“If they’re reported as ‘paid satisfactorily’ or something similar, there will be no negative impact,” Paperno says.

However, if a short sale is reported as “settled for less than the full amount due,” the short sale “will have the same impact as a foreclosure,’” Paperno says.

Foreclosures and short sales don’t just ravage your credit score today, but also hamper the ability to stabilize your life and finances tomorrow.

Plan on renting after you abandon the home you own? You may have to scramble to convince a landlord that you’d make a reliable tenant — a tough sell if you’ve left your mortgage lender with hefty unpaid debt.

Employers may also check credit reports of prospective employees, particularly if the job requires overseeing or handling money.

“Someone with poor credit may not be seen as trustworthy,” says attorney Dianne Coscarelli, a partner with Thompson Hine in Cleveland who chairs the American Bar Association’s mortgage lending committee. “To an employer, they may steal money or not make as good an employee as someone without that financial baggage.”

Time is the only cure for credit damage related to a default. After seven years, a foreclosure will be removed from a credit report. However, it is important to note that with each passing year, a default will have less of an impact on your credit.

“A foreclosure from a month ago will hurt you more than one from five years ago,” Paperno says.

Tax consequences

Foreclosures and short sales also may trigger a bigger tax bill, depending on the kind of home you’re leaving.

The IRS views unpaid debt — including mortgages — as income. In official tax parlance, it’s known as “cancellation of indebtedness income.”

“When you don’t have to pay a debt back, you effectively have income you didn’t have originally,” says Eric Smith, an IRS spokesman.

Thanks to recent and temporary tax law changes, homeowners with unpaid debt may get some relief from these tax obligations. Homeowners who default on their primary residences won’t have to pay income taxes as long as the debt was incurred between 2007 and 2012. After that, the taxes are scheduled to kick back in.

However, homeowners still must pay taxes for debt income exceeding $1 million, or $2 million for married couples filing a joint return. Debt from a vacation or second home, rental property or other business property does not qualify for tax-relief.

Homeowners who flee their mortgage obligations will not experience more serious consequences, such as prison time, says Coscarelli.

“We don’t have a debtors’ type prison concept anymore,” Coscarelli says. “The pure fact that you default on a mortgage won’t send you to jail.”

Going on offense

If you can’t make your house payment — or simply need to move far away from your present dwelling — there are alternatives to foreclosure or short sale.

The best defense is responsible offense. Experts urge homeowners to contact lenders as soon as they start falling behind financially to negotiate lower rates or other terms that preserve your home and safeguard credit.

“If you’re not making headway, contact a (Housing and Urban Development)-approved counselor to help,” Bittner says.

Under the Homeowner Affordability and Stability Plan, the government has started to offer help to up to 9 million families so they can restructure or refinance their mortgages to avoid foreclosure.

HUD also has approved counselors and other resources in every state who don’t charge anything to help homeowners try to stay in their homes.

The National Foundation for Credit Counseling, which recently got $16 million in federal funding to help troubled homeowners, also has counselors trained to help homeowners negotiate with lenders to try to keep their homes.

“People can come to us for free if they need help and want someone to hold their hand,” says Gail Cunningham, the foundation’s vice president. Some companies promise to help homeowners abandon their dwellings and wipe away financial woes instantly. However, they often charge fees for services that nonprofit organizations offer for free, Bittner says.

“We’ve seen companies charging $500, $1,000 $1,500, for services that are bogus or for services people can get for free,” Bittner says.

Short sales and reverse mortgages

As mentioned earlier, a short sale can sometimes — though not always — protect your credit better than a foreclosure.

In a short sale, the lender agrees to allow you to sell the house for less than the amount remaining on the mortgage. Banks agree to short sales because they don’t have to take possession of a house and take on the costs of having to resell it.

A short sale lets borrowers “wipe the slate clean” with their lender, says John Mechem, spokesman for the Mortgage Bankers Association.

Ask your lender directly about the possibility of a short sale or ask a credit counselor to help you try to get one.

Before you sign the dotted line on a short sale, ask the lender if they will report the sale to credit agencies as “paid satisfactorily,” a notation that will help protect your credit score.

Finally, reverse mortgages may also have less impact than a foreclosure for certain seniors who can no longer afford to keep making payments.

A reverse mortgage allows the homeowner to tap into the equity of a home while remaining in the dwelling without making additional mortgage payments. The arrangement continues until the homeowner sells the property or dies.

