Why Selecting a Lender by Rate Alone is Not in Your Best Interest

When Ardell suggested that I post rates on Friday, I was a bit reluctant to do so.   Why?   Because it promotes rate shopping and I don’t believe that is the best way for consumers to select the professional who will be advising them on one of the largest financial transactions they will make in their lifetime.   But I must admit, the posts have created a lot of very interesting comments and kudos to Ardell for putting me on the spot to post rates.

Recently, one of RCG’s frequent readers added a comment on Mortgage Rates for Friday Morning that brings home why you should not shop mortgage professionals by rates and that you should select your mortgage professional by referrals instead: 

I got a GFE from a broker recommended to me by my boss. She was smart and knowledgeable, but not particularly personable. 

I also got one from a guy who worked with my Realtor who called himself a Home Mortgage Consultant (with BIG BANK Mortgage). Personable, but not that sharp. 

I also called a few other brokers off the net and paper – straight APR shopping. 

The first broker, the one recommended, had the best rate. Because I liked my Realtor, I gave the (Bank) guy a shot to match her rate, which he did. 

He made numerous mistakes, and I was forced to go over my docs repeatedly with a fine tooth comb to make sure they were correct. 

In retrospect I should have gone with the recommended broker, though perhaps not, given that she was angry with me and showed it. 

In the end, however, I am going to go with the reputable person who gives me the lowest rate in an apples-to-apples comparison. A quarter point could mean 10s of thousands of dollars over the life of a loan. That’s going to trump loyalty every time, and you are fooling yourself if you think otherwise. 

There are many issues with shopping lenders by rate:

  1. You must shop all of the lenders at the same time on the same day.   There can be several price changes throughout a day.  You cannot compare apples to apples if 5 minutes after you receive one quote, you call the next lender and rates have changed up or down.  Brian Brady did an excellent post:  You’ll Never Get the Lowest Rate.
  2. Unless you’re prepared to lock in the rate the moment you’re dialing for dollars, the rate that is being quoted to you may very well not be the rate you receive when you decide to lock.    If it’s not a confirmed locked in rate, you don’t have it.   It’s a quote, not a guarantee.
  3. The lender who is “quoting

68 thoughts on “Why Selecting a Lender by Rate Alone is Not in Your Best Interest

  1. Home buyers and refinancing home owners: a mortgage loan originator has no duty whatsoever to put your interests above his or her own interests.

    This is strictly a retail relationship.

    No matter where the person works, bank, credit union, broker, consumer finance company, the duties a lender has are legal duties to follow the law and to maximize profits for the company to which they work.

    That’s it. They owe you no duties of good faith to put your interests above their own.

    It might be a matter of prudence to take good care of customers because they will come back again, but this decision is made out of self-interest, not with any care towards you.

    With that said, there are MANY awesome loan originators out there. Consumers, you have no way of knowing which loan originators are going to screw you over, and which loan originators have a great reputation and a long history of high ethical conduct.

    The industry is experiencing ethical chaos. Until the industry decides to self-regulate ethical conduct, you’re on your own.

    Better Business Bureau ratings? LOL. Anyone can join the BBB if they pay a fee. No complaints filed with their regulator? Many consumers never file a formal complaint.

    Rhonda is correct: Interview three lenders from three different kinds of institutions. Your favorite bank, a credit union, and a mortgage broker.

    A consumer who only focuses on getting the lowest rate is a very easy consumer to rip off. You’re marking yourself as an easy target. You’ll get the lowest rate but you’ll pay the highest fees.

    A consumer who only focuses on getting the lowest fees (No cost loans!) is also an easy target for being screwed over. You’ll pay the highest rate.

    Nobody is going to give you a mortgage loan for free, with the lowest interest rate available.

  2. I knew you’d be all over this post, Jillayne! 😉 I completely agree with you. Consumers do need to be careful when selecting a lender. Some are in it for the referral business and others need to make the most money of each transaction because they’re service and lack of ethics are so terrible, no one will return to them. This type of LO has to rely on heavy marketing, “cold leads”, because no one would possiby return to them let alone refer some to them.

    The only part that I differ with you is that I feel consumers should get three referrals from eitiher co-workers, friends, family, realtors, financial advisors, etc. (i.e. people they trust). And call or meet with those three. If they wind up working for a bank, mortgage broker or credit union, great. But I would still obtain a referral instead of calling three different kinds of institutions blindly–then you’re just back to rate shopping again.

  3. Rhonda,

    You mention a good topic. Maybe you can shed light and explain to consumers and agents how lenders allow loan officers the ability to gamble with rate locks which may result in additional income, as your colleague discusses on their blog. I’ve heard that some lenders will give loan officers a 24 hour float.

    While on the topic, one of the things consumers have to understand is that ANY number that shows up ANYWHERE on the HUD-1 settlement statement means money is exchanging hands. Just because YSP’s don’t show up in the borrowers expense column does not mean I’m not signing a check to pay that premium.

