This Just In: Zero Interest Loans, at a Cost of Zero, with a Monthly Payment of Zero (APR 0%)*

This is part three of a four-part series of blog articles about the subprime mortgage problems facing the real estate industry. In part one I sketched the rise and fall of subprime loan products and their relation to predatory lending practices within a capitalist system. In part two, I examined the structural relationship between a professional and his or her client. In today’s blog article, I will compare the subprime problems with a classic business ethics case study.

The space shuttle Challenger accident has frequently been used as a case study in the study of engineering safety, the ethics of whistleblowing, communications, and group decision-making.  With Challenger, an O-ring eroded on earlier shuttle launches. Morton Thiokol (MT) managers believed that because it had not previously eroded by more than 30%, that this was not a hazard. During a pre-[photopress:morning_1_2_3.gif,thumb,alignleft]launch conference call with NASA, the MT engineer most experienced with the O-rings, Roger Boisjoly, pleaded with management repeatedly to cancel or reschedule the launch. He raised concerns that the unusually cold temperatures would stiffen the O-rings, preventing a complete seal. MT senior managers overruled him and allowed the launch to proceed. Challenger’s O-rings eroded completely as predicted by Boisjoly resulting in the disintegration of Challenger and the loss of all seven astronauts. Boisjoly concluded that the caucus called by managers who decided to launch, was an unethical decision-making forum which came about because of intense customer intimidation. “Roger Boisjoly and the Challenger Disaster: The Ethical Dimensions

109 thoughts on “This Just In: Zero Interest Loans, at a Cost of Zero, with a Monthly Payment of Zero (APR 0%)*

  1. Pingback: Coalescing Information » This Just In: Zero Interest Loans, at a Cost of Zero, with a …

  2. Jillayne, very nice article, thanks. Your major point about the understanding the significance of how a system failure can contribute to a devastating outcome is well taken. However, I think that in this case that is only one contributing factor. In the case of the space shuttle disaster, all participants were well trained, both in their respective disciplines and on the overall system, had uniformly high ethics, and no conflicts of interest. As you pointed out, the system failed due to an exogenous pressure being applied in the face of an imperfect system (a better system would have been capable of deflecting exogenous pressure). In the real estate scenario however, not only is the system flawed in numerous ways, but furthermore: 1) many people were new to the industry and not well trained (either in their discipline or the overall system), 2) although many insiders undoubtedly had high ethical standards clearly many did not, and 3) there were very real conflicts of interest which significantly exacerbated the extent of these problems up and down the food chain. I think it’s also fair to suggest that consumers (buyers) are just as culpable as the real estate insiders in this system failure. What ever happened to personal responsibility (ie, to exercise some prudence in not buying more than you can afford and investing a little bit of time in understanding what you are getting yourself into)? So sadly, I personally have to conclude that the system failure is as much of a societal failure as a financing failure. It seems human nature (driven by greed and fear) allowed all too many people to willingly become predators or prey. I am sure we will attempt to reform our system with appropriate checks and balances to prevent these kinds of disasters from recurring in the future. Unfortunately, however, I suspect that unless the root cause is addressed, history will continue to repeat itself.

    How do we create a system that rewards people for having prudence, personal responsibility, ethics, and avoidance of greedy and reckless behavior? I certainly don’t claim to have the answers. However, I suspect that a viable solution will have to be multifactorial – cultural, educational, and political. Culturally, I think we need to be less obsessed with wealth accumulation above all else and at any cost and provide better role models for our society. Educationally, we can do a much better job educating people how to better understand our human foibles and how to overcome them – afterall, the ability to do that is what separates us from being apes, right? Politically, and I think this is most important, I think we need to recognize that much of our problem has derived from the presence of moral hazard in our current political and governmental system. Capitalism only works when rational risk is rewarded and reckless risk is punished. The current situation of moral hazard (examples being the Federal Reserve’s asymmetrical manipulation of interest rates and our current system’s penchant for bail outs) can undermine our whole capitalistic system. It is morally and ethically corrupting to our society since it legitimizes and popularizes reckless behavior. I look forward to reading your (and your readers) thoughts on how we can resolve these problems going forward.

  3. Jillayne,

    I must complement you on this post and the series as a whole. I also like the comparison to the NASA program because it shows that even with highly trained personal that a system can go wrong when a political or financial influence is introduced. I would like to thank you for pointing out the appraiser issue as one of the system components and how it is affected.

    I agree with you in the statement that their will never be enough governmental elements available to regulate each transaction. As members in the industries we cannot fall on governmental regulation or the lack of as reasons. The industries need to regulate or properly police themselves if pride alone does not call for self-policing then a multitude of other reasons should.

    I also agree with Jeremy in the fact that there are “social and culturally contributing factors

  4. Good morning Jeremy,

    Thank you for your very well thought out comments. Your points are well stated. So let’s continue the dialogue.

    Jeremy said:
    [In the real estate scenario however, not only is the system flawed in numerous ways, but furthermore: 1) many people were new to the industry and not well trained (either in their discipline or the overall system), 2) although many insiders undoubtedly had high ethical standards clearly many did not, and 3) there were very real conflicts of interest which significantly exacerbated the extent of these problems up and down the food chain.]

    Jeremy, I completely agree with you. Here are some stories.

    1) Two weeks ago I was teaching a class for loan originators who are getting ready to take their state exam. At the beginning of the class we go around the table and introduce ourselves. A third of the students were brand new. (?What? What is a brand new originator doing in this class, I thought to myself.) So I probed deeper, not wanting to make any assumptions. Maybe these folks use to be in real estate, escrow, maybe they have a degree in Economics. No such luck. Their former jobs (some of them still working part time) were: Mary Kay Salesperson+stay at home mom, Pizza Hut employee, motorcycle sales, one guy works as a movie ticket-taker on the weekends….you get the picture. Not knocking these jobs, just pointing out that these students knew NOTHING about mortgage lending and chose their new jobs because the advertisement promised a six-figure income their first year. There is no way any of them will pass the test without more than what I was able to give them in one day……unless the state dumbs down the test and makes it really easy to pass.

    2) the entire mortgage lending industry is in the middle of moral chaos. Industry trade organization NAMB, who likes to remind us that they originate more than 50% of all mortgage loans in the US continues to live in denial. At every opportunity, their president says “our members adhere to a strict code of ethics.” Read any press release. Here’s their code. You decide. Is this strict?

    To their credit, they do a very good job on the governmental lobbying side.

    3) We are all acting out of self-interest to one degree or another. That is, unless one of us happens to be Mother Teresa.

  5. Jeremy says:

    [I think it’s also fair to suggest that consumers (buyers) are just as culpable as the real estate insiders in this system failure. What ever happened to personal responsibility (ie, to exercise some prudence in not buying more than you can afford and investing a little bit of time in understanding what you are getting yourself into)]

    Yes, once again I agree with you. Where we are now, is that all the burden is placed on the consumer. While it may be true that some retail mortgage salespeople do a fantastic job of helping the consumer understand their responsibilities, and some retail mortgage salespeople even turn homebuyers away and tell them they’re not ready to become a homeowner yet-giving good reasons, this is not the case for the majority of retail mortgage salespeople from my own subjective perspective. (Q: Can I put two ‘ectives’ in a row in a sentence?)

    The industry is out of balance. TOO MUCH of a burden is place on consumers who don’t know what all the language in the loan documents means. I made the following analogy: A person has to undergo surgery and the doctor hands the patient a set of medical books and tells the patient to read the books and make a decision.

    What do RCG readers think about this analogy?

    Are a set of mortgage loan documents as complex to a lay person as medical terminology?

    I am making the argument that it is just as complex, and that purchasing or refinancing a home is just as important a decision as a complex medical procedure.

  6. Good Morning Shane,

    Thank you for your compliments. I always enjoy reading your comments when you visit RCG and other blogs.

    From comment #3 Shane says: [I also like the comparison to the NASA program because it shows that even with highly trained personal that a system can go wrong when a political or financial influence is introduced. I would like to thank you for pointing out the appraiser issue as one of the system components and how it is affected.]

    The appraisal industry was one of the very first groups to publicly and loudly demand that retail mortgage salespeople stop threatening to withhold business if values were not met. They were organized, went to state regulator meetings, testified in public, worked alongside the regulators to draft the language needed to make this practice a violation of state laws.

    This came with enormous consequences: Time spent away from earning a living and possible retaliation from mortgage companies that relied on higher values in order to keep the mortgage machine going. For the appraiser, this choice equated to possible lower income (hopefully temporary.) But the rewards, although not measured in dollars, are very high not only for themselves personally but for their entire industry. Every appraiser benefits from their efforts.

    Homeowners benefit, the people who invest in mortgage-backed securities benefit, the stockholders of banks benefit, and so forth. What I’m trying to say here is that it is very difficult to measure the GOOD a person can do, when compared to the possible scary consequences of doing this same good work. The negative ramifications are all too easy to see and feel.