To qualify, homeowners must be at least 62 and have significant equity in their homes. Financial pros say reverse mortgages aren’t the best choice for everyone. So it’s important to seek the counsel of a trusted adviser, or groups like the AARP’s reverse mortgage education program.

http://www.bankrate.com/nltrack/news/mortgages/20090324_voluntary_foreclosure_a2.asp

The 7 New Rules of Financial Security
by Carolyn Bigda and Paul J. Lim
Tuesday, March 17, 2009 provided by CNNMoney.com

In a world turned upside down, you must re-examine some basic assumptions. A good place to start: understanding the true nature of risk.

Rule No. 1: Risk

Old thinking: If you can stomach the ups and downs that come with risk, you’ll be rewarded.

New rule: Risk isn’t about your stomach. It’s about making or missing an important goal.

You know you have to consider risk. But what is risk? Many of us have learned to think of risk as synonymous with volatility. For years, what came down reliably bounced back even higher. You could easily conclude that risk tolerance was just a matter of taste. As long as you had the fortitude to see the occasional loss on your 401(k) statement and not panic, you would capture superior returns over time.

What to do: You shouldn’t run from risky investments just because they lost money – that train has left the station. But the old buy-on-the-dips advice isn’t quite right either. This bear market’s lesson is that how much risk you can take is a matter of how much you can lose and still meet your basic goals. That may mean scaling back on stocks, even if you miss some of the next market rebound.

Rule No. 2: Cash

Old thinking: Keep enough money in ultrasafe accounts to cover life’s emergencies, but no more.

New rule: Relying more on cash can rescue you in an “asset emergency.”

For most of your career you’ll want to set aside about six months’ worth of living expenses in the bank. That money covers the mortgage and puts food on the table should you lose your job. The fact that you’ll earn only about 2% is beside the point. You can’t take the risk.

The simultaneous crash in stocks and houses has taught us that we need to redefine “emergency.”Rande Spiegelman, vice president of financial planning for the Schwab Center for Financial Research, recommends looking at the next one to three years and adding up any big-ticket stuff you see coming: tuition, a wedding, a down payment on a house. Once you have your total, aim to hold that much in a cash account or a low-risk investment such as a high-quality short-term bond fund.

What to do: It’s not easy to build cash savings and a retirement fund at the same time. If you have to make choices, build up that emergency fund first because you can’t expect to lean on your home equity or stocks if you lose your job. And see if you have some flexibility on the big-ticket obligations. Maybe you plan for a state school rather than a private college, or downsize the wedding. If all your assets are in a 401(k), move some of that balance to low-risk investment options as you build your cash funds. That will preserve more to tap via a 401(k) loan in a pinch. Not a terrific option, but it can beat the alternatives.
In the years just before and after retirement, cash becomes even more important. You don’t want to sell stocks during a bear market to buy groceries. Aim for two to four years’ worth of living expenses in low-risk assets as you near retirement.

Rule No. 3: Human capital

Old thinking: The longer your time horizon, the more stocks you should own.

New rule: Time isn’t everything. You must also consider your earnings potential.

It’s one of the basic rules of thumb: The more years you have to recoup losses, the more aggressive you can be. Unfortunately, the math isn’t so clear-cut.

Here’s a better way to think about how aggressive your portfolio should be: Imagine that it includes not only stocks and bonds but also your human capital, meaning your ability to earn income by working. The safer it is, the more chances you can afford to take with your other assets – that is, your portfolio.

This doesn’t mean that time no longer matters. As you age, the value of your human capital declines, and you’ll need to secure more of your savings. So the conventional advice to hold a lot in stocks when you are young and gradually trim back can still make sense.

But not for everyone. The nature of your career may make your human capital more bond-like or more stock-like, says finance professor Moshe Milevsky of York University in Toronto. Tenured professors like Milevsky have human capital that resembles a triple-A-rated bond, especially when they have a solid pension plan. Those lucky souls can dive aggressively into stocks and even stay there as they approach retirement, he says. The human capital of a commission-based mortgage broker, on the other hand, is pretty clearly a stock – and it’s not a blue chip. That person should own a fair amount of bonds, even when young.

What to do: Assess your human capital. A typical worker’s income is about 70% like a bond and 30% like a stock, says Thomas Idzorek, chief investment officer for Ibbotson Associates. Use that as your baseline and then think about how long you’ll be working, the stability of your current job, and your ability to change careers if you have to. You’ve probably realized in the past few months that your human capital is not as secure as you once thought. If you’ve been an aggressive investor, that alone may be a reason to shift more of your assets to safer ground.