    The failed closing we had that I discussed a few weeks ago was created solely due the borrowers realization, via a lender disclosure form while signing loan paperwork, that their interest rate was needlessly increased by the broker to make additional income. We are talking about mid- 700 FICO borrowers with a large loan. Squeezing an additional $2K resulted in a lost transaction for everyone in the transaction chain. Obviously this rubbed the borrowers the wrong way and they immediately walked. What was more interesting was the explanation given by the loan officer on the phone with them at our office. Honestly, as absurd as it seems, while a lost closing meant lost revenue for our office, I was cheering for them in my mind.

    The truth of the matter is that if consumers understand the process they wouldn’t care much about how much a loan officer makes. But when consumers find out that the loan officer was looking first to see how they could maximize their profit at the expense of the borrower and the secondary objective was then rates and fees, then I can’t blame them for walking. Consumers are interested in a great rate, low fees and smooth process/customer service.

    How do you respond to a borrower (sitting across from me while signing loan docs)asking if a $1,050.00 broker processing fee is “normal?” Maybe this is why most agents and loan officers don’t attend closings. 🙂 Consumers NEED to take the time to shop.

  4. Hi Tim, Consumers need to take time to find an ethical lender who is more interested in providing the best rate rather than how they’re going to bait and switch the next victem (which is what it sounds like happened to your client).
    I think Larry Cragun did an excellent job covering loan “gamblers” in his post. Some LOs will say the locked in the borrowers rate, when they have not. For example, if you tell your LO to lock you in at 6 and rates go down to 5.875%, the LO just made extra bucks. If the rate goes up, the LO just lost and will either eat it so the borrower never knows OR they’ll find their rate increased at closing (like your client). It’s wrong. I’m not a gambler with my money or with someone else’s. In fact, I always advise locking and not floating rates since if rates improve, we can obtain that rate by floating down. Dan Green did an excellent post on this at http://www.themortgagereporter.com, which I was going to link to on this post however ,his site seemed to be having issues. 🙁

    As a neutral third party to the transaction, Tim, how do you respond to that processing fee? I always encourage shoppers to ask the LO if they guarantee their GFE and to have the shopper bring the GFE with them to their signing appt.

    Shopping for the best rate instead of the best person (mortgage professional) can mean that at escrow, you’ve discovered you have neither.

  5. Hi Tim,

    Great story. You’re right. A loan originator does not owe fiduciary duties to consumers.

    For example, consumers reading this, if you go in to see a doctor for knee surgery, the doctor has the highest duty of good faith and loyalty to you, to NOT put you in a worse off position.

    The doctor has fiduciary duties to explain the knee surgery, disclose everything he or she knows about the surgery, including all the possible known consequences.

    The doctor has FURTHER fiduciary duties to not only disclose these things, but to MAKE SURE YOU UNDERSTAND your upcoming knee surgery.

    A loan originator, no matter where they work, has no such duties whatsover.

    Sure, some loan originators already conduct their business as if they owed these duties. But how is a consumer to know?

    Referrals from friends and family are only that. You’re relying on the judgement of your friends and family to make a decision for you. NOT a good idea. Liza Bautista, the loan originator from the south end of King County who got nailed for mortgage fraud did all her business with only friends and family, including marketing herself to everyone at her church.

    The very best consumers can do now is to become highly aware that a loan originator’s duties are NOT like the duties of a doctor or a lawyer and more like the duties of a retail sales person.

    Rhonda, I can create a longer article on dissecting lending institutions, reasons for and reasons against choosing each institution. I will run this by you before I post.

    I need to run; going to go see my nephew perform in Our Town at Edmonds CC.

  6. Rhonda-

    When a client asks if they got a good interest rate or inquires about a fee, staff usually refers them to their LO. Most times, the conversation ends there.

    It is really hard to put on a Poker face when you see outrageous fees and the client talks glowingly about how awesome of a program they received. Likewise, if you know they got a great rate/program with low fees, our neutrality is maintained, even though we would like to say, “yes you did!”

    Slightly off topic: To me, this is why being an LO or in escrow is so interesting, because you get a much clearer pulse of the market and what people are doing financially because of the sheer volume of closings.

  7. Thanks for taking the time to try and explain your position, Rhonda.

    That said, I think I lean more towards Jillayne’s point of view.

    Just because my boss recommended someone doesn’t make them trust worthy. All it means is she had a good experience with her. Without doing some shopping, you have no idea what sort of rates and fees are out there, AND you have no idea how the quality and ethics of different brokers and LOs can vary.

  8. Thanks, Biliruben. My point is (that I keep trying to hammer out) is not to call blindly…do get your rate quotes, but do it with all the same criteria
    1) same day at the same time
    2) same program and credit score, ltv
    3) same lock period
    4) ask them if they’ll guarantee their GFE

    Get three names from three people you respect. (DON’T call blindly to people you don’t know.) Call those people and do the steps above.

