I’m beginning to wonder. I’ve always put the clients best interest first…it’s just something I naturally have to do in order to be
able to sleep at night. There has been a time or two when a real estate agent has told me that my job is solely to provide mortgages and not worry if the mortgage made sense or if someone is capable of making the payment in my opinion. This is one reason why I’m glad that I (and others designated as mortgage brokers) will have official fiduciary duties to their clients. Here’s a scenario for you to chew on that has me wondering if Real Estate Agents will be as accepting of this new responsibility…
Susie and Sammy want to buy a home. They know their credit is lousy and Susie actually giggles about it. However, their friends were able to buy homes over the last few years and so they should be able to as well. Susie and Sammy were referred to me from an agent I’ve worked with for many years. And if it weren’t for bad credit, they’d have none at all. Susie has no credit scores and more collections than you can shake a stick at. Sammy is a fluke of the credit scoring system and has managed a mid-score of 621 although the last time he used credit was three years ago…no one will issue him any new credit due to his proven track record of not paying for any account he opens. Sammy, if the scoring system were perfect and 100% accurate, would be credit scoreless as well. To top it off, they have no savings and would like a zero down loan.
As a “Mortgage Professional”, I review this information with them and I let Sammy & Susie know that they do not currently qualify for a mortgage (because they don’t). If they want to work on their credit and develop a plan, such as practicing making a mortgage payment by paying the difference between the mortgage and their rent into a savings account, perhaps we can develop a long term strategy. In no way is this couple ready for a mortgage. I’m not sure that I could (or would) have provided them a subprime mortgage had they met with me this time last year. As someone who is looking out for their clients best interest, I believe I did the right thing. In fact, even with “subprime” clients of yesteryear, I would let them know of their options: you currently qualify for a subprime mortgage with a rate of X; or you can wait a few months and work on your [what ever is causing you to be subprime] situation and then qualify for a better rate with FHA/VA or conventional. Why encourage people buy “right now” if their finances are a wreck? The choice on what borrowers do with their finances is really their own. Really, it’s not for me as a Loan Originator to determine whether or not they are worthy: we have underwriting and guideline criteria for that. With Sammy and Susie, they really have no options but to work on re-establishing credit and change their spending habits…and they seemed eager to do so. I set them up with a company to help them work on repairing their credit (because it was beyond what I could do) and they were happy (they never followed through with the credit repair).
A few weeks later, I get a voice mail from the agent. He’s upset and wants me to know that Susie and Sammy have found another lender who has referred them to another agent and they’re buying a home. I’ve been checking the county records and Susie and Sammy’s real names are not showing up–I’ll really be surprised if they qualified for anything except the hardest money loan available with a double digit interest rate or seller financing. Regardless, the agent is obviously not very happy with me since I did not “approve” them for a loan and someone else says they did (at who knows what terms). My subprime shoe-horn is gone and I would not have used it here anyhow…this couple is not ready for a mortgage.
Fiduciary duties for Washington State loan originators who don’t work for a bank-mortgage company will be here this summer (effective June 12, 2008). Are you ready? How will you feel if a loan originator with fiduciary duties believes that a home buyer should take six months to a year to improve their credit and have at least 3-6 months of reserves? When this legislation first came out and Jillayne wrote about it. I thought it was an advantage for brokers. Yes, once again it’s more legislation on brokers (excluding mortgage bankers) for the sins of ALL loan originators regardless of institution. Wouldn’t everyone want to work with a loan originator who has a legal responsibility to look out for their best interest (mortgage broker) verses one who has no legal responsibility (mortgage bank)? Perhaps some agents would rather their clients not work with someone who has fiduciary responsibilities. Consumers…you may want to ask your loan originator whether or not they owe you any fiduciary duties.
Dear Jillayne,
I have two residential loans that have been referred to me, one from a mortgage broker in Colorado and another from a credit union. Both LOs have already taken the loan application, gathered all the supporting documents, and sent the loans through the lender’s automated underwriting system. The credit union is unable to make the loan because the dollar amount is too large for their institution. The mortgage broker in Colorado is not licensed to do business in WA State. Both of these LOs would like their client taken care of but because of the amount of work they’ve done already, they would like to get paid on these files. Of course I would disclose all fees to the consumer, but is this even possible to do?
John.
Dear John,
Because of the subprime and now prime mortgage market meltdown, we are going to see some incredible changes taking place in state and federal law during the next decade. One of the main problems with the mortgage lending laws today is that mortgage brokers can only earn a fee if a loan is made. This sets up an external motivator for an LO to make lots of loans, whether or not the consumer needs a loan. This should and will change. Someday you will be able to earn a fee for, let’s say, giving a borrower valuable financial advice relating to their mortgage loan, similar to how you might hire a CPA to advise you on matters within their scope of knowledge.