Rule No. 4: Borrowing

Old thinking: Borrowing sensibly is a good way to build wealth.

New rule: Borrow cautiously. You have to worry about the other guy’s debt too.

The quarter-century leading up to 2007 wasn’t simply a golden age for stocks. It was also a bull market for leverage. (That’s Wall Streetspeak for debt.) Since 1982, mortgage rates have fallen from 16% to below 6%. The levy on college loans dropped to around 3%. Americans responded to easy credit in a predictable way. The personal savings rate fell from over 12% to zilch, and household debt payments as a percentage of disposable income rose by a third as families “put it on the card” and paid for lavish kitchen upgrades with home-equity loans.

Looking back, America’s borrowing binge was nuts. Families were leaning on housing wealth, and that wealth was shaky.

The obvious moral here is to be conservative. There are always good reasons to borrow, even today. You need a mortgage to buy a house, and a college education provides enough of a lifetime payoff to justify a loan. But you ought to stretch less.

There’s a subtler lesson too. David Ellison, president of the FBR Funds, says that you have more exposure to leverage than you think, especially now that everyone is trying to unload debt. Perhaps your employer borrowed a lot over the past decade and now needs to conserve cash, so it’s laying off staff. Suddenly that HELOC you could easily handle on your salary doesn’t look like such a super idea. You can’t lean on your investments for help, because many of the companies you owned used leverage to pump up profits, and now they can’t borrow, so their earnings and stock prices are falling. And it’s harder to shore up your own balance sheet by selling your house when banks are reining in lending and potential buyers are scared to borrow for an asset that may decline further.

What to do: Be conservative about debt? Make that very conservative. Especially when your neighbors aren’t. Get a mortgage you can afford for the life of the loan, and put at least 20% down.

Rule No. 5: Housing

Old thinking: You can expect your house to appreciate handsomely over the long run.

New rule: Your home won’t make you rich. But it is an important savings tool.

If you live on one of the coasts, you probably guessed sometime around 2005 that home prices couldn’t keep rising the way they were. But the severity of the crash was still a shock: You heard a lot about how the market would have to “cool off” or “get back to normal” – the implication being that slow but steady appreciation was the future.

But the long-run data always told a different story. Yale University economist Robert Shiller looked closely in 2005 at the history of home prices since 1890, using a database he constructed. What he found was surprising. Except for two spectacular booms – the first after World War II and the second starting in 1998 – real estate appreciation has been unimpressive after figuring in inflation. As Shiller wrote in “Irrational Exuberance,” technology has allowed builders to nail up more houses faster, ensuring that supply never gets too far behind demand (and often gets ahead of it).

Even when prices are rising, gains on real estate aren’t as dazzling as they look, once you account for expenses. Maintenance costs typically run at about 1% of a home’s value annually, in addition to insurance and taxes. If you remodel, the most you can expect to recoup is about 80%. You have to pay steep fees when you buy (up to 3% in closing costs) and sell (up to 6% for realtor fees).

What to do: This doesn’t mean you have to rent, just that you should have modest expectations for your house as a wealth builder. There are still financial pluses. First, owning a house gives you a hedge against rising values in your own community so that you don’t risk being priced out as rents go up. (Ask a New Yorker about that.) Second, a traditional 30-year mortgage acts as what economists call a “commitment device,” or a tool that forces you to save. Instead of writing a check to a landlord, you gradually pay off principal. At the end, you own a house. Aside from your 401(k), no other asset enforces such discipline.

Rule No. 6: Diversification

Old thinking: A diversified portfolio lowers your risk.

New rule: Diversification won’t always save you – and you need more of it than you think.

Diversification hasn’t stopped you from getting hurt in this downturn. Both U.S. and foreign stocks are deep in the red. Holding bonds did cushion your losses, but most kinds of bonds still declined. What happened?

Jeremy Grantham, chief investment strategist at GMO, observed back in 2007 that we had a bubble not just in one or two kinds of assets, but in risk. Investors around the world were so confident, and so hungry for even a little extra return, that they were throwing money at anything that might deliver. Now that the risk bubble has burst, all those investors want now is the safety of U.S. Treasuries. So everything has moved roughly in sync, both up and down, for a few years.

Bear in mind, though, that these times are, to say the least, unusual. Over a longer period – as little as a decade – diversification still looks effective. While large U.S. stocks are down the past 10 years, U.S. corporate bonds earned 4.6% a year for the same period.