    Jillayne is right. My background (before lending) is 14 years in the escrow/title biz… I can count how many LOs I had respect for on one hand.

    If your boss (or whoever) had a good experience, enough of one where she would recommend that person to you, then they should be a candidate worthy of your consideration. I recommend interviewing who is offering the referral to see exactly why they feel the LO is worth of a referral.

    I know for me, when I refer someone for any reason, I have to feel strongly about that person and their service/product. The last thing you want is a friend or family member or co-worker to have a bad experience because of someone you’ve recommended.

  9. I can get on board with those sentiments.

    I met with the two that were recommended before-hand and got pre-approved, but didn’t start getting quotes until after we had our offer accepted. That’s when I started to rate-shop, subject to 1-4. They were locked for 60 days. Didn’t do any harm, and I was more confident that I was getting a good rate and the fees were in line with what others were charging.

    I don’t see a down-side to doing a bit of shopping.

  10. Tim, when I use to be an employee of a title company, I had to cease helping out the escrow department with signings because when clients asked me to explain a fee, I would explain the fee giving the customer all the facts…………..so I was no longer allowed to do signings.

    My assistance compromised the neutrality of the escrow function.

    Consumers: Please do not rely on your escrow closer or signer to give you advice on your fees and rates. “Am I being ripped off?” Is not a question escrow can answer, even if they know the answer.

    This question is better asked BEFORE you enter the signing room, preferably with an estimated HUD I taken to an attorney, along with your good faith estimate BEFORE YOU ENTER THE SIGNING ROOM.

  11. There’s no downside to rate shopping BEFORE you commit to lender by having them lock in a rate for you. Once you lock in a rate, the LO is commiting to the lender that the loan will be delivered. Lenders track the “fall out” of loans that are not delivered after being locked which then can impact underwriting decisions, rates, etc. for that mortgage company. For the consumer, it amy seem like nothing and you may not care at all how it impacts the company and those who work for it. I have two sisters, both are wholesale lenders…so I probably hear too much about what happens on the back end. But…this is what happens. It can make a difference of me being able to togher a challenging transaction, or maybe getting some one 0.125% better in rate if my fall-out ratios are good. If I make a “commons sense” plea for someone who does not fit the underwriting guidelines, and my fall out ratios are poor, the borrower is SOL.

    This is why the mortgage broker referred to you by your boss was angry. More than the time she spent with you, which is significant since most LOs are not paid any salary and are only paid when a transaction closes, is that it jeopardizes her relationships with lenders when you lock and don’t close the loan.

    Again, no immediate downside to you…unless one day you need an exception made and the person you’re going too has one-too-many locks (commitments) not honored. It impacts people more than they know.

  12. Escrow is a neutral third party. When I was managing an escrow/title branch, I would seek out the LO to explain the program, rate questions, etc. Nothing made me happier when a consumer brought their GFE with them to signing.

    If someone is going to escrow not knowing what their program is, fees are, etc. there LO did not do their job.

  13. Well that’s a flaw in the industry, then. How can I compare two rates if they don’t guarantee that’s the rate I’ll get?

    I make no apologies for asking for a rate, then comparing to another rate, and I don’t feel that I should.

    There are no advocates out there for the buyer, so if you take away common-sense apples to apples comparisons of guaranteed rates, we are at the complete and total mercy of the industry.

    It’s downright anti-capitalist to not be able to get an honest, competitive bid for my business.

    This just re-enforces by strong belief that the industry is in serious need of reform. Now.

  14. There was a time not so long ago when consumers needed to make an “application deposit” before locking in a rate which would be credited towards the loan. This could happen again, who knows.

    You’re absolutely right, you should be able to get a rate quote and have it be true. If I lose a “shopper” to rate, I truly hope they get the rate they think they are going to get.

    I’m just explaining what happens when you lock in a rate, which is commiting to a loan, and then you don’t follow through.

    It’s similar to making an offer on a house and then not purchasing it. The practice of commiting to locks and breaking them increases costs to others and ultimately, it rolls onto the consumer.

    “It’s downright anti-capitalist to not be able to get an honest, competitive bid for my business.”
    What is honest about commiting to a locked rate and then breaking it?

  15. Jillayne-

    The idea of consumers receiving their HUD prior to coming to signing is unfortunately far less than should be(LOL). When escrow receives loan documents the DAY OF or the day prior to THE LAST POSSIBLE DAY THE BORROWER CAN SIGN, it is a rush and difficult to get the HUD off to the loan officer, never mind the borrower. Ironically, in many cases the agents and or LO is asking why we have not scheduled the borrowers to sign docs….to which we reply…..um, we haven’t received loan docs yet. When you are closing anywhere from 70-90 deals, most of ’em typically over the last 5 business days of the month, it is nothing short of controlled chaos. No better word for it. That’s why I asked Rhonda months ago , how long she gave us before burn out sets in.