  7. “A real estate agent or Realtor is not supposed to become involved in the mortgage side of the transaction because it means the agent has stepped outside his or her area of expertise.”


    Why then does every real estate licensing body have many, many pages on mortgage qualifiying and mortgage terminology, etc. as a requirement of real estate agent licensing?

    Because it IS the agent’s job to know enough about the mortgage business enough to assist the buyer client, and keep them from making huge mistakes. It is at minimum our job to know what the buyer can and cannot do from a lending standpoint, and also know that the client knows what they can and cannot do.

    If the only way a buyer can get a mortgage, is with a prepayment penalty and sub-prime or non-prime financing, the agent should know that, and be sure the client knows that, BEFORE the agent writes an offer for that client.

    The fact that some real estate companies have listened to some lawyers who told them to put blinders on the agents for liability reasons, does not change the fact that State Licensing bodies STILL include knowledge about the client’s mortgage as a licensing requirement every place in this Country, last I looked.

    Culprit in the Seattle Area is the Finance Addendum. No rate cap clause. First State I’ve ever seen that has “no rate cap clause”. If the buyer had a rate cap in the contract, the buyer would know from the getgo that they were sub-prime, and would be entering into the Purchase and Sale Agreement with full knowledge that the loan will be sub-prime.

    I have been told that there “used to be” a rate cap clause in the Finance Addendum, but it was removed.

    “Outside Area of Expertise” does not include things agents and their companies CHOOSE to be ignorant of, that are included in the licensing required education.

  8. Good Morning Ardell,

    Excellent point. In the real estate licensing law curriculum in many states, the real estate agent students are give a plethora of education on a wide variety of real estate related topics. Chances are, at this early stage in their career, there is not a required ethics component in this curriculum where a case study like yours might be learned (the ethics of helping a homebuyer understand the mortgage lending side). Here are the general educational requirements for a new real estate agent before licensing. This was taken from the WA State Dept of Licensing website, although it is probable that other states have very similar requirements.

    Real property ownership
    Land use
    Real property ownership rights and interests
    Agency law and brokerage relationships
    Listing agreements and procedures
    Appraisal valuation
    Real estate finance
    Escrow and title
    Leasing and property management
    Fair housing

    A brand new licensee would probably not do a very good job of helping consumers understand any of the tandem parts of a real estate transaction, UNLESS a new real estate agent has a background in one of these areas. The basics ARE taught. Real depth comes from many years of practical experience along with taking continuing education classes in these areas, making mistakes and learning from them, and so forth. Experienced agents are very different from a new or newer licensee. This is why, in my opinion, brokers and attorneys like to tell agents to be careful not to assist the homebuyer in areas outside their scope of knowledge. This advice promotes a good out come for: the broker, the agent, and the consumer, when the agent is new or newer.

    An experienced real estate agent who educates the consumer because of his or her real depth in all parts of the transaction is worth more because he or she brings more value to the consumer.

    The real estate industry, if it so chooses, can come up with a tiered system whereas a new agent would be treated as an apprentice and would work under an experienced agent(s) for a set period of time.

    I do not believe a new or newer agent holds enough knowledge in order to help the consumer avoid making a huge mistake in his or her choice of mortgage financing, with the exception of a new or newer agent with a background in a related field such as a degree in economics.

  9. Jillayne: Excellent article. Here’s the one thing that keeps bugging me. What happened to quality control programs? Before I left the business of mortgage lending to do title work – 1991 – quality control had become the focal point of self-policing in mortgage lending. FNMA, FHLMC, FHA & VA all required very specific internal programs designed to find and fix individual and systemic fraud and degradation of standards.

    The basic structure of these programs were that they had to operate outside of the mortgage department and report directly to senior management. Operated as directed they would have a random audit 10% selection of transactions of each originator, mortgage broker, appraiser, underwriter, etc. so that compliance could be closely monitored. All these audits were to be compared against payment histories. These very thorough audits should have raised the red flags years ago. I wonder what happened. That system should have worked and that’s something I wish regulators and lawmakers would take a look at. QC was supposed to be the police mechanism.

  10. Ardell, I was waiting for your comment regarding that sentence! 😉

    Diane, I can’t speak for other mortgage companies, however, our company has several layers of quality control. We perform random checks on files and have to be audited (I believe it’s at least annually)in order to maintain our status to provide FHA financing.

    Jillayne, I still feel that consumers need to be more responsible with their finances. If you put the average American consumer in front of the most eductated ethical Mortgage Professional, they still may not fully grasp their largest debt–no matter how many times it’s explained to them. Plus, the average consumer does not manage their credit cards and they do not save money…is that the fault of the Mortgage Professional too?

  11. Hi Diane,

    After the early 1990s, we saw the risk-based pricing explode. Before then, everyone received the same interest rate on his or her loan, no matter what the credit score.

    Marginal credit but still qualified for a conventional 30 year fixed?
    Great credit and also qualifies for a conventional 30 year fixed.
    Both clients received the same interest rate.

    With the introduction of risk-based pricing (credit scores) there was a huge increase in the growth of the mortgage broker industry. NAMB likes to proclaim that today over 50% of all loans in the US are originated with a broker. Along with that, state regulators that oversee mortgage brokers do not have the resources available to audit EVERY SINGLE mortgage broker who has a license.

    On the plus side, the growth of the mortgage brokerage industry has created an fairly easy way for a person to start and grow a profitable small business without needing the capital required to start, say, a bank.

    Since small business NEED profits just to survive, let alone grow, the priority of training, compliance, and auditing get pushed down on the list of priorities unless it becomes an emergency, or unless required to do. Once a broker reaches a point of deciding to spend money on these things, a small mortgage broker is often struck with shock and awe at how much training, auditing, and compliance can cost.

  12. Hi Rhonda,

    It is probably not a good idea to continue to call retail mortgage salespeople Mortgage Professionals. We had over 100 comments on this blog article.

    In no way shape or form ought retail mortgage salespeople call themselves Professionals. This is deceiving to the public.

    I suppose retail mortgage salespeople can try calling themselves that, but it doesn’t make it so. I can call myself queen of the universe and it doesn’t make it so, except in my own head.

    Here’s a recent story:

    A student sitting in an ethics class introduces herself as a mortgage broker. “Oh fantastic!” I replied, “so you’re the broker at your office?”

    “Well no,” she said, “I’m a loan originator.” I asked her why she referred to herself as a broker and she said it was because she works for a broker which means she can find the best loans available for consumers. I asked her if her broker was approved to do FHA loans and she said “no.”

    I offered that she should be representing herself to the public as how her license reads “loan originator.” She did not agree with me so I referred her to the state law, which she had not yet read.

    Once again, this is very deceptive to the consumer who is reading the newspapers and hearing about how loan originators now must be licensed.

    Retail mortgage salespeople are not Mortgage Brokers and are not Professionals.

    Is it so awful to call yourself what you are: “licensed loan originator?”

    I thought the mortgage broker community was so very impressed with what they had accomplished, being the ONLY group of mortgage salespeople who have a license when compared to a loan officers at a bank, credit union, or consumer finance company.

    When referring to the group as a whole, it is more accurate to say “retail mortgage salespeople.”

  13. From comment 10, Rhonda is comparing consumer credit card debt to real property mortgage debt. This is shifting ground. The consequences of mortgage loan far exceed that of a credit card.

    If retail mortgage salespeople decide to elevate their status to that of a fiduciary, in Rhonda’s scenario, the retail mortgage salesperson is now a Mortgage Professional and would ABSOLUTELY NOT MAKE THAT LOAN for that consumer who did not understand a mortgage. You wouldn’t make the loan, and neither would your competitors because you would all have a much higher duty to the consumer.

  14. Jillayne, “retail mortgage salesperson”. I am not a sales person. I am not in the business of selling mortgages. I probably advise more people out of mortgages than into them. I don’t see how you can blanket the entire industry with that phrase. If one sits at the desk and is fed leads to call, the yes, they’re a mortgage retail sales person.

    I am a Certified Mortgage Planning Specialist (a designation I have earned) and, on my emails and business card I have added Licensed Loan Originator 510-LO-32047. I have no problem with that. And I’m not aware of anyone who does. LLO is much different than the slam of “retail mortgage salespeople”.

  15. Jillayne,

    I think I will write a post on this after I do some research. I’m going to count the number of pages in the required education for licensing that involve Consumer Finance issues. If it is 3% of the total, I’ll agree with you. If it is 20% of the total (which is my recollection), then I will not, because I find that the number of pages used to cover a topic, equals the percentage of my job, give or take.

    Some sections of the required education are optional thereafter IF a licensee chooses NOT TO WORK in that area. For instance, the section on Commercial Real Estate. An agent can get a license, choose not to do commercial sales, and choose not to become an expert in the commercial topics.

    But an agent cannot choose to not become an expert in the areas in the educational requirement that involve his chosen profession, residential real estate.