But in a global economy where money moves quickly, you have to work harder at diversification than before.

What to do: To ensure you are diversified, you don’t have to go out and buy 16 new mutual funds. First, look under the hood of the funds you have to see if you already own some of those assets. An easy way to do so is to plug your holdings into Morningstar.com’s Instant X-Ray tool. And buy funds that kill two birds with one stone. The T. Rowe Price International Bond fund, for example, invests up to 20% of its assets in emerging markets and the rest in developed countries. Put that together with a high-yield fund and a broad U.S. bond fund, and you’ll own most of the bond universe.

Rule No. 7: Retirement

Old thinking: Retiring early is a prize.

New rule: Retiring early is a problem.

Ever since Uncle Sam set 65 as the age you could retire and collect full Social Security benefits (it’s 66 or 67 for boomers today), workers have been trying to beat that bogey by quitting early. And that seemed well within reach earlier in this decade after a bull market that gave workers confidence that their money could work for them rather than the other way around.

But the reality of early retirement, even before the stock market’s sickening plunge, was never quite that rosy. More than half of early retirees leave work before they intended, and of those, nine in 10 depart because they get sick or are downsized.

And now the financial prospects for those who had a shot at a secure early retirement have dimmed: Long-tenured workers nearing retirement have seen their 401(k) accounts shrink an average of 30% over the past 14 months, according to EBRI. There’s no way around it: The numbers require you to rethink your plans.

What to do: “By delaying retirement just one year you could increase your annual retirement income by 9%,” says Richard Johnson, senior fellow at the Urban Institute. If you can hang on to your current high-paying post, great. The reality, of course, is that in an era of harsh cost cutting, well-paid older workers are more vulnerable. And you might not want to stick it out any longer anyway if the severance is decent. But there’s much to be gained from finding another job, even if it’s a lower-paid or part-time position. If you can earn enough to avoid collecting Social Security benefits early or dipping into your retirement accounts, research by T. Rowe Price shows, you’ll barely feel a hit to your income when you do retire. If your new job comes with health benefits, so much the better. The average health-care tab for an early retiree before he is eligible for Medicare runs to $8,500 a year, says an AARP study.

Despite all those benefits, if you are still many years away from the retire-or-work decision, you should think of working longer as Plan B. As we noted, you won’t have complete control over your ability to work – your health or the job market could make it difficult. That means you can’t afford to assume that you’ll just work a few more years if things go wrong. You will still have to stick to rules 1 through 6.

Copyrighted, CNNMoney. All Rights Reserved.

The Treasury Department released detailed guidelines designed to let the lending industry know how to enroll borrowers in the program announced last month.

“It is imperative that we continue to move with speed to help make housing more affordable and help arrest the damaging spiral in our housing markets,” Treasury Secretary Timothy Geithner said in a statement.

The administration, launching what it calls the “Making Home Affordable” initiative, said that borrowers will have to provide their most recent tax return and two pay stubs, as well as an “affidavit of financial hardship” to qualify for the $75 billion loan modification program, which runs through 2012.

Borrowers are only allowed to have their loans modified once, and the program only applies for loans made on Jan. 1 2009 or earlier. Up to 4 million borrowers are expected to qualify. Mortgages for single-family properties that are worth more than $729,750 are excluded.

Separately, up to 5 million borrowers who have mortgages held by government controlled mortgage finance giants Fannie Mae and Freddie Mac should be eligible to refinance through June 2010.

Meanwhile action to put in place another part of Obama’s housing plan is expected soon on Capitol Hill.

House Democrats, under pressure from a group of moderates in their ranks and the banking lobby, agreed Tuesday to narrow legislation that gives bankruptcy judges the power to force lenders to lower the mortgage interest rate or principal balance.

Under the terms of the agreement, judges would have to consider whether a homeowner had been offered a reasonable deal by the bank to rework his or her home loan before seeking help in bankruptcy court. Borrowers also would have a responsibility to prove that they tried to modify their mortgages.

The compromise legislation was expected to come to a vote in the House as early as Thursday.

___

On the Net:

http://www.FinancialStability.gov.

By Associated Press

10 steps to negotiating an affordable loan modification

DETROIT – Feb. 12, 2009 – Ralph R. Roberts, consumer advocate and spokesperson for Federal Loan Modification Law Center, LLP, released a list of the top 10 steps homeowners can take to negotiate an affordable loan modification. The following steps apply to homeowners working directly with a lender, as well as to those teaming up with an attorney or alternative third-party representative.