    Consumers ARE supposed to receive their HUD for review PRIOR TO CLOSING according to the Real Estate Settlement and Procedures ACT. In my mind this falls short and is too vague. Consumers should be required to receive their HUD at least two business days prior to signing their loan documents and AT LEAST FOUR BUSINESS DAYS PRIOR TO CLOSING. Lynlee (my wife) is laughing at me now….saying the lenders will never do that–they always get loan docs out to escrow at the last moment.

    If lenders sent CORRECT docs to escrow in the first place, then some consumers would get more of a chance to review the HUD prior to signing. Trouble is, loan docs sent to our office are wrong over 50% of the time and have to be redrawn after corrections, sometimes multiple times which wastes an enormous amount of time that could be devoted to other transactions. We learned after getting burned so many times doing mobile signings across the Puget Sound area to go over the loan documents with customers before we head out the door. This has saved us numerous times in both time and fees.

  16. In RESPA it says that if the consumer asks, the consumer can receive their documents one day prior to going into the signing room.
    Yes, I know that the HUD 1 will only be an estimated HUD 1 at that point. That’s good, fine, and better than not having anything to review ahead of time.

    Here is the reference for that. Scroll down to the second question. It’s in the second paragraph of the 2nd question.


    The trick in RESPA is that the consumer must ask. When the consumer asks, the lender complies.

    This takes a strong consumer, because lenders will have ALL KINDS of excuses as to why this is just not possible. It means backing everything up even farther away from the last day of the month.

    By the way, there is nothing in RESPA that dictates that lenders must advise consumers that they can ask to review their docs 1 day ahead of signing.

    A nice bright red flag for consumers that they’re possibly dealing with a predatory lender is when the pressure of “time” is used against the consumer. But, of course, in today’s Seattle Times, Adam Stein, president of the WA Assoc of Mtg Brokers (WAMB) estimates there are less than 1% of the 10,000 loan originators in the state who might possibly be predatory.

    I guess he and the author can’t do their math. In the next sentence, they count 209 mtg broker complaints filed with the state AGs office, and we all know that most all complaints are never formalized. Maybe the author gave us the 209 complaints so that we could all see that WAMB’s numbers are propaganda.


  17. Biliruben,

    Regarding your comment number 14, I absolutely positively agree with you. If there can be any good that comes from the subprime collapse, it will be reform.

    Unfortunately, it will probably be government mandated reform, which means my tax dollars are going to be spent policing an industry which has made and will continue to make billions of dollars in profits. This is unjust and unfair to all taxpayers.

  18. Rhonda the reason why consumers like biliruben will lock AND shop is because they are starting to learn that the way we currently have set up mortgage lending (paid by commission, retail relationship), means the consumer knows that mortgage lenders are no longer to be trusted.

    Consumers believe no trust is owed to mortgage lenders because they can’t trust the industry to treat them with honesty. In fact, a consumer who DOES trust his or her mortgage lender in today’s environment is a complete and total idiot. Don’t you see? The mortgage industry has won the battle but lost the war. The industry has exchanged profits for consumer respect.

    Mortgage lending won the profits battle and lost the war on earning respect and trust of clients.

    Yes, this cuts into profit margins all around, HOWEVER, profits are still being made hand over fist.

  19. Tim, this is probably because of my background in escrow, I almost always (99.9%) of the time have docs to escrow well in advance. I review the HUD for my clients before signing to make sure it is in line with my GFE. Sometimes, I hear a bunch of excuses from escrow companies why they can’t provide a HUD in advanced.

    Jillayne and Biliruben, I don’t blame consumers for not trusting LOs. There are a lot of dogs out there, no doubt. But locking (commiting) to a loan and not honoring the commitment will effect the lending industry. LOs (hopefully soon w/licensing and the market adjustments shaking a few unsavory one’s out of the industry) will soon have to charge application deposits before locking since they will no longer be able to trust the consumer.

    When brokers have a high “fall out” ratio with lenders, it impacts underwriting decisions, pricing…it burns the relationship with the lender. I don’t expect a consumer to care about this. They don’t see how this will impact them down the road. But it will.

  20. I can understand your perspective given the history of the industry as well as the your view of how things work from behind the scenes, Rhonda.

    From my perspective however, it simply looks like a 7-11 not putting prices on their Mars Bars because of all that effort it takes to apply the sticker. Their is an added bonus in that less reputable store franchise owners get to charge an extra dime for the Mars Bar, if the costumer looks particularly clueless or hungry.

    You would appear to be of the more reputable sort, Rhonda, but how is a costumer to know?

    Perhaps I’ll search out an Upfront Mortgage Broker, for my next loan. At least then I’ll know what they are making.