  16. Jillayne, thanks for sharing your additional thoughts 🙂

    I found your anecdotal experience regarding the background of your new trainees simultaneously humorous and troubling. How’s that for an odd mix of emotions? Unfortunately it doesn’t surprise me. Don’t get me wrong – I bet any one of your trainees could make a great loan originator if they were getting into it for the right reasons (not just for a quick buck) and compensated for their lack of experience with enough training, some determination, and a good role model. Why do I doubt that’s what will really happen?

    I would have to agree with you that the mortgage lending industry in moral chaos. How it chooses to deal with that will certainly determine it’s future. It either needs to aggressively establish stricter ethical standards and self enforce those standards on it’s own or it will face the governmental regulations (and it may already be too late to avoid the latter). Historically, when problems of this sort have arisen in other areas, self regulation (when properly conceived and implemented) has often proven to be much more efficient and sometimes more effective than governmental regulations. Often, when externally enforced rather than self imposed, you get the worst of both worlds: for example, in the case of Wall Sreet, there are regulations for disclosure and reporting which adds much expense and overhead; even in the face of that participants manage to circumvent the intent of these regulations by making the disclosures and reporting overly complex, lengthy, and difficult to understand. Sound familiar?

    I think you raised an interesting analogy – “A person has to undergo surgery and the doctor hands the patient a set of medical books and tells the patient to read the books and make a decision”. I would agree wth you that making a huge financial mistake could be just as detrimental to your well being as making a huge medical mistake. Your point is well taken – if this doesn’t happen in medical decision making why is it the current norm in the mortgage decsion making?

    Although mortgage documents currently are lengthy and complex, I think an important question to ask is “why does it need to be that way”? We both know that this is not rocket science! Often things are made more complex than they need to be for one main reason: to obscure the truth. Loan documents certainly can be simplified, shortened, and made more understandable for average people.

    The other element that I feel is screaming to be addressed is disclosure. How many buyers don’t understand that a loan broker is not necessarily working in their best interest? Proper disclosure would at least put more people on their guard and prompt them to do their homework regardless of how complex the documents are. If you were to combine proper disclosure with simplified documents I think you would go a long way to empowering buyers to avoid catastrophic mistakes. In a perfect world we might even make an effort to raise ethical standards a bit. Am I asking for too much?

    Thanks again, Jillayne, for your articles and for fostering this important and interesting discussion.

  17. Rhonda,

    You are an excellent loan originator with over a decade of experience. You are very knowledgeable and counsel your clients well. Anyone who reads your most excellent blog will surely see that you conduct your business as if you DID hold professional status. I hold the utmost respect for you and I’m not just saying that because we’re fellow bloggers. You are very good at what you do and I am a smarter person for knowing you; you’ve taught me a thing or two!

    I don’t think retail mortgage salesperson is a slam, and I do not mean it as a slam. If I was going to slam, I would probably go way lower than that. I believe “retail mortgage salesperson” is an accurate description of a whole group of workers in the United States.

    The relationship is retail (not fiduciary)
    Mortgage loan products are what they offer to consumers
    They are paid like any salesperson: in a number of ways such as salary, commission, bonus, basis points, and a number of OTHER ways that I will not go into at the moment. They are paid based on volume and dollar amount like any other salesperson.

    I am really glad we’re having this discussion because I honestly believe it will be helpful for consumers, RCG readers, and others in the industry who already work as if they did hold professional status. I am trying like heck to help the industry learn that just because you operate in one way does not mean the rest of the industry conducts their business the way you do. I know you guys are trying to set yourselves apart from the masses and the people selling designations are capitalizing on this need.

    The consumer does not know the difference and the industry’s reputation as a whole is only as good as the LOWEST form of business conduct.

  18. Hi Jeremy,

    I have be co-writing about your observations in comment #16 for over 5 years now. In the narrative history of any profession, a professional group is far better of self-regulating rather than having the government regulate for you.

    Some have said perhaps it’s too late for retail mortgage salespeople. I disagree. In fact, I am very hopeful that the current subprime and foreclosure crisis will be a catalyst for great change.

    Any professional group is better off economically and also better off from the perspective of consumer respect if that group self-regulates.

    As you’ve observed, when government regulates, we end up with complex laws such as Truth in Lending (Regulation Z). Maybe I’ll write an article on the history of that law, why we have it, and why this law makes mortgage lending MORE confusing for consumers.

  19. Okay Rain City Guide Readers,

    Jeremy has a question, and it’s a good one:

    From comment #16

    “How many buyers don’t understand that a loan broker is not necessarily working in their best interest? Proper disclosure would at least put more people on their guard and prompt them to do their homework.”

    Let’s re-phrase Jeremy’s question to read “retail mortgage sales people.” That way, we are addressing the wide group of folks who work in a retail sales capacity at any of these institutions:

    Mortgage Broker
    Correspondent Lender
    Credit Union
    Consumer Finance Company

    RCG Readers: Do you believe it would be helpful for a retail mortgage sales person to disclose in a very clear way in writing:

    “I am not necessarily working in your best interest”

    When the president of NAMB (Nat’l Assoc of Mtg Brokers) testified before congress a couple of weeks ago, he was asked this question. He answered that no, brokers do not work for the consumer’s best interest, they work for their own interests. The congressman then handed him an advertisement that clearly stated the opposite.

    In the future, I believe there will be some people who will want to remain in the retail relationship with the consumer. I also believe there are some people who will want to leave retail status and work in the consumers best interest. Indeed some awesome mortgage folks out there already are doing this.

    That way the consumer will have a choice: retail or fiduciary.

    The person with the higher duty owed to the consumer will be able to charge more for his or her services.

  20. Jillayne,

    Thank you for the complement.

    Diane #9

    Some of these quality checks are still in place. Some of the confusion comes from the different kinds of lenders in the market today. Banks, Mortgage Bankers and Mortgage Brokers are confusing because they use names that are similar may sell similar products but are regulated in different fashions. The bank side of the lending industry has tried to stifle the mortgage brokers because they are competing but have had very little success in this area. One of the major arguments from banks is that they are regulated heavier then the mortgage brokers. For example Banks are required to have one out of every five appraisals reviewed regardless of results of the loan closing or not. Mortgage Brokers many times do not unless they are selling the loan to a bank. Other areas that a Bank is regulated and Mortgage Brokers are not are in areas of documentation and underwriting. These requirements vary from state to state and company to company.

    In Jillayne’s comment # 11, I agree with her in her stating that the State Government does not have the resources. In Michigan it has been a major argument that the lack of regulation is due to the lack of funding but some of the problems also are in the systems themselves. Michigan, Ohio and New York States have all ran into problems trying to regulate the lending industries from Federal Agencies and Courts due to jurisdictions. In Iowa the top person in charge of appraisal regulations and licensing was victim of identity theft on fraudulent appraisals and held no recourse, one reason being that the system does not offer a protective measure that is built within it and the other because state and federal laws do not perceive this type of identity theft as an issue.

    In Ardell’s comment # 7 I would like to add that she has touched on a good point and am wondering what the take is on real estate agents who also broker or originate loans (Ardell’s and others). In Jillayne’s response to Ardell’s comment # 8 I like the idea of a tiered licensing system. I am finding a lot of experienced real estate brokers that are working to move to a tiered licensing system also. My concern is that those who do not have enough experience entering into areas that they do not hold enough knowledge on, but how do you determine that they do have enough experience in the task at hand?

  21. Hi Jillayne,

    You’re definitely an original thinker, which is why you’re fun to read, and it doesn’t surprise me that you were well ahead of the curve on this topic.

    If you ever get the time and have the interest, please write that article on Reg Z – I’d very much like to read it!

  22. Hi Jeremy and Diane,

    Yes, I will write that. I have two others ahead of that one. First, I will finish this series of blog articles on the subprime problems, next, I owe Rhonda an article on comparing different types of lending institutions. Then I will write a brief history of how we ended up with the Truth-in-Lending Act and why it doesn’t work.

  23. Jeremy, scroll back up a bit and read comment numbers 18 and 19, which I wrote around 2PM today and were just set free from the spam bin.

    Rhonda, my follow-up comment to you is number 17. I hope you feel better soon!

  24. Jillayne, thanks for your replies (and thanks for pointing out the ones that got hung up in the spam bin as I missed those). I think that what you are describing as an alternative fiduciary relationship would be VERY attractive to most borrowers. These people need to organize to self regulate, provide a uniform code of conduct and level of service, and brand themselves to promote their services effectively. My only concern is that the buyers who need that help the most might be the least likely to take advantage of it (ie, if they are oblivious enough not to read or try to understand current loan documents and the ramifications of the terms they are signing up for, they may not go the extra mile to research and find a retail mortgage sales person acting in a fiduciary capacity. Another important issue is incentive-based referrals. I wonder how many buyers currently select their retail mortgage sales person based on the advice of their real estate agent? Of those that do, what are the motivations of the real estate agent for recommending a specific person? Are there any referral fees or other compensation involved? If so, the people who need the fiduciary the most may not be directed there. What a tangled web we weave!

