The subprime crisis continues to erupt in Connecticut, with the state yanking yet another 10 mortgage broker licenses within the first three weeks of 2008.
The tally now rests at about 30, with the bulk of state Department of Banking enforcement actions occurring during the past three months.
It is a critical piece of the unfolding economic downturn that has resulted in 23,470 foreclosure filings statewide in 2007, a dramatic 100 percent increase from one year earlier, according to California-based RealtyTrac.
Mortgage brokers are feeling the pinch, with the number shuttering their doors in the state up six-fold as compared with 2005.
The reason: it’s getting increasingly difficult to find a bond company willing to issue a surety bond to mortgage brokers.
“We’ve definitely seen an increase in bond cancellations recently,” said Kathleen Titsworth, spokesperson for Howard Pitkin, commissioner of the state Department of Banking. The department is notified when bonds are cancelled. Brokers are given 30 days to respond.
Getting Tough
Another sign of the times, mortgage brokers who have lost their bond generally fail to respond to the state’s notice of license suspension, which then results in an automatic revocation.
“This [situation] has occurred before, but not to this extent,” said Titsworth, noting that the department is seeing a ripple effect from the increased number of suspended and revoked broker licenses. Broker bonds are now more expensive as a result, which is pushing financially fragile mortgage brokers out of business.
During the past several months, lawmakers and mortgage industry leaders are considering tougher license standards for mortgage brokers, particularly in regard to subprime lenders.
According to the governor’s office, there are approximately $8.1 billion in subprime loans currently outstanding on Connecticut properties. The number past due continues to increase.
Peter Spalthoff, executive director of the Connecticut Society of Mortgage Brokers (CSMB), is confident that necessary changes will be made to stabilize the industry. “To be honest, we’ve been hoping for some sort of a housecleaning,” he said. “It’s a problem that … came up really quickly.”
Spalthoff is a member of two task forces; one created by Speaker of the House Jim Amann, D-Milford, and the other, by Gov. M. Jodi Rell. Among the task force recommendations, the state wants to increase the brokers’ mandatory surety bond from $40,000 to $60,000 and also increase the broker’s net worth requirement from $25,000 to $50,000.
“I do not know of any company that would be put out of business by raising the bond or the net worth,” Spalthoff said. “It might have an effect on some of the smaller companies to keep $50,000 lying around, but it shouldn’t have a major impact.”
Broker Exams
The more important changes, at least from Spalthoff’s perspective, are non-financial ones. He wants the state to tighten up its broker license requirements by adding education requirements and a certification exam.
“If you look at the [state’s license] process, everyone has to take a test,” Spalthoff said. “The appraiser, the attorney, the Realtor . They also have to take continuing education, but the broker doesn’t have to do anything.”
The CSMB has been pushing for education requirements for nearly six years, but until the recent subprime crisis, the association had made little headway in that regard. Now, tougher standards are in vogue, he said.
“It’s something that we’ve wanted for a while. We wanted to be tested,” Spalthoff said. In addition to increased exam and education requirements, both task forces are considering another new requirement, background checks, to reduce the chances of individuals with checkered pasts getting into the business.
Of the 10 companies the state suspended or revoked licenses from in January, only Nexus Mortgage Group of Fairfield and Goodwill Mortgage Services of East Hartford were based in Connecticut. Attempts to contact both companies were not successful; a recording indicated that their phone numbers were out of service.
Nexus Mortgage Group had acquired its bond, before its cancellation, through the New Jersey-based Selective Insurance Group. The company would not comment on the specific account, but it has not been scared away from surety bonds, said Sharon Cooper, chief marketing and communications officer.
“We continue to be a market for surety bonds that meet our strong underwriting criteria for regarding the individual and/or the company applying for the bond,” she said.