  21. Any lender can be an “upfront mortgage broker” without paying the $300 membership fee to Guttentag’s organization. This is not new…it’s just a new way for LOs to market themselves…it’s spin.

    It’s an excellent question to ask a lender, the next time you go shopping, is “how much are you making on this transaction”.
    They’ll squirm for sure. I have no problem answering that. If someone does not see the value of my services, then we’re probably not a good match.

    I believe if the borrower is getting a competitive market rate (or better) and excellent service, they won’t mind what a LO makes on a transaction. This is just another example of transparency in real estate and many LOs are doing this.

    Why does what an LO makes a transaction matter to you? Why is that important? (out of curiosity).

  22. Rhonda,

    If you get loan docs to escrow well in advance then we need to replicate you! It would be a heaven send to have docs early, if for nothing else than to give escrow enough time to work with redraws, vesting issues etc…

    Can we replicate you! LOL.

  23. From my escrow days, I know this doesn’t happen that often. The LPOs I worked with have trained me well!

    My other favorite interaction with lenders when I was in escrow was when they would ask us to lower our fee. “Hmmm….I don’t any changes in all of your fees? What cost are you reducing for the client?” Would normally be my response.

  24. Directly, nothing. If they can get me the best loan, I don’t care what they make.

    Indirectly, everything. If the broker is making 10K off of my loan, I want to know why. If it’s that profitable for the lender, or up the chain to the investors buying the loan, that they are willing to sweeten the deal that much, then it is very likely unprofitable for me. What the broker is making is indicative of how closely I want to look at the terms.

    I’m glad you have no problem letting us know how much you make on loans, Rhonda. This should be a great opportunity for you to give me a bit of education:

    Let’s say I walked into your office tomorrow. In a different market I may be doing this, so consider this as real world as possible:

    We are buyers with FICOs in the 800 territory, looking for 400K loan. We will be putting down 300K.

    How much would you make on a loan to us – full doc, decent debt ratios, 30-yr fixed?

    Now, say we want a 2/28 option-ARM, NINA, 5% pre-pay penalty. How much would you make?


  25. For one, you should not have a prepayment penalty with the 800 credit score. Clients I’ve worked with who have had prepays, it was a requirement of the lender–not to pad my pockets. I am completely opposed to prepayment penalties.

    The company and I, typically (it all depends on pricing, the difficulty of the transaction, etc.) make approx. 1% of the loan amount. I pay the company $200 off the top of the 1% and then we split the amount 50/50. So, using either scenario, my income (or pay) would be approx. $1900. I tend to get skinnier on my pricing, the larger the loan. For my returning clients, I typically provide them an additional $300 credit towards closing costs, so that would reduce my income on a transaction to $1750 (the credit is split between the company I work for and my net). This is just a rough estimate.

    When I was at an ethics class (now required for licensed mortgage brokers) LOs stated they make anywhere from 1-3% on a loan. One boob said he makes 3-5%…I’ll watching to see if he passes his test once it’s available. It’s people like that we need out of the biz…in my opinion.

  26. Thanks, Rhonda. I appreciate the transparency and honesty.

    So just to be clear – you make the same amount on a 30-year fixed as on an option-arm?

    I had heard that, due to the investor demand for alt-A products with higher returns, lenders were offering brokers bonuses for mortgages with higher yields. Perhaps that is now a thing of the past.

  27. Biliruben,
    I have NEVER done an option-arm. I’m sure I’ve lost some business for it. Typically, when I explain neg. am., most people do not want that product. I have heard that wholesale reps can be paid more on different products, which I don’t understand. (I’m retail).

    So I’m paid the same regardless of the product.

  28. I think when most people hear a realistic explanation of neg-ams, the don’t want them. Good for you for taking the time and making sure your clients are educated on the subject.

    Not all brokers are as forthright. I had a friend who came over a couple weeks ago all excited. He was buying a condo at Pike Place. He has owned a house for a while now, and he’s made some equity in that house. He’s starting to see dollar signs.

    Anyway, he says his broker has “worked it out” so his payments would be less for the two mortages than he is currently paying on just the house.

    I start to ask some questions:

    What kind of loan is it? I don’t know.

    When will it reset? I don’t know.

    Is there a pre-payment penalty? I don’t know.

    This guy was due to finalize his offer in 3 days, and he didn’t know anything about his loan.

    He’s a smart guy. A highly educated professional who makes a very good living. Yet he didn’t know anything about the terms involved in the more than half million in debt he was about to take on.

    I made him promise to ask his broker some questions.

    He did.

    He isn’t getting that condo.

    When there are brokers like that out there, you have to be very very careful. You had to do research. You have to educate yourself.

    And yes – you have to shop around.

  29. What your friend did, which is what I recommend, is to talk about mortgages and home buying with other people they trust. I’m glad he did too. It doesn’t take long for that neg. am. mortgage to catch up with you. I see no reason for them what so ever.

