The mortgage business needs to clean up.

This is not a bubble post. It is a post about lending.

Having loan officers and mortgage brokers with Fiduciary duties to their clients is a small step in the right direction. Take a guess as to what the paint spells on each of the individuals chests as you read the link below.

Live from Kirkland, Wa. ala 2005-06.

78 thoughts on “The mortgage business needs to clean up.

  1. From that link, I can’t see where we would be able to ask the author questions about his time spent at Merit. Readers are left to assume he use to work there based on the picture and all the insider information.

    At first, it is unclear as to if the article is a confessional or offering insight. Then further on down, the author blames the downfall on the subprime mortgage crisis.

    “Appears the party really is over.”

    Thank you for that deep insight, Bryan.

    What would have been more interesting: Bryan telling us what he’s learned from his time spent at Merit. He talks all about other people in the article but fails to address his own role in the Merit demise and the subprime crisis. I suppose that would have been a buzzkill to have to think about.

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  3. Pretty gross, huh? I relate to how he says that you tell borrowers “I can’t help you and if I could, you wouldn’t want it”…sad thing is, they tend to find it at places and/or LOs like the article.

    He misses (as many do) that only LOs who work for Mortgage Brokers (not mortgage banks or credit unions) are held to the higher standards by Washington state. Look out California!

    “Still, there is a silver lining. Reform is in the wind. In the state of Washington, for example, new laws have been enacted requiring loan officers to pass state mandated exams which were, encouragingly, difficult. New restrictions on licensing barred all felons with convictions within seven years from originating loans. Many moved to California where, incredibly, law does not prevent felons, even those convicted of financial dishonesty such as fraud or embezzlement, from practicing in the finance industry.”

  4. So, I gotta ask..

    How far does a mortgage originator’s role go as a “fiduciary”?

    I have a pretty strict definition of what mortgage originators role should be. I’d like to hear everyone else’s input.

  5. Wild, Wild West indeed…what an ugly side. Consumers as cash cows rounded up by “rustling mortgage cowboys” for financial slaughter.

    Good thing this “lawlessness” is starting to change and the “good guys in the white hats”, who care about consumers as their clients, are taking back the town.

  6. How many of these former Merit folks are currently originating loans in other companies located in Kirkland, Bellevue, Redmond, Issaquah, Seattle and elsewhere? How many have started their own shop?

    Does the culture really change if you work somewhere else after you’ve been at a work place similar to Merit and others?

    If there was any other occupation I would gravitate to outside of escrow it would be law enforcement (specifically r.e. fraud and white collar crime). I have a good mentor in my old next door neighbor, former US Attorney John McKay.

  7. Hi Tim,

    The boys from Merit scattered all across the eastside. You will find them at any of a number of mortgage broker shops, still all hanging together.

    Just look for a mortgage broker who employs mostly all young men.

  8. Good morning, Brian.

    Well, we could start by saying the role would be opposite of the culture created at Merit:

    Merit encouraged and rewarded treating the consumer as an object to maximize fee income earned.

    A fiduciary would respect the consumer as person and not treate the consumer as a tool for ones own use.

  9. Hi Deborah,

    A corporation still must make money (within the bounds of the law) to stay afloat.

    Last time I checked, Merit and its former owners were not subject to any law-breaking investigation other than the labor law violations of deducting money from their employee’s paychecks in order to pay their own business B&O tax toward the end.

    The state regulator did not launch any investigation into Merit until they announced their shutdown at the beginning of May, 2006 because, they told reporters, they had never heard any complaints.

    There are many corporations whose employees and leaders wear white hats in public, and then behind closed doors, take off their hats.

    Look at all the large mortgage corporations that fell AFTER Merit, who told all the employees, while wearing that white hat, “everything is fine,” and then very quickly fired hundreds of people giving them all little time to prepare. Locally, MILA is another example.

    Corporate culture is complex, challenging, and not as simple as good/bad, black/white.

  10. That description of Merit is straight out of the movie “Boiler Room”. I wonder if they used the movie as a model for their corporate culture?

  11. Jillayne (re:10):

    I stipulate the first part of your comment; Merit, as presented here, was a breeding ground for leeches.

    Respect is such an ethereal concept. How might we demonstrate that concept in specific actions? Moreover, what specific actions of the consumer’s respect for us should we expect?

    (I’m leading you but I’m not fishing for a fight)

  12. Whether you are a lender or an agent, we help people accomplish what they are trying to accomplish. While there is an element of acting in their best interest, that really means the reverse, that we act without self interest in the thinking process. We can give advices regarding what we deem to be in their best interest, but mostly we help them achieve their goals, whether we agree with them or not.

  13. Ardell, well said.

    I would also add that there are times that the when the client’s ideas and perceptions are at such odds with the professionals, there are times the prudent course of action for the professional is to make the decision in advance not to enter into an agency relationship.