    At the risk of being unpopular I’m going to venture to make a radical statement: I believe that ultimately the mortgage industry should move ENTIRELY to fiduciary-based sales. Why? Because ultimately it comes down to the fact that what is good for the buyer is good for the industry and what is bad for the buyer is bad for the industry. Placing self-interest above the buyer’s interest may be profitable in the short term, but as we watch the current system implode I think it’s clear that this is not a viable long-term solution for the industry. The non-fiduciary sales model works when selling small discretionary items like TV’s and shoes. When purchases are large enough to ruin someone financially (just like when medical decisions are serious enough to effect someone’s survival) I think we need to take special precautions. I don’t see a place for non-fiduciary mortgage sales in our society where too many people are willing and able to be misled and/or taken advantage of. The downside of such an approach seems quite limited given the potential upside. Interestingly, If adopted, would this approach limit choice or innovation? I don’t think so. A fiduciary would simply recommend and justify the most appropriate products and would still offer alternatives if requested to do so, which might be particularly applicable to sophisticated or experienced buyers or investors. A fiduciary would not be able to keep anyone from making a mistake if they wanted to take on excess risk (it’s still the buyers choice after all). At least no one would be intentionally misled or misinformed which is the current norm. On average buyers would pay a slightly higher fee for these services but the cost would be worth it compared to the instability propagated by the current system. Think about it, in the current system, even prudent and diligent buyers will be harmed by the housing market instability created by the current system. Furthermore, if all sales people were fiduciaries, the most of the current issues plaguing the mortgage industry – lack of education/training, non-uniformity of ethical standards, questionable fee based referrals, use of inappropriate loan products, industry-wide financial instability, limited professional esteem would be addressed to a large extent.

    Ultimately, what is in the interest of the buyer is in the interest of the mortgage industry and what is not in the interest of the buyer is not in the interest of the mortgage industry. It will take some serious leadership to reform the current situation and I hope that industry participant’s step up to the plate.

  25. “A fiduciary would simply recommend and justify the most appropriate products and would still offer alternatives if requested to do so,”

    BINGO!!! That is the Real Estate Licensee’s Role in the process, as far as I’m concerned. Least it used to be, and still IS, in some places in the Country. I’ll write a post on my feelings on this one.

  26. Hi Jeremy and Ardell,

    In the classroom, I ask real estate agents the following question:

    Should Realtors recommend retail mortgage salespeople to homebuyers?
    If yes, why?
    If no, why not?

    The answers usually split 50/50.

    Half the class says, “absolutely not, because it increases an agent’s liability.”

    The other half of the class says “absolutely, because it increases an agent’s liability when a consumer is not steered to a GOOD retail mortgage salesperson.”

    I phrase it as a black and white question, but this is not the case.

    My answers are:

    To those that say “no way,” the more an agent boxes himself or herself in to what can and cannot be done (for fear of liability) the less value an agent will hold in the eyes of consumers.

    To those that say “absolutely” I ask them to tell us how they know that their clients are being referred to a “good” retail mortgage salesperson, and what does “good” mean?

    Experienced agents say they know their retail mortgage salesperson is good because of numerous past good service experiences.

    In my opinion, I do not believe a real estate agent is arm’s length enough away to know for sure if a random retail mortgage loan originator is good, unless that agent has extensive knowledge in the area of predatory or abusive lending practices, knows how to spot fraud on the HUD 1, knows what a low-ball good faith estimate looks like, knows all the lender bait-and-switch tactics, and so forth. A real estate agent has just a small degree of self-interest here, in getting the transaction to CLOSE, so the agent can get paid, AND ALSO so that the homebuyer receives a fair loan.

    Further, Jeremy references kickbacks in comment #27

    “Another important issue is incentive-based referrals. I wonder how many buyers currently select their retail mortgage sales person based on the advice of their real estate agent? Of those that do, what are the motivations of the real estate agent for recommending a specific person? Are there any referral fees or other compensation involved?”

    Jeremy, kickbacks are not allowed as per the Federal Real Estate Settlement and Procedurs Act (RESPA). Do they still happen? Yes. Why? Because there is not enough government resources available for HUD to police every single transaction.

    What is more troubling is a legal form of kickbacks called Affiliated Business Arrangements where a real estate broker/owner also owns a mortgage company. It is a well known problem that real estate broker/owners put direct and indirect pressure on real estate agents to direct business to the affiliated companies, and the agents are then given something of value in return such as a better renewal contract or other unwritten perks. Why does this continue to happen? Because there is not enough government resources to police small infractions. To their credit, HUD has stepped up enforcement during the past 3 years. AfBAs, also known as Controlled Business Arrangements are a very complex issue worthy of a separate post.

    Agents with an extensive background in lending are worth quite a bit more in today’s real estate market to a home buyer. Even with market changes, this agent has valuable foundational knowledge than compared with a newer agent, does not cave under pressure from a broker owner to send business to an affiliated mortgage company, understands RESPA, and has tried out enough retail mortgage salespeople to make a pretty good recommendation.

    Most all knowledgeable, experienced agents say they absolutely recomment retail mortgage salespeople, and they recommend at least 3.

  27. “What is more troubling is a legal form of kickbacks called Affiliated Business Arrangements where a real estate broker/owner also owns a mortgage company.” I would love to see a post on this and you may want to consider including the ABAs with real estate brokerages and title companys. Many Mortgage and Title Professionals are not allowed to meet with or pass the Guard at the front desk of these offices. Even if they are promoting available discounts and lower rates than what the “in house” title company offers which would benefit the consumer.

    It’s rumored that the brokers have received generou$ incentives to increase their capture rate. A large audit is currently going on right now with local title companies with findings to be announced in the next couple of weeks. I have heard of real estate agents being called in by the broker when they are not using the “preferred in house” title company and/or mortgage company.

  28. “Of those that do, what are the motivations of the real estate agent for recommending a specific person?”

    Excellent question! I am “stripping out” the agent related parts of this thread, to do a separate post on the agent related questions and concerns, which I will post tomorrow.

    So if anyone has any more questions about the real estate agent’s role in the lending process, keep them coming.

    I will to a “workshop” post giving an actual conversation I have with a client, and one with an agent for her client. I will also answer Jeremy’s question regarding my motovations, and how I choose whom I am recommending and why.

  29. Jillayne, thanks for your additional thoughts. You really drilled down to enumerate a wide range of interrelated conflict of interest issues I was alluding to. You correctly pointed out how complex this problem is to define and track, as there are so many direct as well as indirect conflicts currently prevalent in the system. The indirect conflicts, such as a real estate agent referring a buyer to a retail mortgage salesperson who they know will “do whatever it takes to close the deal” so they can get paid (even if there’s no direct or indirect kickback involved and despite whether it’s in the best interest of the marginal client to get qualified for a no doc option ARM loan) are perhaps the most prevalent and therefore most damaging conflict of interest to buyers and the overall system. They also may be the hardest to track and self regulate.

    I know there are many honest, ethical, and hardworking real estate people out there with nothing but the best interest of their clients in mind, but when these things go on it ends up tarnishing everyone. These kinds of problems typically get exacerbated during periods of rapid market expansion (booms) when existing oversight and self regulatory mechanisms break down due to the increased volume of transactions, the influx of so many new inexperienced people, and the tendency for existing participants to get carried away bending or even breaking rules “chasing the boom”. This results in a toxic mix of naivete, ethics erosion, and outright fraud (both by buyers and market participants). Market contractions (busts) reveal these transgressions as the blame game plays out.

    We can’t undo the past, but I hope we can learn from it. Since history keeps repeating itself and the roots of the problem are embedded deep within the human psyche, it’s not clear that will be the case but at least we should try. Since we can’t change human nature, it seems the only viable potential fix is to continue to refine and optimize the system – which was the essential point of your initial post. With some critical thinking that incorporates human nature induced failure modes, I would hope we could end up with a system that is more robust even if it is never perfect.

    On a more positive note, Jillayne, I really like how you teach and approach these complex issues – by asking some key and fundamental questions and then dissecting the answers for inherent flawed assumptions, justifications, conflicts, rationalizations, and reasoning. Sometimes you just have to ask the right questions in order to get the right answers! I really appreciate what you are doing. You are a breath of fresh air and it’s people like you who keep me from getting too cynical and give me some hope!

  30. Ardell, I’m looking forward to reading your thoughts on how real estate agents currently fit in the mortgage equation (and how they should fit in in the future). I’m sure many real estate agents have a rational and ethical way to deal with these issues. Unfortunately I’m also confident that many do not. How does a buyer know they are working with a real estate agent who is willing and able to avoid self interest? If there’s no way to be sure they’re with an ethical agent, there’s no way to know they are getting an unbiased referral.

    It seems to me that just the fact that SOME of the real estate agents are doing the right thing isn’t nearly good enough. I would go so far as to say that I think that what we need are an appropriate combination of federal guidlines, self regulation, and transparency to mitigate conflicts of interest. Furthermore, if all retail mortgage salespeople were fidutiaries, we whould have a safety net for the system.