Let’s first take the example of if YOU were in the position of referring a loan to another broker. Let’s say you didn’t have FHA approval, your cousin Vinnie over at XYZ brokerage did, and you wanted to earn a fee of X for sending the loan to Vinnie. This is not allowable under many state laws governing mortgage lending (and for WA state, see the MBPA.) You can only earn a fee when a loan is made and the loan originator as presented to the lender on this transaction was Vinnie. If Vinnie hands you some cash outside of escrow, this is called an “unearned fee.
When I read the news on HUD’s proposed reform of the Real Estate Settlement and Procedures Act (RESPA) I was skeptical. Cathy from Sequim challenged me to read the 96-page federal register document so we could all figure out what’s going on. I am here to tell you that there is one very good change coming out of this proposal. In fact, it’s so good that I am borderline hopeful that this change might do what legislation is suppose to do and what HUD forgot to do when they signed the original version of RESPA in 1974. But first, the changes that will have many, but not all mortgage brokers screaming bloody murder:
HUD wants to make the Good Faith Estimate (GFE) look the same, no matter where homebuyers apply. Right now there are many off-the-shelf (OTS) software systems that make the GFE look different from company to company. Also, some OTS software can be modified. Some fees, for example, the Yield Spread Premium (YSP), are shown down at the bottom of the form, below the “total costs
Two Senate bills have been introduced into the state legislature this session.
The first bill, SB 6381 (link opens a 2 page PDF) will change the state’s Mortgage Broker Practices Act to require that mortgage brokers owe fiduciary duties to consumers. In order to make fiduciary duties meaningful, they must be extended to include the loan originators that work under a mortgage broker. The legislature should make that crystal clear. Many LOs work out of branch offices and are unsupervised on a day to day basis by their broker, who may be located in a different office or in a different state.
[photopress:capital.jpg,thumb,alignleft]I recommend that the state legislature also include not only mortgage brokers but businesses licensed under the state’s consumer loan act. We must not forget that the two largest predatory lending lawsuits in the United States were settled with companies that were NOT mortgage brokers but consumer loan lenders: Household Finance and Ameriquest. If we do not make this change, unscrupulous mortgage brokers may just change the way they’re licensed. This loophole should be closed now.
The second bill, SB 6452 (link opens an 11 page document) also changes the state’s MBPA in an interesting way. At the bottom of page 3, this bill would remove a mortgage broker’s ability to quote a Yield Spread Premium range. Recall that brokers can see the wholesale cost of mortgage money, and elect to quote a higher interest rate to the consumer and earn the difference as profit. Sometimes, when a borrower wants a “no cost loan
This is part one of a series of blog articles on the subprime mortgage market correction. In today’s article, I will briefly sketch the rise and fall of subprime loan products and their relation to predatory lending practices within a capitalist system.
When I first entered the industry in 1985, Conventional loans were the cream of the crop. There was no risk-based pricing. Everyone received the same interest rate on their conventional loan whether they had great credit or a few late payments. Homeowners with very poor credit, lack of job stability, zero cash reserves, and unverified source of funds to close, were not approved for a mortgage. It was a very big deal to decline a loan. As a mortgage loan underwriter, I was told our job was to make loans, not decline loans. We had to try our very best to help our company figure out a way to help the homebuyer. Declining a loan was serious. We had to state rational, good reasons why a homebuyer did not qualify. That all changed with the introduction of risk-based pricing into the mortgage lending market.
20% down
10% down
5% down use to be considered very risky.
3% down buyers were directed to FHA loans
0 down use to only be available to veterans
0 down seller contributions to closing costs is currently the norm for first-time homebuyers.
0 down seller contributions, pay-option ARMS, interest-only, negative amortization use to be available only to the most savvy and credit-worthy of homebuyers.
Hard money which was re-named subprime lending moved in the same direction. Subprime started out years ago with high interest rates and a very large down payment required. In our capitalist economy competition heated up and we saw a relax of credit standards in the same direction; from high down payment to 0 down, which coincided with the introduction of risk based pricing. The more risk, the higher the price.
This ended up pushing a huge amount of homebuyers into the market, and infused the industry with a tremendous amount of job growth in the lending, banking, title, escrow, appraisal, and real estate agent arena. Corporations must earn a profit (within the bounds of the law) so corporations continued to push for profit growth. We live in a democracy (although my econ professor believes we live in a system where corporations control our political system.) It doesn’t matter which political party holds power: Democrats or Republicans. BOTH parties push homeownership onto the American public as the dream every person in America ought to be able to achieve. Government-sponsored, low down payment homeownership programs sprung up all over the country. On a side note, it might be an interesting topic for a longer post to see how those homeowners are doing default-wise.
About four to five years ago I started seeing a lot of real estate agents structure offers for 0 down clients + seller contributions to closing costs. The mortgage products were out there being marketed by wholesale lenders to street-level loan originators.