    Some have the perception that a real estate agent will take any business that comes along the way. Not true! I have to like and trust the client and believe that I can help them achieve their goals.

  14. I ditto Greg’s comment 16. That’s how I try to manage my business as well.

    If there is not mutual trust and respect amongst each other it can be torture. Especially considering you’re in a transaction for about 30 days.

    It’s very gratifying when you’re helping someone you like and care about.

  15. It’s okay to work with clients you like and avoid the others.
    Life is too short to work with people you don’t like.
    Rule #1 is to forget about “closing the sale” and instead inform, educate, and advise your clients.
    Then, let them make their own decisions because we don’t have to live with the consequences of their decisions.

  16. Agents have a BBA to establish a contractual agreement defining roles and responsibilities of each party.

    Doesn’t it make sense for a mortgage originator, banker or broker, to establish a financing contract to define those roles and responsibilities?

  17. Hi Brian,

    Okay, one more soccer game down and our team is still undefeated, I just finished making a homemade german chocolate cake for a party tomorrow and now my back hurts so I’m sitting down to catch up with you.

    Respect from the perspective of a professional business relationship would generally be thought of as honesty. When we’re completely honest with a client, and give them all the possible information they might need, and fully explain all the possible consequences of various options, that client feels very respected. Why? Because we’re promoting our client’s autonomy.

    We can compare that to what’s currently required by law, which is to hand a client a set of government-mandated disclosure forms within 3 days of the application; no explanation required.

    The behavior (or we could also call this a virtue or character trait) is honesty, the value is respect. We see this written within many codes of ethics.

    However, what we would not want to do, would be to spell out exactly what each LO must do, every single time. Now we’re moving out of the realm of ethics and back to just talking about law.

    For example, from comment 19, there are many states that require a disclosure form outlining the relationship between an LO/mortgage broker and his or her client.

  18. We don’t need more paperwork, we need better paperwork. We need the Finance Contingency to be improved so that buyers are not stuck with whatever they can get, being obligated to purchase regardless.

    Now we get “improvements” to the Finance Addendum saying the buyer has to say “Seller May I” when they are trying to be responsible borrowers. Let’s all say bend over while we’re at it.

    What we need is a “Guardian ad Litem” of sorts assigned to protect the interests of buyers, and another to protect the interests of sellers. These two attorneys, or task forces of attorneys, should review every stitch of paper called “the real estate contract” used primarly in this State, and every State. They should revise them according to people’s REAL needs, in language that people can readily understand, that protects them adequately.

    It should show the payment range within which the buyer is obligated to purchase. It should show the total cash needed to close.  The buyer should be verifying at time of offer, the source of those monies. It should have a drop dead date for an actual written loan commitment with NO contingencies, and the seller should not have to pack and move out until that written commitment is received. And all parties should be able to sue the lender if they renege on that commitment.

    Now that would be a change for the better, but don’t hold your breath.  But BTW, that’s how it was written when I started in this business.  So much for changes for the better.

  19. If I were a listing agent, the last thing I would want would be a buyer hoping around to various lenders after my seller accepted an offer partial based on the preapproval letter of another lender.

    One of my friends, who is a Realtor recently told me this story:

    “On my listing 2 weeks ago we got an offer, I called the buyers lender, [lender a] (which we are all doing in this climate) felt really good about him, accepted the offer.”

    Agents and Sellers do give the preapproval letter some weight on which offer they select. It is a factor, so to change that factor afterwards seems wrong to me. Plus, my prepproval letters say “buyer is approved with Mortgage Master” not “buyer preapproved for fannie mae with accept plus….”…her story continues:

    “A week or so later, I was told the buyers changed to [credit union], beccause of well intended parental influence. I was concerned. 3 Days later they went back to the original lender [lender a], Whew!! But,then a couple days later they went with [lender b], input from a financial advisor.

    Stong buyers 20% down, but still all these well-intending people just confused these buyers.”

    One good thing I see about this addendum is that buyers should do their research upfront regarding a lender. Not write up an offer on a home and then find one. Especially in the current mortgage climate we have.

    “Loan docs are at escrow, we close next week, we are fine…but it wasn’t very good of them to keep changing like the wind!”

    Happy ending…however more drama than anyone needed. She had a good enough relationship with the selling agent that she was kept informed. I wonder how many prior to the new addendum would fess up to the listing agent that the buyer is changing lenders and no longer with the lender they were approved with.

  20. Ardell

    You have indicated your displeasure with the current NWMLS financing contingency more than once. If that remains the case, why don’t you have your company attorney prepare a financing contingency as you would want your buyers to have? From all accounts, we are in a buyer’s market now and buyer’s will have plenty of leverage to add things to the contract that would not have been palatable to sellers in recent years.