  31. Rhonda,

    I could do a post on AfBAs/CBAs. Doing so will perhaps put me in a position to loose potential business from those real estate companies and title companies. I have duties to many people that must be analyzed and ranked before I can start to consider all the possible consequences, both positive and negative. Finally, I have to consider what kind of person I am, and how shining light in a dark corner of the industry is going to affect my own psyche. What are my own motives? These are the things I’ve been wrestling with. My current decision is to try to work IN the existing system as an educator.

    MANY people in the industry know a whole lot about the dark side of AfBAs. We’re all talking to each other. We need to go further and talk to the people who can make a difference: State and federal regulators.

    Not every person is so well situated that they can act as a whistleblower inside their own company. Not everyone can just quit their job, like I did.

    There are grave personal and business consequences to consider. But now I’m repeating myself so I’ll just stop there. I look forward to any insight RCG readers can offer me in this regard.

  32. Jeremy,

    Regarding your comments from #32: Yes, more or less, we humans are always acting out of some form of self-interest, UNLESS we are in a position like a saint, like Mother Teresa for example. Most people are not in a position to choose to live in such a way.

    When there is a power/knowledge imbalance like when a person knows a whole lot more than an average random person, THEN as a group of people, we try to figure out how to balance our natural tendencies toward self interest with a sense of fairness toward the “other.”

    One of the best ways to do this is in a public forum, such as this blog, and to have a dialogue, a conversation about what it means to be fair, what is a “fair” loan, and so forth.

    Consumers might hold a belief that a fair loan means the lowest rate at the lowest cost and with the lowest monthly payment, but that’s not fair or reasonable to the business owner. It’s also not fair for a business owner to let the consumer believe he or she is getting a fair loan when in fact, the loan is anything but. Somewhere between where we are now and where we are headed is the answer, and there will certainly be more than one right answer.

  33. Jillayne,

    Your points are well taken. I agree there aren’t that many saints walking around these days, myself included 🙂 (although I’m always working on that). I used the terms self interest and conflict of interest a bit loosely. I’m not that concerned about these when they are minor in degree and fully disclosed (which is what I think you are referring to about making a living). In that case, saavy buyers will pay a bit less than others and that’s just life. What I am really concerned about is when self-interest crosses the line to become predation. Predation can ruin people’s lives. This is where regulatory oversight is needed since there are far too many people in our society who are not capable of protecting themselves. When a buyer who is ignorant is knowingly put into a suicidal loan by their retail mortgage salesperson, that is predatory lending. I honestly don’t see how anyone could do that to another human being and live with themselves and I don’t think that they should be allowed to do it. We are beginning to see a legal debate as this current mortgage crisis ensues about liability for inadequate disclosure, improper loan product representation, and sales of inappropriate loan products. As I said before, I don’t think that all buyers who were put into these loans are completely innocent either, but many of them likely are, and the damage to our society of predation will extend far beyond the few directly involved.

  34. Jeremy,

    I’ve been reading a lot elsewhere about the mortgage industry and I just don’t see their being taken to task as “a fiduciary” in the picture in the near term. So I’m still at the agent, who in most of the Country IS the only fiduciary in the picture, being taken to task and prepared for fulfilling their role unless the client insists that they butt out of the finance end of it. I rarely have a client who doesn’t at least want the checks and balances portionof my duties, even if they can “fend for themselves”.

    I was out with clients all day,but will get to that post within the next day or two.

  35. Hi Jeremy and Ardell,

    It is my belief that if the industry does not self-regulate and embrace elevating their status from retail to fiduciary, then the federal and state governments can and will step in and regulate the industry in such a way that will make it so.

    Barney Frank is getting ready for a big hearing in DC tomorrow on federal predatory lending legislation. This is going to be a very interesting couple of years. IF foreclosures keep increasing, it will become a political issue.

    Then, in the future, some really smart law student will look at all the new state or federal laws and conclude that put together, the laws really do say “fiduciary” without really saying it directly.

  36. Jillayne – you beat me to answer Ardell’s question by about 3 minutes while I was getting a couple of references for her! Good job. To be complete, here’s a few details:

    New Predatory Lending Legislation a Possibility
    Yesterday’s New York Times reports that Congressional Democrats are contemplating new predatory lending legislation. Representative Barney Frank, chair of the House Financial Services Committee, plans to move a bill that “would give borrowers and others the ability to sue the Wall Street firms that package those mortgages and then sell them as mortgage-backed securities, as well as the purchasers of those securities in the secondary market” while Senate Democrats, including Senators Dodd and Schumer, are also looking into the matter.

    Senior Democrats propose new predatory lending legislation
    March 20, 2007 at 7:24 am • Posted by Sam Glover

    Following on the heels of a media blitzkrieg on the credit industry, including payday lending, credit card companies, and the subprime mortgage industry, Democratic legislators in both houses of Congress are moving forward with legislation to curtail predatory lending practices. From the NY Times article:

    The provisions include requiring mortgage lenders to determine if borrowers have the financial ability to repay loans and making issuers and buyers of predatory mortgages more legally accountable.

    If this can make past an extremely well-funded lending industry not keen on further regulation, it could be a great help to consumers. The statute is both remedial and preventative. On the one hand, it would give consumers the right to sue mortgage lenders who write, well, stupid loans when they should know better. On the other, I’m sure the industry will say this means consumers will take advantage of them. Of course, lenders knew very well what they were doing when they started lending to risky borrowers and they made a heckuva lot of money doing it.

  37. Ardell and Jillayne, I replied to Ardell’s post #37 earlier this evening but it looks like it got lost in the cosmic bit bucket since it is nowhere to be found. I was gathering the following reference links for Ardell (which I had rerrered to in my earlier post) just as Jillayne replied:


    New Predatory Lending Legislation a Possibility
    Yesterday’s New York Times reports that Congressional Democrats are contemplating new predatory lending legislation. Representative Barney Frank, chair of the House Financial Services Committee, plans to move a bill that “would give borrowers and others the ability to sue the Wall Street firms that package those mortgages and then sell them as mortgage-backed securities, as well as the purchasers of those securities in the secondary market” while Senate Democrats, including Senators Dodd and Schumer, are also looking into the matter. I wonder if Congress will consider eliminating the authority of federal regulators to preempt state predatory lending statutes as to federally-chartered and regulated financial institutions.


    Senior Democrats Propose New Predatory Lending Legislation

    Following on the heels of a media blitzkrieg on the credit industry, including payday lending, credit card companies, and the subprime mortgage industry, Democratic legislators in both houses of Congress are moving forward with legislation to curtail predatory lending practices. From the NY Times article:

    The provisions include requiring mortgage lenders to determine if borrowers have the financial ability to repay loans and making issuers and buyers of predatory mortgages more legally accountable.
    If this can make past an extremely well-funded lending industry not keen on further regulation, it could be a great help to consumers. The statute is both remedial and preventative. On the one hand, it would give consumers the right to sue mortgage lenders who write, well, stupid loans when they should know better. On the other, I’m sure the industry will say this means consumers will take advantage of them. Of course, lenders knew very well what they were doing when they started lending to risky borrowers and they made a heckuva lot of money doing it.


    My concerns about predatory lending do relate to real estate agent referrals. This is because some agents want to help marginal borrowers buy their home, others just want to close the deal, and still others may not know they are referring to someone who’s lending irresponsibly. Regardless of their good intentions, conflict of interest, or ignorance, these referrals did occur in volume. So I think it is very appropriate that real estate agents closely examine their role and thier responsibilities in the referral process.

  38. Jillayne: This discussion is wonderful. I have nothing to add and have enjoyed it immensely. Jeremy, thanks for going “radical”. I had to put that one up on Radical.

    I know you have many posts lined up to write, but please consider your contribution to the discussion of affiliated businesses. I am of the opinion that the acceptance of ABAs was the beginning of our ethical downfall. It’s the point in our industry timeline when the focus of all efforts by our trade associations moved to discussions of how to get away with “it”, rather than good old-fashioned business.

    I know it’s a scary prospect – writing truthfully about ABAs. I run an ABA and I speak out “radically” against the concept all the time. I’ve never liked ABAs and market forces caused me to have to go in that direction. I run an ABA that is RESPA compliant and the interests of most partners are less than 1%. It’s not the typical ABA, but that said, I wanted you to know that though it’s scary, it’s the right thing to do.

    You are and have positioned yourself as a teacher of ethics in this industry. Affiliated business is the MOST ethically challenged concept we have to deal with, so PLEASE use your God gifted brain power and articulate manner and take on that issue. Don’t be afraid.

  39. As an ignorant consumer, trying to get less ignorant all the time, I just wanted to let you know that you are a big help in that education and that you just rock, Jillayne. Keep up the good fight.