1. Come clean. It can be tempting to bend the truth when you are trying to convince a lender to approve a loan modification. Only by laying all your cards on the table and disclosing the truth can you begin to develop and implement solutions that will put you back on the path to long-term financial health.

2. Understand your lender’s point of view. As far as your lender is concerned, it all boils down to money. You are most likely to be approved if you can show modifying your loan will cost the lender less than a foreclosure.

3. Keep a cool head. Expressing anger toward your lender puts you in an extremely disadvantageous position. For example, your lender may decide that you are unreasonable and that foreclosing would be less costly overall.

4. Give them what they need. In order to expedite the situation, find out exactly which forms you need to fill out and which documents your lender needs to process your application. Make sure you provide everything to your lender or representative in the manner specified.

5. Ask for what you want. Before meeting with your lender, make sure you spend some time figuring out what you want and need. For example, how much can you realistically afford to pay each month?

6. Let them do their job. Loan modifications typically take between 30-90 days from start to finish. During this time, avoid the temptation to micromanage the process. To alleviate unnecessary anxiety, ask your lender for an anticipated timeline.

7. Get your financial house in order. Put a tracking system in place today and start developing a budget to ensure you are not spending more money than you are earning.

8. Keep everyone posted of any changes. If anything changes related to your financial situation, be sure to keep your loan modification representative or lender in the loop.

9. Make sure the lender’s offer is truly affordable. If the loan modification is unaffordable or makes your budget so tight that you are only one car repair or medical bill away from defaulting again, head back to the negotiating table to try to work out a better deal.

10. Hold up your end of the bargain. The key to success is discipline and commitment. All the effort you spend setting up a plan is of no use if you don’t follow the plan you created or agreed to.

© 2009 FLORIDA ASSOCIATION OF REALTORS®

Florida Realtors also reported a 3 percent gain in statewide sales of existing condominiums in the fourth quarter compared to the same time the previous year. This marks the first three-month period that has noted increased statewide sales in both the existing home and condo markets compared to year-ago levels.

Twelve of Florida’s metropolitan statistical areas (MSAs) reported increased sales of existing homes in the fourth quarter compared to the same three-month-period a year earlier, while eight MSAs showed gains in condo sales. A growing number of local markets have reported increased sales activity over the past few months, according to FAR.

The statewide existing-home median sales price was $161,200 in the fourth quarter; a year earlier, it was $216,600 for a decrease of 26 percent. According to industry analysts with the National Association of Realtors® (NAR), there remains a significant downward distortion in the current median price due to many discounted sales, including a large number of foreclosures. The median is a typical market price where half the homes sold for more, half for less.

To gain insight into current trends in Florida’s real estate industry, the University of Florida’s Bergstrom Center for Real Estate Studies conducts a quarterly survey of industry executives, market research economists, real estate scholars and other experts. According to the fourth quarter 2008 survey, respondents’ increasing concerns about the economy have dampened the investment outlook for various types of properties.

However, one positive sign is the recent dramatic increase in refinancing with the availability of 5 percent mortgage rates in mid-December, according to Dr. Wayne Archer, center director. If additional programs are put into place that create 4.5 percent Federal Housing Administration mortgages for people who have difficulty making payments, he said, it will do even more to stabilize the housing industry.

In the year-to-year quarterly comparison for condo sales, 8,374 units sold statewide for the quarter compared to 8,098 in 4Q 2007 for a 3 percent increase. The statewide existing-condo median sales price was $136,400 for the three-month period; in 4Q 2007, it was $190,400 for a decrease of 28 percent.

Continuing low mortgage rates remain another favorable influence on the housing sector. According to Freddie Mac, the national commitment rate for a 30-year conventional fixed-rate mortgage averaged 5.86 percent in 4Q 2008; one year earlier, it averaged 6.23 percent.

The outlook for housing and the economy remains clouded despite improved affordability conditions, according to NAR’s latest industry forecast. “For a sustainable housing market recovery and, thus a sustainable economic recovery, we need a significant housing stimulus and mortgage availability for qualified borrowers,” said NAR Chief Economist Lawrence Yun.

© 2009 FLORIDA ASSOCIATION OF REALTORS

Lenders drop mortgage brokers
Some big banks are cutting out mortgage brokers and having lending generated by their own people. That could be bad for consumers.