  21. I’d redo the whole contract Russ. Especially with the recent revisions. But in my experience, the odd contract, meaning the one the listing agent has to actually read, is often cast aside. Often the counter is “to be resubmitted on new Statewide Form”. That’s what happened when Buyer Agency first came about in the early 90’s, in a buyer’s market, and we tried to submit forms that were more buyer friendly.

    Do I want to take that chance at the buyer’s expense of his offer not being given due and good consideration? It’s a quandry.

    What do you think of buyers or sellers agreeing to unknown “charges and assessments” at the time the offer is written? Who came up with that? Have you seen the new forms. I’m clearly tempted to change them rather than “teach” them to my agents.

    Who decided to have a “Statewide Form”? Couldn’t be the mls or the Board of Realtors. Who was it?

  22. Adell,
    Do you not have the right to present your offer to the seller? I know rules are different from state to state. Ours is a MLS rule. At one time all offers were presented to the seller by the agent that was working with the buyer,

    it is throw back of the sub agency days and all agents represented the seller. Most MLS and Boards have not removed it.

    I usually tell the agent that has never heard of it the rule and I have the right and if they wanted they could check with their broker. Of course the seller has the right not to, but I don’t tell them that.

    I try to present all my offers on behalf of the buyer. I have had my buyer(s) park around the corner and I would present my offer and then the seller and the listing agent would tell me to wait outside while they discussed it and I would go back in. If they had a counter and I told them my clients were around the corner I would be back in minutes.

    The part I like the most is, if it is a simple issue like timing or a little amount of money, as a seasoned agent I would ask the seller, besides the day of the week everything else is OK, so if the buyer agreed with the new day of the week we have a deal?

    PS, guess who the seller calls next time? Because usually the listing agent is the one that sold them the house and they know they didn’t do that.

  23. The biggest problem here Rob are the words “it’s our company policy to…”. Every time you try to do one tiny thing differently for the benefit of your client, you have to fight the battle of “our company” does it THIS way. It’s never about the seller and the buyer in those minor skirmishes, so you have to choose your battles carefully.

    Just because you get to present it in person doesn’t really help the situation. There’s no replacement for the standard forms being drafted correctly in the first place, from the standpoint of the buyer and seller vs. the various companies involved in promoting the form changes.

  24. Rob,

    I think you are correct that the next set of due$ and continuing education will eliminate quite a few from the agent rolls.

    The contract issues are not really related to being able to present the offer in person. You took it in that direction, but protecting the buyer from predatory lending via the Finance Contingency will take more than one person modifying the addendum. When you step out so the agent for the seller can talk to their clients, the end result is they want it resubmitted on the form “everyone” uses.

    Still, if we get into less of a seller’s market in 2008, it’s something to consider.

  25. Nice post. Thanks!

    I remember telling 3 people, when I was at Countrywide Full Spectrum Lending, that they didn’t want my rates….so C-wide fired me after 2 months. I closed 1 loan I think, a line of credit….and never got paid for it….I think I lost $100…. : )

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  27. I understand the real estate agents’ comments and can respect them. Let me rephrase my question:

    Wouldn’t a financing agreement, akin to the BBA that agents use, with a transparent fee agreement, benefit the borrower, originator, and real estate agents? It allows the originator to negotiate terms for the benefit of the borrower while insuring that his/her work won’t be in vain. It allows the borrower the very best chance at a REAL fiduciary relationship; loan recommendations won’t be swayed by “hidden compensation”.

    Finally, it provides a sense of stability to the transaction, knowing that no suurprises will materialize.

  28. national licensing for ALL mortgage originators = a better idea. To single out brokers and not include LOs who work for mortgage banks is wrong.

    Mortgage brokers are being blamed for “toxic mortgages” which were created by the mortgage banks and pushed by the mortgage bank’s wholesale reps and also provided by the mortgage bank at the retail level.

    Countrywide and WaMu were significant providers of options ARMs both retail and wholesale. Wachovia Bank is still pushing option ARMs on TV as if the making the minimum payment is the answer for when you can’t afford your full amortized payment because your dog had puppies. It’s totally being marketed to the wrong crowd.

    Yet it’s the mortgage broker who is getting the black eye.

  29. Rhonda,

    Interestingly, in the article that Diane referenced, the author does advocate licensing of all originators.

    “Common sense licensing requirements that are uniformly enforced could greatly help in weeding out the bad actors. A nationwide monitoring system that covers all mortgage originators could help prevent unscrupulous mortgage originators from moving across state lines or switching employers to evade detection.”

  30. Jillayne, the quote you reference, I’m all for. I’m sensitive to when the term “broker” is used when perhaps it should be “originator”.

    “…we need to bring a higher level of integrity to the mortgage origination process. The development of a uniform national licensing, education, and monitoring system for all mortgage brokers is worth considering.

    Some of the conduct and practices that I have learned about are shameful. It is no secret that, while not the norm, some fraudulent activity on behalf of mortgage brokers occurred.”

    I’m just after equality for all originators. 😉

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