  40. Jeremy,

    I rescued your comment from “the cosmic bit bucket” 🙂 There was a porn comment just before yours from a guy named Jeremy, and the spam filter just nabbed both of you. It’s an intuitive Askimet spam filter, and sometimes its “intuition” is a bit off.

    But it has trapped over 140,000 spam comments, so it’s worth having, even if it is a bit overly finicky at times.

  41. Ardell, I and my “cosmic bits” thank-you! I’ve only got so many cosmic bits to go around, so I don’t want to lose any frivolously. I’ve not seen any spam on this blog so it must be doing it’s job very well.

  42. Pingback: The Real Estate Agent’s Role in the Lending Process-Part 1 | Rain City Guide | A Seattle Real Estate Blog...

  43. Diane, thanks for your comments. I hadn’t come across your blog before but thanks to you comment now I have – and it looks really excellent (though you really have to raise your standards about people whose opinions you cite, particularly the most recent post).

    I really appreciate people like you and those on this blog who have the interest and courage to tackle such controversial and challenging problems. It’s actually ironic that so few people want to go there, since in the long term it seems that it’s clearly in their best interest to do so (kind of like diet and exercise). Sometimes I just marvel at human nature, really it’s a funny thing, you would think that it’s designed to facilitate our survival yet in so many situations somehow it predisposes us to do exactly the opposite.

  44. Well I’m currently at a convention all day today teaching about Real Estate 2.0, new business models, blogging, and so forth. Thanks for all your comments, compliments, and encouragement. I will write about AfBAs/CBAs sometime soon.

    While you’re waiting and for your entertainment, here is a link to a satirical piece I wrote in Oct 2006 after our title insurance companies here in Seattle received a major spanking from the state insurance commissioner.

  45. Jillayne, you would be great at talking about ABAs. Would it jeopardize your income more than talking about mortgage retail sales people? I would assume you have a great deal of business from mortgage retail sales outfits, too…

  46. Hey are you answering a question with a question? Please don’t do that to me when I’m still on Theraflu! 🙂 I’m not sure. For one, I don’t know how the demographics of your business look like. If it is more real estate agent, title or mortgage based? If it is mortgage based, do you receive more business from banks or brokers?

    Questioning your questions…back at you. I left my lap-top charger at work today (thanks…head cold)…so my battery time is limited until I get it tomorrow morning. (fwiw)… I’m using the desk top until I get kicked off for home work, or ???

  47. Fair enough 🙂 I am heading home from the Independent Broker’s Association convention and when I get there, it is possible that I too will have my laptop taken over by a middle schooler with a homework deadline. I will respond in detail later on tonight.

  48. Hi Rhonda,

    We work with banks, mortgage brokers, correspondent lenders, real estate broker owners, real estate agents & Realtors, home warranty companies, home inspection companies, title and escrow companies, home builders, law firms, non-profit associations, and professional associations. We do all kinds of consulting work, including working with companies who need help forming RESPA-compliant AfBAs/CBAs and we work with companies with existing AfBAs who need help with RESPA compliance.

    This list is not completely up-to-date but it will give you a snapshot.

    Interestingly, a third of the people who have contacted us through RainCityGuide after reading this series on the subprime problems, have been consumers looking for a referral from us to…………..
    an ethical lender.

    I am always open to looking for ways to help grow my small business. It would seem that there is need now, for a professional association that would help guide the ethical conduct of its members. I believe we have opened up a path for providing a service to consumers and to retail mortgage salespeople who are already acting as a fiduciary, but want to be able to have a dis-interested third party verify this for the consumer.

    So when I blog about retail mortgage salespeople, this doesn’t hurt our company but instead, has attracted highly competent and already-acting-as-a-fiduciary loan originators to our professional assoc,

    See, we all act out of self-interest, more or less, to SOME degree. However, along with that, we hold a belief that we actually can help the industry move towards “professional status.” I love teaching the ethics class because the majority of retail mortgage salespeople grow a little bit from the time they walk in the classroom, to the time they leave. It is a total kick to help people grow.

  49. Hi All,

    Okay, I will write a blog article on AfBAs/CBAs

    (Affiliated business arrangements also known as controlled business arrangements)

    However, I like to think about my blog articles for a while before I write and post. Watch for this after the one I already owe Rhonda on lending institutions. I need to think about the very best way to help the readers.

    Perhaps I’ll use a voice as if I am talking to a consumer such as a first time homebuyer or home seller, kind of like I did with the one on APR.

  50. Jillayne,

    I did not respond to your item in regards to AfBAs/CBAs because I figured that you would come up with an answer on your own. Your a smart person.

    I like your reply (to yourself) in comment # 54. I think that you are on the right course and look forward to your future postings.

    Please keep in mind that it is important to include those that you feel you may be at risk of disconnecting from. I wish you the best of luck and offer any assistance possible.

    I agree with Diane and her comment # 41

  51. Jillayne,
    Ethics seemingly always get displaced when the almighty dollar is involved. Many people who may have good intentions get sucked into the vaccum of greed and will stomp on their own ethics and moral codes to make a buck. I, like you, have seen an array of people come in and out of the mortgage business and have been startled at the lack of education required to poses a license or for that matter to just book loans.
    For instance, I have a financial planner. She is wonderful at her job, well educated, highly recommended and licensed. Before I even sat with her for advice, I made sure to do my due diligence. I made sure her license was in good standing, made sure she had no bad “google” refernces, and checked with the Better Business Bureau too. Even after I sat with her, I made sure to consult a 3rd party to check that all my t’s were crosssed and i’s dotted. Having mentioned this, I want to tell you that in all my years in the mortgage industry I have never had ONE person/client do even half of what I did. I would like to take all the credit and say that I am the greatest sales person in the world and that I can walk on water, but I believe it is either a general apathy towards it, or an overwhwhelming feeling of “where do I start”.
    The American dream, at least until 2007, was home ownership. So many people just want that house, and will sign now and ask questions later. I believe that 3 things need to happen. 1) consumers need to take accountability, use all the sources of information available to them (i.e news media, internet, etc…). 2) Disclosures and information to consumers needs to be mandatory and needs to be simplified. The disclosures we give consumers with respect to APR, ARM’s and fees, are borderline scientific. Most people I have dealt with inthe industry, couldnt tell you what APR stands for, how to calculate it and what its significance is!!! SCARY.
    3) Higher government standards for licenees and brokers. I believe that brokers and mortgage loan originators need to be on par with other professionals with respect to education. Mandatory educational requirement may help.

  52. I think LOs need to have more trainings avail for them on how to handle disclosure in order to help borrower understand them more. I often attend closing with my clients, and I noticed that there are lots of paperworks but not enought time for borrowers to review them. I think Escrow papers should be breif and to the point to avoid too much and confusion to borrowers.

  53. Most borrowers I know use the disclosures and packets for kindling. It is hard reading, has a jargon of its own which most people aren’t famaliar with, and we dump 100’s of pages of this on them at once. Who would read all this? It is our responsability to guide the customer along the way and make sure that they understand everything. Unfortunately, some people just want to sign the papers and don’t care about anything about the loan details.

  54. Good Reading! Thanks Jillayne for pointing me to your blogs. Not sure what to add here – many angles to think about. I do admit that I am one of those real estate agents who have from time to time, also represented the borrower in obtaining a mortgage. I consider it to be 1) VERY difficult to wear two hats and have two files going and 2) beneficial for the buyer. Since I don’t need to make any more money in the transaction, I can offer significantly reduced loan costs.
    As a rule, I do not like this role but as I said, it can have it’s benefits.

  55. It seems one of the problems you spoke of is retaliation if one blows the whistle on shady dealings. In other words their business will suffer the consequences via referals ect…Should not the State have a system avalible to recieve complaints from in house (moral) associates which would protect their idenities? It really comes down to “Treat others the way you would want to be treated”

  56. I’m not a real estate agent so I don’t know what they are allowed to do or not do. My question is as a person and a “proffesional” do they not have a morale obligation to help prevent their client and fellow human from getting screwed?

  57. I agree that they “system” is broken. I believe as individual Loan Originators, or Real Estate agents, it is our responsibility to do the right and ethical thing for our clients. I started my Mortgage career with a very Unethical lender. I couldn’t even sleep at night, so I quit and went to work for another, more ethical company. We have to police ourselves. If we are working in a company where most of the people are ethical, and we see someone who isn’t; it is our responsibility to call them on it. After all, the way they are doing business is going to effect the way people perceive the entire company. It’s the old “One bad apple spoils the whole bunch” theory.

    Regulations have helped some. In fact, the company I started my career with, has been fined many millions of dollars, and may even be out of business now. Hurray!!!!!!!

    The government and agencies can only do so much. It is the responsibility of those of us who are ethical to speak up and be self policing. It may not be popular or comfortable to be that way, but we will have the respect of our clients and the other ethical peers we associate with.

  58. I enjoyed the article. It was interesting to see through reading this article how circular the process is and how we got to where we are today. I can see how ethics plays it’s roll in cleaning up and raising standards in the mortgage area. It really starts at the individual level and treating others how you would want to be treated.