  30. He was fortunate to stumble into a friend with an unhealthy, wonky fascination with all things real estate at the right time. Not everyone is so lucky. 😉

    I might consider Neg Am if I were rich I was using the deal as some sort of tax shelter or in a short-term situation where I didn’t want to liquidate other assets. I am pretty sure such situations are very rare, given how it appears to be being used these days.

  31. I would only consider a neg am for an investment property and it would have to have the five year fixed option. It would only work if the person who is obtaining the mortgage is deciplined enough to never fall back on the minimum payment due…and then, what’s the point? You might as well just do a fixed period interest only ARM where you know what the rates, can make IO payment or pay towards principle…many of the same options less the neg. am.

    You’re right! Real estate is facinating.

  32. Well, Rhonda. If this stuff interests you as much as it does me, I really need to introduce you to the magnificent writings of Tanta over at Calculated Risk (calculatedrisk.com), described cryptically and anonomously as “a bank officer.” As my grandma used to say, she is “a treasure”. She is one of those rare individuals who actually both:

    1) deeply understands a complicated topic, and
    2) and is able to explain it in simple and sometimes quite entertaining ways.

    I should warn you about interacting with her in the comments, however. Her wit is sharp and sometimes hurts.

    A taste from her latest post on defining and re-defining the term “conforming loans”:

    “Many folks, right about now, are taking the rating agencies to the woodshed over some of the assumptions in those models and the rating agencies’ apparent inability to react (downgrade) fast enough when new data on performance catches up with some of these loan products underlying these pools. I can’t argue with the critics of the rating agencies in the specifics. On the other hand, I find myself chuckling a little—in a cynical way—over the underlying problem here. For the rating agencies to become fully effective modelers and predictors of credit risk for Alt-A is, at some level, for them to reinvent a certain wheel that the GSEs invented a generation or more ago on the “conforming

  33. …….an option arm adjusting monthly on the LIBOR spot rate bouncing around more than a ping pong ball. We had a client get stuck with one of these. the note had a two year prepayment penalty. the client shopped rates and wouldn’t listen to us. The lender was “friend”. Our client got hosed.

    Real estate is fascinating……more opportunity for arbitrage with the increased qualitative influence than other asset classes. All the finance theory and calculations are exactly the same as the capital markets and any asset investment. Calculate risk and reward. Most business schools don’t teach the topic unless they have a real estate finance program, so many people believe real estate is a magical and mysterious asset. Now where did I put my Magic 8 Ball? I mean my HP calculator.

    Michael P. Lindekugel
    Financial Analyst
    RE/MAX Commercial
    Team Reba – RE/MAX Metro Realty, Inc

  34. I am opposed to option ARMs…even the one’s that are being pegged with a five year fixed period. I have never sold one and never will. I’m hoping that some of the “predatory” marketing will be stopped in light of what is going on with the increased foreclosures. I’m sure it’s wishful thinking. What does your Magic 8 Ball say about that? BTW, Michael, I don’t know if you have children but my son thinks he was in school for a brief while with yours? Best, Rhonda

  35. It’s:


    It’s not her site, BTW. She is an occasional co-blogger. Calculated Risk himself is a retired senior finance executive. He’s not a bear by nature, but has been following housing for the last few years as a hobby. Very balanced with great data, but not nearly as good a communicator as Tanta. Most of her gems are in the comments, but occasionally she writes the main posts, like the one I quoted from today.

  36. Michael, I’m sure you showed your client how many months it would take for the loan to recast at the minimum payment? Sometimes, you really have to be “simple”. 😉

    Biliruben, I may have to add calculated risk to my blog. It’s facinating–thanks for sharing. 🙂

  37. Biliruben, I know calculatedrisk has no control over this (and this is why I won’t ever have it on my blog)…the headlines of the 4 google ads are (I’m not making this up):

    1. subprime mortgage loan
    2. bad credit no problem
    3. 100% financing
    4. bad credit mortgage

    Yuck. 🙁

  38. Yeah – they just began putting ads in last week. A little annoying, but what can you do.

    Google just links ads to related content, I think. Sometimes it makes for some humorous and incongruous situations, when the content is criticizing the subject of the ad!

  39. Hi Rhonda,

    I am not opposed to the option ARMs, but they are not a good fit for every borrower. They work in specific applications with disciplined borrowers. Unless I know the lender, I am less inclined to recommend it to a client. Some of the option ARMs are very volatile depending on a number of factors. Is the index a spot rate such as the LIBOR or an average such as the MTA. The index may be a monthly, yearly, etc. what is the note term? How often does the payment rate, start rate, or teaser rate change. Prepayment penalties. Etc.

