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Barclays: New Compensation Rules Threaten Brokers

More hard times may be in store for brokers in the loan origination sector, which the Federal Reserve's new compensation rules already shrank by causing a wholesale market pullback in April, according to an assessment released by ""Barclays Capital"":http://www.barcap.com.
[IMAGE] A weekly economic forecast by Barclays offered a section entitled ""Bye, bye broker"" that predicts a flight by brokers to high-balance loans over the next several years. Basing their predictions on new compensation rules, analysts Sandipan Deb and Nicholas Strand explained that the rules bar lenders from paying brokers with revenue derived from yield-spread premiums (YSP).

""These new guidelines are likely to further reduce"" the share of loans and restrict lender underwriting standards, the analysts said. The economics of originating and passing on the loans to lenders and acting purely as an intermediary look ""significantly worse"" under the Obama administration and federal regulatory agencies, the report noted.


Deb and Strand added that YSPs have provided brokers with as much as 90 percent of their compensation in the past. By also prohibiting dual compensation and incentive payments, the new regulations may force brokers to close shop in favor of work in correspondent and retail services.

In accordance with the Dodd-Frank Act, the ""Federal Reserve"":http://www.federalreserve.gov approved new compensation rules for mortgage loan originator compensation as a way to increase transparency and help prevent borrowers from making poor choices with their loans.

Barclays says brokers that stay in business will find that it is necessary to pursue high-balance loans more aggressively ├â┬ó├óÔÇÜ┬¼├óÔé¼┼ô a natural incentive that may actually steepen loan amounts, forcing costs onto borrowers by requiring higher prepayments.

""As a result, we expect the prepayment slope along loan size to become even steeper, especially for broker and correspondent loans,"" Deb and Strand said.

The compensation rules go further by restricting characteristics required of loans, barring brokers from charging origination fees, and choking compensation for brokers from both lenders and borrowers, according to the researchers. Deb and Strand noted that the regulations will impact brokers as well as all loan officers.

Still, the analysts held that the new rules will make brokers suffer the most and unload costs onto borrowers, worsening conditions in the housing market.

""The new regulations suggest that the loan size prepayment├â┬ó├óÔÇÜ┬¼├é┬ªcould steepen sharply,"" the analysts said.

About Author: Ryan Schuette

Ryan Schuette is a journalist, cartoonist, and social entrepreneur with several years of experience in real-estate news, international reporting, and business management. He currently lives in the Washington, D.C., area, where he freelances for DS News and MReport.

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