In the classes I teach, I continued to bring up the question: “What happens if the house doesn’t appraise?” The agents answer, “The house will always appraise; we’re in a rising appreciation market.” My follow up question is, “When you create a new Comparative Market Analysis (CMA) a couple of months later on a similar home just down the street, don’t you want to know if that sales price included seller contributions?” Everyone answers “yes,” but at that time, there was no way of obtaining that information short of calling the former real estate agent. Some agents return phone calls of this nature, some do not.
With little regulatory oversight in existence for mortgage brokers and consumer loan companies, (although they argue that they are HEAVILY regulated) the mortgage brokers, consumer loan companies, and the wholesale lenders have had a field day with profits. ALL the real estate agents I talk to, and I meet thousands of real estate agents every year, with regards to predatory lending considered this a problem of the mortgage lending industry, acknowledging that there “could” be effects on the real estate market, but without actually feeling any of those effects it was always someone else’s problem.
Our state regulators DO have money set aside to go after the most egregious cases of predatory lending and mortgage fraud. However, government was never intended to police every single deal written by mortgage brokers and consumer finance companies. There is just not enough government re$ources available to do this, and there never will be. In Part Two of this series, I will outline possible solutions that go beyond harsher government regulations.
Every one of us in the industry WILL feel the effects of the subprime collapse. We might feel it in more or less intense ways, some of us sooner, some of us later, but this will affect us all. From Rhonda having to make those difficult calls to homebuyers to real estate agent’s homebuyers who were approved last week and now those loan products are now no longer available.
On the up side, the industry might experience a rush in homeowners seeking to refinance into fixed rate mortgage loans which will lead to an increase in business for title, escrow, appraisal, and lenders this year. Mortgage brokers and consumer finance companies that blatantly ripped off consumers will not see repeat business. Those customers will go elsewhere, as they should. Mortgage brokers who have ONLY done subprime will find it challenging to become approved as an FHA lender as FHA has many rules to follow including the requirement for loan originators to be W-2 employees and many brokers pay their originators as contract workers. Consumers are sick and tired of bait and switch advertising and hopefully won’t fall for it this time around. Those companies will go down, their loan originators finding jobs scarce since their only training has been hard-core, script-memorizing, pressure-laden sales tactics. They have specifically chosen to be in subprime for the money and only the money. They will exit the industry and find another unregulated industry.
Treating home buyers (and refinancing homeowners) only as a tool to maximize profits is one business model that is no longer growing profits at previous rates. These companies are refi machines built on marginally to blatantly deceptive direct mail or email campaigns and they exist in every market in the United States. The market now sees a decline in profitability and in a capitalist system, profit drives morality: what’s profitable is good, what’s not profitable is bad.
Brokers, lenders, and banks that have always operated their business with a foundation of treating consumers with respect will survive and thrive. By respect, that means declining some loans because sometimes this is the most respectful thing to do, and yes, real estate agents, this WILL affect you, no matter what price range or neighborhood you’re in.
It is way past time for a mortgage market correction and I am hopeful that our current subprime crisis will lead us to a better place in the mortgage lending industry. I for one welcome the winds of change.
Part 2 of this blog article will examine the deeper relational-structural issue at the foundation of our current mortgage market correction and propose possible solutions.
Syndicated Columnist Kenneth Harney will report in his column tomorrow morning that the new chairman of the House Financial Services Committee, U.S. Representative Barney Frank, a Democrat from Massachusetts, has made it clear that his top priority will be enacting nationwide mortgage lending standards to protect consumers from predatory lending.
I was recently asked by a national housing coalition to sign an endorsement letter for the purpose of showing Congress that there is broad support for federal anti-predatory lending standards which do not preempt state laws. These ideas will be included and give to Rep. Barney Frank:
As Congress begins a new session, we respectfully ask that any new anti-predatory lending legislation be based on the following principles:
- Considering a borrower’s ability to repay in lending
- Eliminating the incentives for steering borrowers into predatory loans
- Ensuring that loans are serviced fairly
- Protecting the right to go after predatory lenders
- Preserving states’ rights to protect against predatory lending
- Preventing foreclosures
[photopress:bankersbrokers_1.jpg,thumb,alignleft]Let the wild debate between banks/mortgage brokers and consumer advocate groups begin! This is one area where the banks and brokers will more than likely combine their lobbying dollars together.
The biggest concern I have for any new federal law is: How are we going to regulate this? Is the money going to come out of my tax dollars? I don’t think so. IMHO the money can come from the profits of bank, credit unions, lenders, and brokers. If you don’t want to self-regulate your own industry, then please don’t make the rest of us pay for it.
[photopress:predator_1_2.jpg,thumb,alignright]We can always ask Chris Hansen from Dateline NBC for help. “You’re naked, holding a container of cool whip and you’re trying to sell an adjustable rate, interest only, pay option ARM to the cute 18 year old mortgage lending prospect in the next room. Is that accurate?