  59. In reference to the challenger analogy that was provided in the beginning of this article there is also a comparable aviation analogy with the Alaska Air mid 1980’s flight pin failure. There was a similar worn part of the plane that was warned to be ready to fail by one of the head mechanics and due to GREED the company pushed planes of repair lots, flew them longer than suggested and maintained them less than required. Eventually one of the planes that had been scheduled for repair eventually failed and ended lives. The single flaw of this aviation design was that if this one part failed than the entire plane also did. In the mortgage industry their isn’t one single part of the business engine that if overlooked all loans will crash. It requires multiple failures, a greedy loan officer, a uneducated consumer, a sales driven corporation. That is why I feel it impossible to point a finger at one single group of this conundrum and say “that’s to blame for the crash.

  60. As long as greed is in the system we’ll probably continue to see some form of disintegrations until the ones at the top are truly held accountable. Otherwise, expect new names and new games.

  61. Jillayne,

    That article was very good and right on point! i agree on all of the bases you talked about. i believe there is and was pressure on appraisers and they wanted the repeat business along with the lenders to push loans though fast to their bigger clients. lets hope this all changes and we get back to basic lending and good moral ethics.

  62. Exactly we all know what is going on in the industry and nobody said or did anything and just followed the trend. It is about time to change. Lets all take responsiblity to do it now and do it from myself. Then we are powerful to make a difference and to fix the broken system!

  63. The points that were made in this article were right on. As long as we keep going along with the current systems and ways of check and balances, these problems that we are having will never subside. Here is what I see: everybody in the transaction, including the client is responsible for making well informed decisions and giving well informed advice. We as originators are responsible for properly advising and educating our clients, so that our clients can make well informed decisions.

    I feel that there are too many products to choose from, to loose advertising laws, and we as professionals are not being personally held accountable for our actions. There needs to be more structure on a national level to make this profession more well respected.

  64. The business practices described here are still being used today by the retail lenders. I was just in a Bank of America location and saw a pamphlet talking about a zero cost loan with NO explanation of how this works, what this will cost the homeowner or what other options are available. Yet another example of deception in advertising.

  65. Laney, I disagree. I was in the escrow/title industry before being in mortgage. It is the loan originator’s job to make sure the borrower understands everything. Escrow is a neutral third party and with some programs, may not be aware of all of the nuances of the mortgage product that is being selected.

    Ideally (I know I’m saying ideally) the consumer should not have questions at the signing table. They should understand their mortgage before hand and attend their signing with their Good Faith Estimate and Truth in Lending in case what is presented at closing doesn’t seem to jive.

  66. It’s interesting to go back in the archives and read the posts and comments. Nice comments Jeremy, where have you been lately?!

    Regarding the designation “Mortgage Professional” debate, I would say that we need to have additional certification and education (without exhorbitant costs) available. Jillayne is certainly doing a good job locally.

    Regarding the “No Cost Loan”: I used to to be at a broker that successfully (and almost exclusively) advertised that feature. Competitors complained. DFI told him that he had to state that we had loans other than no cost, and to explain the implications of a no cost loan (higher rates).

    So, the first thing on his website shows no cost, no points, and paying points, and the relative merits of each, including that no cost loans have higher rates, and high cost loans have lower rates.

    Seems simple enough. It’s not as if no cost loans are immoral or inherently harmful.

    Re escrow explaining loans terms. They mostly do, but, it would be business suicide for a closer to point out the flaws in a loan at closing. No paycheck, and no future business.

    I would say it is the duty of an LO to point out the most important features of a loan at the beginning AND the end of a loan, and to make sure that the lender has delivered what the LO has promised.

    Finally, no system will ever be perfect. As in investing, there will always be winners and losers, good choices and bad choices, selfless decisions and selfish decisions, and all points in between.

    Borrowers WILL have to get better educated, if they want better odds of succeeding, or simply rely on luck at encountering an LO who will act in the borrowers best interest.

    It looks like it will happen.

  67. Another great article! I like the comparison to the NASA program and agree with another comment stating, the comparison of NASA is a good one because it shows that even with highly trained personal that a system can go wrong when a political or financial influence is introduced.

    I also agree with you in the statement that their will never be enough governmental elements available to regulate each transaction. This is why “raising the bar” for licensing and self regualtion is so important. It will assist in providing a level of authenticity and ethical standards that cross all channels of the loan transaction i.e. the appraiser, lender, loan originator, escrow etc.

  68. Reading this article just makes me realize just how naive people are in this society. For hundreds of years people havebeen making choices based on greed. As a result some government specialists, from statistics, knows in general what percentage of people or companies will push the envelope between greed and using good ethics. Sure the companies and individuals who took advantage of consumers are dissaponting and sad. But even if no one was dishonest in the subprime market the end results on the economy would not be any different. Because oureconomy is a mess andhas been a mess for a long time and the government economists need to take whatever steps they can to make short term progress and when that is done there will allways be a negative impact. In reality, the housing market has been a temporary band aid for the nations economy. Just like the .com boom of the 90’s, people jump on the wave and then when it crashes people atart blaming others when what happened was destined to happen. Andit will happen again and again in whatever arena consumers have faith and put their money.

  69. Once upon a time I was employed by a well know Mortgage Corporation. After a number of years of getting paid a double digit salary. ( not bad for a ex-school teacher) I suggested to the Chief Executive O-Ring that a great strategy to the corner the market might be to merely charge every one a flat fee. We would be renowned for our low cost loan. No matter what size of loan our origination fee we would be known for one rate for all.
    As I look back this would have been the first vestibule of self regulation. What a novel thought. My time with that coproration had come.
    Once again the rules of protocol have placed us in a fine to do.

  70. Its really our job to explain to our clients what happens thruout the loan process and how the GFE and TIL works. Too many times its just sale sale sale, we dont take time out to educate them on whats most important. I have friends that are escrow closers and they tell me they seen the worst of it and its good to point out that they have to remain neutral cause thats their job. Good points on this article!

  71. Yes this is another good articel. I have really enjoyed reading the part about how the retail mortgage sales people have no mandatory ethical duties to the homebuyers or homeowners who want to refinace their homes to put the clients needs above their greed, and try to make as much money on each consumer.

  72. Jillayne, re your response to Laney: “The duties you describe are the duties and responsibilities of a licensed loan originator, at the beginning of the transaction”

    I’m hoping you are including all loan originators (like those who work for banks-WaMU, Countrywide, Wells, BOA, Chase, etc) and credit unions…shouldn’t this be the first job of ANYONE who is originating a mortgage and not just those of us who are held by higher standards and regulated by DFI (those who work for Mortgage Brokers)?

  73. Roger, I agree. The no-cost mortgage has received a bad rap. I don’t like either when I see it advertised as a “no strings attached” mortgage. It does carry a slightly higher rate and all home owners should investigate all options (including pricing) to see what the best solution is for their scenario. No cost refi’s can be great as long as the consumer understands “where the costs are”.

  74. There are many times I have witnessed abusive lending. I really do wish more escrow officers and real estate agents would make complaints. This would really help bring this issue to an end. Loan originators have the same option, when the consumer is shopping around and talk about another offer.

  75. Its interesting to know that people are uninformed because people are afraid of increased liability. If theres something you want to say its probaly about something they should be hearing. So that leaves the client missing on important details. I liked the anology about the surgeon. The client has to make hard decisions on something that could effect there life, so the client is probaly gonna want to trust you since your the proffesional.

  76. LOs should make sure their clients understand the entire loan process and give the proper disclosures. No cost loans, when advertised, sound really enticing. Consumers should be aware of what they are getting into before signing anything.

  77. There is an accountability factor that needs to be adhered to, I believe the best advise for LO’s is “disclose, disclose, disclose” The more your client knows, the more comfortable they will be and we as LO’s can have a clear conscience, knowing we have created a win, win situation for all that are involved.

  78. I think now more than ever consumers are becoming more aware of the need to really investigate the type of loan program they are being offered by loan officers. With all the hype in the media about sub prime lending how can they not. It is still the job of a LO to inform the consumer about all aspects of the loan they are offering, there really needs to be a certain amount of trust involved in the whole transaction. The process of buying a home is a very important decision and needs to be looked at carefully by a consumer. No longer is there a rush to buy, buy, buy, so hopefully people will be more apt to slow the process down a little and look at all aspects of a loan they are being offered. Everybody wants something for free, and with all the no cost loans being advertised, consumers are being sucked into the sales person trap instead of being helped by a trustworthy, ethically sound mortgage representative.

  79. Good article, good examples and comparison. You are right, all is necessary disclosures to the borrower minuses and pluss of loan. Naturally borrower knowing that to it will more favourably agree to take the loan with smaller percent. I think broker morgige will not lose anything. In fact if it will satisfy interest of the borrower at it will more and more and more clients more.

