Every city I visit, loan originators and brokers complain about deceptive radio ads running continuously, making claims that may or may not be true, slamming the competition, and barely if not at all complying with advertising requirements set forth in the federal Truth-in-Lending Act. When I was in Vancouver WA recently, LOs told me there’s an ad running that says something like this: “If your mortgage broker charges any fees at all, they’re predatory lenders.
If Congressman Barney Frank has his way, all mortgage originators will have to utter those words in the back of their minds when considering loan options for their clients. Frank is not just any member of Congress, he happens to be the new chairman of the House of Financial Services Committee and his top priority is to create national laws to protect consumers from predatory mortgage practices.
Recently, on The Perennial Borrower post, I was asked by RCG readers how do I determine what loans are right for clients with all the options that are available in today’s mortgage marketplace. It takes a great deal of determining what the available financing options are, what their financial plans are and then what mortgage makes the most sense, or is the most “suitable”. This doesn’t happen automatically for every borrower with every loan originator. Which is why states like Washington are now licensing Mortgage Brokers and Congress is looking into the same on a nationwide basis. Currently, when we have subprime lenders calling on our office, they promote “how low they can go” in the borrower pool. 55% debt to income ratios are common–heck, you hardly have to be re-established out of your bankruptcy if you don’t mind the interest rate. Can’t document your income, assets…don’t have a job but your credit is good–fantastic, we have a loan for you! It’s true, there are a lot of mortgages that seem crazy and while they may not make sense for some, they do for other clients. Suitability.
According to Kenneth R. Harvey’s article last Saturday, “…a new national standard might require loan officers to determine an applicant’s suitability for a particular loan program based on:
• Employment status, income level, assets and likelihood that income or employment could change;
• Other recurring expenses and the effect they could have on the borrower’s capacity to repay;
• The potential for higher future monthly payments based on the structure of the loan.
A suitability standard might also ban brokers and others from steering less-sophisticated borrowers to higher-cost mortgages than they qualify for, such as pushing them into complicated higher-rate subprime loans when they could qualify for prime rates and simpler programs.”
This sounds great…however; there is always another side to the story. NAMB is concerned this could “lead to accusations of discrimination.” I agree, I mean, are loan originators to provide IQ test to borrowers before determining if they truly understand a more sophisticated loan? Who are we to judge? Many times, this surprises me, I may not physically meet my client. The entire transaction may take place over the phone or internet. You do get a “feel” for whether or not a person understands the mortgage product by the questions they ask, but how do you really know? If you’re a borrower who wants an option ARM and a lender (deciding you are less-sophisticated) insists on giving you a 30 year fixed, have you been discriminated against?
2007 should be a very interesting year in the mortgage industry.