The credit crisis has already taken a big toll on the nation’s largest banks, brokerage firms and finance companies, but it’s also hit small mortgage brokers, including one of Western New York’s most influential.
The former president of the New York Association of Mortgage Brokers last month voluntarily gave up his state license to run Twinstar Mortgage.
The Western New York lender had been in operation since October 1998, and had full-service offices in Buffalo, Fredonia and Lakewood. It has also done business elsewhere in the state.
But despite his reputation, founder and president Gregory A. Krauza said the firm couldn’t sustain its business, as the credit crisis has wrought unprecedented changes on the mortgage industry. Consumers aren’t borrowing, lenders have gone out of business, and there are fewer customers eligible for the fewer loan options.
“It was a very difficult decision to make. A lot of blood, sweat and tears went into building my business into what it was,” he said. “But we were forced to make a choice. I’m not doing enough volume to warrant having my own business.”
Krauza also said the firm struggled to keep up with the ever-changing rules, new regulatory demands, and rising costs of doing business in New York state.
“It has become increasingly difficult for small brokers to secure financing and pay the fees and assessments that it takes to run a small business,” Krauza wrote in an e-mail. “Hopefully, all the good guys will not be forced out.”
Twinstar is just one of a number of small mortgage brokers who have closed their doors or merged with larger competitors in the past two years because they’re unable to survive.
Others locally include Snyder Funding, Greenwich Mortgage, Anderson Funding, and Carmichael Funding, as well as branches of mortgage brokerage and banking companies. Wholesale representatives of large national lenders, who buy loans from brokers, have also been let go, as their firms retrenched or left the business while licking sizable wounds.
And other competitors say they expect the downsizing to continue. “I am so sorry to hear that Greg is surrendering his license,” said Nancy Gascoyne, a broker at MultiSource Funding in Cheektowaga, who is also a past president of the New York Association of Mortgage Brokers. “But I doubt if he is the only one or will be the only one in the coming months.”
The biggest factor is the decline in business volume, first because of the direct results of the subprime mortgage debacle, and now also because of the recession. Billions of dollars in losses and a subsequent credit crunch caused many subprime and “alternative-A” lenders to go out of business, pull back the reins, or withdraw completely, leaving the industry with fewer lenders and less capital.
At the same time, the survivors have taken many products off the market, while tightening underwriting standards sharply for those that remain. Customers who used to be able to qualify no longer can. And some lenders are requiring brokers to do at least a minimum amount of business with them, or not offer their products at all.
The result has been a sharp reduction in loan options and eligibility, especially for borrowers with imperfect credit. And despite the lowest mortgage rates ever, borrowers themselves are being cautious, not wanting to take on more debt while they’re fearing for the security of their jobs. So loan demand is down as well.
If that’s not enough, brokers say, they’re being hammered on the other side by higher regulatory fees and requirements. The state Banking Department is a self-funded agency whose $81 million annual budget relies on examination, application, and other fees, which have risen sharply after the state switched a few years ago from a flat $500 annual fee to an assessment based on size. Last year, Krauza paid $4,000.
And those fees are expected to go up again with the adoption this year of a nationwide mortgage licensing system to register individual loan officers.
“This is not uncommon,” said Michael Bonito, president of MultiSource, and another former president of the state trade group. “The state of New York and the federal government have made it increasingly difficult for small business owners in the mortgage industry to survive in this environment.”
On top of that, the exodus of both large and small players from the industry means the same or higher costs are being borne by fewer entities. Bonito said his company’s fee has already risen from $2,500 in the first year to $4,500 last year, and he expects it to rise again to $7,000 this year, but with half the business volume from 2005.
There’s also new audit rules, consumer protection regulations, and the expensive requirement for brokers to post a bond that the state can call upon to pay fines or fees.
“The increased regulations, fees and general decline in business will have many negative effects on the mortgage business,” Gascoyne said. “The unfortunate reality is that the consumer will be the ultimate victim.”
In the meantime, Krauza has taken a position as general manager of Route 60 Homes, a designer and builder of modular and manufactured houses. He still has his registration as a mortgage loan officer.
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