  80. Just recently my father told me about when he bought our families first home in Renton WA in the early 1970’s. He and my Mother had to sign like one or two pieces of paper at closing. With the RESPA act there are now numerous pages and tons of disclosures, but as you said most consumers have no clue to what any of it says or means. The borrower really is put in a postion where they MUST trust their broker and, as we all know, in so many cases that is a not a good thing.
    I like surgeon analogy.

  81. Loved the comparason to the O-Ring. I think it’s long overdue for the education and licensing requirements for mortgage brokers and loan originators be set in place. With so many components, I think the only way we can begin to correct this is to hold each party accountable for their business practices.

  82. We trust those professionals around us to perform their work ethically, professionally and with knowledge. Bonds are a commodity, mortgages should not be. I believe it to be a vital part of the service I provide as a loan officer to be present at signing. Not always possible, but important. It is not the escrow officers responsibility to explain the loan program. The borrower relies on the loan officer to be forthright and ethical. The borrower has to assume some responsibility for understanding the loan, but it is inherent upon the loan officer to make certain the borrower has a clear understanding before docs are drawn.

  83. I see what your major point is; I see the system and each individual (real estate agents, home buyers, loan officers/mortgage borkers) is playing a role in your article. everyone in the system was faithful to what they were interested in (selling a home, buying a home no matter how much they can afford, and closing loans). it looks like they all lean on each other, leaving liabilities to each other. they all pursue their interest and financial gain. i think the sytem failure is due to unethical practices when pursuing the interest. what if the real estate agent thought about if the buyers were cabale of buying the house ?? what if the loan officers cared of if the buyers could afford the payment? what if lenders thought about the liar’s loans before they made the easy easy guidelines??

  84. You made an analogy of a dr handing you a book and then asking you to make an important medical decision. If I was referred by a friend to a DR told they needed to amputate my leg I would get a second opinion if that Dr. was working out of his home I would not enter, but continue down the road until I found another Dr. This isn’t a communist country there are not people telling us what to buy, where to buy it! We are given every opportunity to make informed decisions. With the internet there is absolutely no reason the consumer cannot do there homework. I absolutely disagree with the Escrow officer telling the consumer anything in regards to the loan, PERIOD! He or She has no idea the time spent, the credit score, or any of the contributing factors on the deal. I’ve actually had an escrow officer kink a deal in our office years ago telling the consumer that the loan wasnt a good loan when it was. She knew nothing of the circumstances or the consequenses. She was subsequently let go and right fully so! Im not saying it should be open season on the poorly informed consumers. We all know somone in the industry who is ethically challenged. Hopefully there days are numberd.

  85. Many of the points you made in this blog are feelings that I share. I really dislike the way that mortgage companies advertise in the same way as your example, $200,000 with a payment of $662 a month. If people really knew from the beginning that this payment was probably the minimum payment for the loan, which means that interest is being added to their loan amount every month, resulting in a larger loan amount and less equity every month, I doubt that the consumer would opt for this loan. Also, I doubt that the consumer would really give a second thought about the company that put this ad out in the first place. I think that it’s immoral and it’s not the way I would choose to do business.
    Also, wow! 4 points on a loan? That’s an insane amount to charge someone! I only charged a point for my first loan that I’m working on right now.

  86. I found the Challenger comparison to be quite insightful in illustrating what happens when either a stubborn adherence to protocol or blatant self interest is put ahead of the best interest and actual facts of a given situation. If everyone in the real estate and mortgage industry acted in an ethical manner there would of course be no problems, but unfortunately, human nature being what it is, this is an improbability. It seems to me that more effective self regulation is needed as well as a willingness on the part of the consumer to be proactive in educating themselves before making major financial decisions.

  87. I enjoyed this article. With everyone in the chain, the LO is really the first link. In order to have a clear conscience and future business, you must make sure people really undertand what they are signing.

  88. We all have duties and responsibilities as a LO and I believe the best advise is to disclose, disclose, disclose. I for one dont think there is a problem with acting as an Agent and LO as long as all parties agree….I mean why wouldnt you want to offer your client the same outstasnding and ethical service on both ends, if your client trusts you to do one service and you are licensed and well educated why would you help them……at least then you would know they were getting served right! As long as everyone is one the same page and working towards the same goals then everyone will be happy at the end of the process. If you know that thre is something that is questionable then speak up (and that goes for everyone) when it comes to your money, personal information and future as well as your being there is no such thing as a stupid question…..

  89. Taren-

    In a perfect world there would be perfect agents/LOs, but in reality there is a conflict of interest. If both roles are paid based on finalization (is that a word?) of a sale, then I don’t see how the customers interest is taken care of. Unless there is stronger oversight, stiffer penalties, compensation restructuring,etc. I don’t think agents/LOs is an acceptable combination IMHO.

  90. Jillayne, I believe many of us in the industry have seen the subprime crisis happening and I know our firm has been self-selective (in that we have talked countless people out of applying for loans they might not be able to afford) for years as a result. I like your analogy to the Challenger crisis and agree that what we have seen in the subprime market has been similar, and on a much larger scale at that. In the long run, we will hopefully be able to work together to avoid something like this again. I already see things changing.

  91. They system had been built and has the necessary checks and balances emplace. What it comes down to are the individuals in those jobs. We have a duty to our clients and referral partners to use what has been built as well as our voice. We have to either speak up or not use the Escrow, Appraisal, or Real Estate agents that don’t provide the real services needed for our clients and don’t meet the standards set by licensing and regulation. Understanding our duties should be taught or hit on a little harder. In any great Business Model it comes down to the people. Our government is making changes and setting forth standards. Of course I always have wished they would employee people with a little more foresight.

  92. First, in response to your multiple comments “The industry is out of balance. TOO MUCH of a burden is place on consumers who don’t know what all the language in the loan documents means. I made the following analogy: A person has to undergo surgery and the doctor hands the patient a set of medical books and tells the patient to read the books and make a decision.”
    There is currently legislation going on about Credit Cards based on similar arguments. It appears that the whole “Credit

  93. Definitely many elements to the real estate lending business for sure. In agreeing with everyone, that are system is imperfect in this business due to so many variables and areas for error and misguidance. One key factor that I must comment on is that as I personally take every step to make sure every one of my clients understand fully the loan they are getting and also see a benefit in the transaction, the reality is that many of them I find are so caught up in the emotional aspect of the transaction that it doesnt matter what I say or give them to read because they have been referred to me and trust me. Referals and trust are good but I stress to them to understand the loan and the transaction always. The other thing is esepcially in my cases, i have a very cultural database of clients which in many cases my referal sources are very strong but at the same time, I have come to realize this. As much as our system of lending is fixed or updated for the better, there will be many clients out there that will still never understand what they are getting, just know or feel they need to something and will find someone to trust or say yes, or a hungry lo will find them. This unfortunately will not be prevented any time soon. While I was I was in the east coast for a few yrs, I had a past client of mine who lives in washington who lost my number but was trying to get a hold of me. Unfortunately, they were in a hurry so they went to a local HFC bank to refinance their loan and get cash out. Although they did not fully understand what was going on, they just knew they would get the cash they needed. Everything was properly disclosed to my client and discussed but again, they really did not understand due to language barrier, just the bottom line of cash back. To feel better about it, they took a friend of theirs who has been through many transacations herself to make sure she was doing the right thing. The papers she ended up signing were over 9.5% and 5pts origination which the friend agreed was ok as well. Imagine what type of loans her friend has gotten in th e past. Again, the the bank disclosed everything properly and the customer signed. Done deal. She was 80% ltv 660 full doc. Unbelieveable.

  94. While analogies generally aren’t perfect, I like them as a way of giving perspective. The ones put forth in this article, as well as the airline analogy in comment #68, are great. One good thing about the Challenger and Alaksa Air analogies is that people saw the problems and tried to do something about them, displaying competence as well as heroism. Unethical loan originators, as the consumer’s first point of contact with a bewildering world, need an application of the stick. Is there some kind of carrot for those who see problems and try to do something about them?

    One thing that came up earlier in this series just came to mind: the whole American ideal of home ownership. Are people with homes happier than those who rent? Renting can mean a lot more freedom. If more people were prepared to throw up their hands with the whole home-buying affair, that might encourage the industry to come up with better ways to behave.

  95. Thank you for this post. It was very helpful in seeing the holes and flaws in the whole system.

    As far as the L.O. side of things, I stand by my previous comments about changing our thinking from being a retail industry to being a service industry. If we have a service mindset, doing things like taking the time to explain disclosures well would be seen as a value that we bring to our business.

    I know the problem gets down to the fact of personal integrity. No matter how the system is tweaked and improved and regulated, there are still going to be those who lack integrity and who look after their own earning of the Almighty Dollar. There are those who lack integrity in every industry. Maybe ethics training can speak to the issue of personal integrity!?!?

  96. Pingback: The Financial Crisis Inquiry Commission is Interviewing the Wrong People : National Association of Mortgage Fiduciaries

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