Subprime crisis opens banker, broker rift

By Patrick Rucker

WASHINGTON (Reuters) - The crisis in the U.S. subprime mortgage market has heightened tension between mortgage lenders and brokers who both hope to shape any laws aimed at stamping out dangerous loans.

Legislation requiring more disclosure by mortgage brokers could be introduced as early as this week and is likely to widen a rift that has opened with heated rhetoric in recent weeks.

At the end of May, Mortgage Bankers Association Chairman John Robbins laid much of the blame for the subprime meltdown at the feet of brokers who he said need more oversight.

"Frankly, it's too easy to hang a shingle and call yourself an expert in mortgages," Robbins said, calling for stronger broker standards.

Mortgage brokers arranged a large share of the now-troubled subprime loans that helped millions of borrowers buy a home despite shaky credit. While many of those mortgages are now failing, broker advocates say banks, Wall Street investors and other lenders share some blame for offering financing so freely during the recent housing boom.

"Most residential mortgage loans are quickly sold into the secondary market. In fact, most lenders are really just brokering the transaction but afraid or ashamed to admit it," National Association of Mortgage Brokers President Harry Dinham said in response to Robbins' remarks.

Mortgage bankers have always had an uneasy relationship with brokers who originate their loans but often operate at arms-distance from the lender. The two sides could square off on Tuesday at a Senate Banking Committee hearing on subprime loans.

Rep. Chris Murphy, a Connecticut Democrat, may introduce a bill this week that would force mortgage brokers to disclose how they earn their fees and require them to insure their loans against possible suits by home buyers and lenders. It would also prohibit brokers from steering borrowers to high-cost loans when they qualify under more affordable terms.

The National Association of Mortgage Brokers argues that Murphy's proposal wrongly hinders its members.

"When one channel for mortgage lending is held to a higher standard, it puts them at a competitive disadvantage," said Joseph Falk, who heads the trade association's legislative affairs committee.

Murphy said last week that brokers require scrutiny since they sold so many subprime loans in recent years.

Acknowledging that his bill may create tensions between mortgage brokers and lenders, the freshman lawmaker said: "I can't control fights that predate me getting here."

Erick Gustafson, a top lobbyist for the Mortgage Bankers Association, said his trade group has offered input on Murphy's bill and that the MBA has long called for greater disclosure among brokers. Last week, another banking group, Americas' Community Bankers, expressed support for the Murphy draft.

Despite current tensions between brokers and bankers, Falk said the two groups often share common interests.

"Mostly we walk arm in arm but ... our natural disagreements are magnified in this environment," he said.

Murphy said that he hopes his legislation will be folded into whatever comprehensive lender reform bill comes out of the House of Representatives' Financial Services Committee on which he sits. Committee Chairman Barney Frank, a Massachusetts Democrat, expects to have a bill drafted by the end of the year, a spokesman said.