Why your mortgage broker never touted his test score

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I had high hopes on Monday for a Milken Institute global conference panel on ‘the future of the mortgage market.’ Turned out to be more of a look back at all that went wrong. But there was a testy and entertaining exchange between two of the panelists -- Ethan Penner, a securitization-industry pioneer who now is executive managing director of CB Richard Ellis Investors; and Ellen Seidman, who directed the federal Office of Thrift Supervision from October 1997 to July 2001 and now is an executive of the New America Foundation.

Seidman was making a point about the incentive a mortgage broker had for getting a borrower the biggest possible loan, regardless of whether the person could afford it. ‘The whole compensation structure was make a loan, take a fee, take a bigger fee if you make a worse loan -- a loan that’s worse for the borrower -- and you have no responsibility after that,’ she said.

She blamed, in part, the fact that mortgage brokers weren’t subject to any significant government regulation.

Penner then interjected: ‘Is it really right to regulate salespeople?’

‘Yes,’ Seidman shot back. ‘Yes. Securities brokers are regulated by suitability rules, and these guys might also be too.’ (The suitability rule means a securities broker has a responsibility to be sure an investment is suitable for a client.)

‘Let me just give you a really simple example of how bad this was,’ Seidman said. ‘In the state of Illinois they put on a regulation that required mortgage brokers to take a really simple examination -- you know, sort of, when bond prices go up do interest rates go down or vice versa, that kind of affair. Half of them didn’t show up, and a significant portion of the ones who did failed.’

In case there still were any questions about how it was that, during the boom, truly anyone could get a mortgage.

Posted April 29, 2008