    I cited a research paper on RCG a while back about the option ARM borrowers. Don’t quote me all of this. I think the research firm might have been PMI Corp. On a national basis the results seem to indicate the borrowers had higher credit scores, more assets, and fewer missed payment and defaults. In WA, the results of the research showed borrowers faired better than the national results. I would venture to say the defaults were associated with the predatory lenders pushing the 80/20 programs in hyper capital growth markets such as San Diego, Boston, etc. When the investors left town they flooded the markets with supply depressing prices. Those 80/20 borrowers are upside down. Those markets will be hardest hit with foreclosures. WA will see a rise, but not a significant increase. We have too many strong economic indicators.

    You son did not go to school with my kids because I don’t have any! My ancestors arrived in the USA in the early to mid 1800s. We are all related. One of those siblings settled in WA. Most of the WA Lindekugels are descendents of that sibling. The other siblings settled in the Midwest. I am directly related to one of the Midwest siblings.

    Michael P. Lindekugel
    Financial Analyst
    RE/MAX Commercial
    Team Reba – RE/MAX Metro Realty, Inc

  40. Hey Michael,

    Could you explain the differences you see between San Diego and Seattle? The only differences I see are a 6 month to a year lag, and the degree and speed to which housing prices has increased. As to the later – we are doing our best to catch up fast.

    1) Economy? San Diego’s is stronger.
    2) Weather? San Diego’s is nicer.
    3) Condos? Sprouting in both places, with Seattle catching up rapidly.
    4) Investors/speulators? Both places.
    5) Unscrupulous lenders? Both places.

    I just don’t see any significant difference in the two places that would warrant thinking that we won’t be effected by the down-turn in housing and the general economy.

    I look forward to your perspective as a professional in the industry.

  41. Hello Biliruben,

    I see quite a few differences exist between Seattle and San Diego.

    Economy. Seattle is different. San Diego is not stronger according to the Bureau of Labor and Statistics. As of last fall SD job growth was 1.35%. Seattle was 4.05%. SD and Seattle have low employment right now. SD and Seattle are almost back down to the historical average. Low unemployment and job growth are pushing wages up in Seattle. That isn’t happening to the same extent in SD. During 2005 and 2006 Seattle was the only MSA with any significant high tech hiring. SD’s affordability index is 68. Seattle is 88. SD has very few significant economic indicators pointing to sustained capital growth in the short term and continued low unemployment. Seattle has many economic indicators pointing to our lower capital growth is sustainable and unemployment will remain low continuing to put pressure on wages. We have a worker supply shortage even though we have high immigration for white collar jobs.

    Weather. We don’t tan. We rust in Seattle.

    Condos. Seattle is different. We are constrained by geographical challenges of mountains and water. Also, some idiot in the 1990s created the Growth Management Act. We had height restrictions. All of those kept supply low creating upward price pressure. The local economists are saying Seattle does not have enough in the pipeline to meet demand. Construction. Permitted. Permitting. If all the condos scheduled to be finished by 2009 were available today we still do not have enough supply to meet demand.

    Investors/Speculators. BLS reports on capital growth are Seattle did not experience the same amount of speculators and hyper capital growth as San Diego, LA, SJ , SF, Boston, NY, etc. for a number of reasons. Seattle did not have a lot of opportunity for arbitrage. According to PMI and MBA Seattle did not have a lot of speculation or 100% financing. Contrary to public perception, most option ARM loan borrowers tend to be higher net worth, higher credit scores, higher down payment, lower default rates, etc in Seattle. Builders in WA have been self policing to stave off government intervention on flippers. Many builders included resale restrictions in their contracts to prevent new construction flipping of houses ad condos. Many builders included owner occupancy requirements in their contracts. Buyers (and their real estate agents) are being successfully sued by the builders to recover the gain realized on the disposition and the agent’s commission! (Bad agent for not reading the contract or committing fraud. No latte.) As a result we did not have the same level of artificial demand creating price pressure. When SD began to falter, the first to leave were the investors. They flooded the market with supply dampening prices. Homeowners who used 100% financing are now underwater. Short term interest rates are killing many borrowers.

    Unscrupulous lenders. Yes. We do have some. We had our major news story a few months ago. The firm is no longer in business. Fortunately, we have not had any headlines on collusion between agents, lenders, and escrow. We left that to Portland.

    PMI reported last fall SD had a 60% chance of capital loss on asset values. In hind sight, that happened. At the same time, Seattle had a 15%. The probability is calculated using a number of factors. Capital growth, acceleration or the rate of change in capital growth, unemployment, demeaned unemployment, and affordability. Seattle’s rate of capital growth has slowed, but Seattle continues to experience capital growth. Seattle has a housing shortage.

    I see significant differences. I usually ignore what is in the main stream media. If it bleeds then it leads. I pay more attention to the consensus of economists.

    Our business cycle is in a growth phase. If I remember correctly, Equity bought a building in Bellevue for a record amount per square foot. Equity is now being purchased by venture capitalists and taken private. Seattle and Bellevue have very low commercial vacancy right now.