By Les Christie, CNNMoney.com staff writer
Last Updated: February 12, 2009: 1:49 PM ET

NEW YORK (CNNMoney.com) — Some big banks have cut back on doing business with mortgage brokers – and if the trend continues, many mortgage brokers could close down.

That may be bad news for consumers because fewer brokers could lead to a less competitive marketplace and more expensive home loans resulting from consumers not being able to easily comparison-shop rates.

“The banks want to get rid of mortgage professionals to reduce competition,” said Alan Rosenbaum, founder of GuardHill Financial, a New York City-based brokerage firm. “It’s not good for consumers.”

A few years ago, according to Rosenbaum, mortgage brokers were responsible for 80% of the mortgage-lending business in America. He said that’s probably under 70% now and dropping.

The actions of two big banks have helped push that percentage down.

JP Morgan Chase (JPM, Fortune 500) announced in January that it would end its so-called wholesale operations. It will no longer fund loans arranged through brokers, instead it will make loans mostly through its own offices. And Citigroup (C, Fortune 500) said it will cut back the number of mortgage brokers it works with to 1,000 from 10,000.

“Our customers are best served when a mortgage officer works directly with them, explains our products clearly and then helps them carefully evaluate the choices in light of their personal financial situation,” according to an internal Chase memo.

However, brokers say they perform a needed consumer service by monitoring offers from an array of lenders, picking and choosing the best deals. That helps keep rates low because lenders have to make their terms attractive to keep their volume flowing.

Borrowers going into a Chase branch for a mortgage loan would, on the other hand, only receive the terms available through Chase. If brokers disappeared, borrowers would have to shop all the individual banks to compare deals.

Marc Savitt, president of the National Association of Mortgage Brokers, suspects that banks like Chase may think they can increase profits by cutting out the middlemen, but the added costs of bricks-and-mortar operations will ultimately make the business less efficient. Loan officers may find themselves sitting around waiting for customers to come in rather than fielding applications from mortgage brokers.

Chase opened a slew of new branches lately, including 2,200 as part of the Washington Mutual acquisition it made this past fall.

“Five years ago, we had 600 branches, now we have 5,000,” said Thomas Kelly, a Chase spokesman.

Despite Chase and Citigroup’s actions, John Courson, president of the Mortgage Bankers Association, does not think all mortgage brokers will be driven from the business.

“Every lender has its own business model,” he said. “Chase made a decision to only lend through its personnel, [but other large lenders] will still need loan production. Mortgage brokers will continue to be an important part of the mortgage channel.”

Chasing higher profits
Chase took the step of discontinuing its wholesale lending for two main reasons, according to Kelly. For one, “The best people to originate the loans, we believe, are those working in our bank branches,” he said. Secondly, Chase determined that loans originated by brokers defaulted at higher rates than did bank-originated loans.

The brokers scoff at that. “Mortgage brokers don’t develop their own products, their own guidelines and parameters,” said Savitt. “They take applications; Chase makes all the decisions.”

“Mortgage brokers have been blamed for everything from tooth decay to global warming, and it’s baloney,” added Allen Hardester, a Maryland-based broker.

He pointed out that no mortgage broker ever underwrites a loan, creates a loan program or approves an application. Lenders always have the final say.

And, if the loans from brokers did perform poorly, it’s because lenders encouraged, nay prodded, brokers into bringing them more and more poor-quality customers during the boom years. Subprime mortgages were very profitable, before they started to default at higher and higher rates.

“The lenders dangled large carrots in front of brokers,” said Rosenbaum. “They told me, ‘Unless you give us more subprime business, I can’t improve your pricing for your good customers.’”

Now, he hardly deals with big banks at all. “We haven’t done much business with them for more than a year. Banks are throwing the baby out with the bath water. They don’t know the good mortgage brokers from the bad.”

So far, the other big banks, Wells Fargo (WFC, Fortune 500) and Bank of America (BAC, Fortune 500), have not followed Chase and Citi’s leads. “[These] lenders may be looking at this as an opportunity,” Savitt said. “They said they were committed to the broker channel and would expand it,” he said.

If that’s true, it shouldn’t affect the market too much even if two big-hitters drop out.

“It will remain a competitive environment,” said Courson.

Plus, he said, the there will be a flight to quality. “I think even for banks that continue to take mortgage broker-originated loans, there will be much higher standards.”

That includes requiring brokers to show greater stability by demonstrating higher net worth and posting higher surety bonds (a kind of performance guarantee).

First Published: February 12, 2009: 6:16 AM ET