    Michael P. Lindekugel
    Financial Analyst
    RE/MAX Commercial
    Team Reba – RE/MAX Metro Realty, Inc

  42. Thanks for taking the time to share your perspective, Micheal.

    re: the PMI report for chance of capital loss: agree with didn’t go as high as San Diego, and so may not fall as far or as fast. I don’t think it makes us immune, however.

    Much of the rest can be partially explained by the fact that San Diego has already started to decline. RE is a significant preportion of growth over the last 5 years. That has already fallen apart in SD, effecting both economic growth as well as increasing their unemployment rate.

    This also holds true for investors and unscrupulous lenders. It’s hard to estimate their prevalence in an increasing market. Only as prices start to decline is it clear home much or little of this has been going on. It’s too early to tell if self-policing has had any significant effect. If reports from some of the new condo projects downtown are any indication, there is signficicant speculation and flipping going on.

    As for the urban growth boundaries, outside of the urban core, I see plenty of land, even as close as a half-hour outside downtown. The population of that core is nearly identical now to what it was in the 1960s. I just don’t see this as anything but a canard from the builders, with little in the way of fact to back it up.

    As for the SFH market, scanning the listings and prior sales, I would estimate a quarter to half of the market is made of over-priced flips and shoddy renovations. That’s huge. It will have to change one way or another.

    Time will tell, but I am not nearly as sanguine about the future of Seattle’s housing market as you are.

    I own a house, so a part of me hopes you are right. On the other hand, I think Seattle as the city I love would be a better place if ordinary people could afford a house again without resorting to risking their future financial health to do so. I’d be more than willing to give back my equity to see that happen.

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  45. I ran across this site and topic a bit late but I would like to reference a post made on 12 March by Rhonda Porter.

    The post dealt with asking a mortgage broker how much they were making on a loan. In the post, Rhonda said it was an excellent question to ask. Her last sentence, however, posed the question “Why does what a LO makes a transactions matter to you? Why is that important?”

    Just the fact that someone would consider asking a mortgage broker/LO what they would be making on the deal shows how large the problem really is when it comes to the mortgage loans..

    Can anyone think of any other business where you would go up to the sales agent and ask – “If I buy this product/service from you, how much are you going to make off me? (realtors are the only ones I can think of)

    Even the used car salesman doesn’t get hit with this personal and probing question. Or how about the dreaded life insurance agent. Ever ask him or her what they were going to make before you bought that policy you still don’t understand?

    The answer why and the reason for asking your loan originator is because there are no easy safeguards to protect the public from being taken advantage of. Plain and simple.

    Unless laws are passed and implemented that provide full disclosure, transparency and guarantees that are missing and sorely needed, this will continue to be a mistrusted and sullied industry.

    To all who enter the process – caveat emptor.

  46. Thanks, Jim. I’m assuming you read my response on comment 26? In this day and age of “transparency”…it’s going to become a more common question. I do remember feeling very frustrated with my financial planner when I’ve asked him how IS he paid (I didn’t ask how much) and equal frustration when my (former) CPA decided to jack up the cost of my returns by more than double for no apparent reason when I have to disclose my cost or changes to the cost up front on my GFE.

    I would love to be paid hourly!

  47. Hello Rhonda,

    Some years ago as a CFP, I had a number of clients I did financial plans for. They would ask HOW I was paid but not how MUCH. Totally different questions with different implications.

    To actually ask someone what they personally make off of providing a sale or service, to me, shows there is a severe lack of trust somewhere. Unfortunately, this is what the industry has brought on itself and unlikely it will change anytime soon.

    I too fired a former CPA I used to work with. He used to do my taxes and after seeing a substantial jump in earnings I had over the prior year, decided he wanted to share in some of my good fortune.
    Moral of the story is designations, titles, referrals, etc. are not the end all. People have to be more informed and knowledgeable these days before entering into agreements and contracts that could literally cost them the roof over their heads.

    Anyway Rhonda, I think we are on the same page and you appear to be more of what the business needs. Keep up the good work and keep posting.

  48. Thanks, Jim! My CPA tried telling me that it took more time to do the same tax return and she charged hourly, which I was aware of. But…it took her twice as long to do the same tax return after financial/life changes that she could see with my returns? I felt like if she was being truthful, then I was paying for her being inefficient.

    Are you still a CFP?

  49. No Rhonda – I met my goal and retired at age 50 – that was 9 years ago. For some reason I started reading up and doing research on the real estate/mortgage industry about two years ago. Fascinating topic to say the least.

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  54. Hello Rhonda, Have you heard abou ther Ufirst program , where it pays off your home with in 8 -11 years on a 30years program
    also I have friends that have that MTA program and they are happy with it i just got my house about 3 months ago fro a builder they did the financing, however I did some research for different program , with my score being 630 i was able to get 95% 80/15 loan at 7% on first and 10% on second to prevent MI, according to the broker
    Did I get a good deal
    Concern Florida residence

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