Blind Men and the Transparency Mortgage Elephant

I just caught up with a great post over on The XBroker by Jeff Corbett called Transparency in the Mortgage Service Industries. As usual Jeff does an admirable job describing how technology is going to affect the industry, what disintermediation means and why borrowers should care. Jeff has been beating the drum of full transparency loudly and for some time now. In the interest of full disclosure: I too beat on that drum; just not with the rhythm and panache that Jeff has. He even gets a chance to flex his vocabulary with the word “rapine”. What caught my eye, however, were the comments following his post.

There seems to be a lot of confusion on the future for mortgage brokers/bankers/advisors or whatever title we give ourselves. (Before anyone comments on the multitude of differences between these various professions: I know. They are differences without distinctions as far as the general public is concerned.) Some have argued that the internet revolution will lead to ‘point and click’ lending, thus leading to the demise of our profession. Others argue that clients want the relationship aspect too much and will never leave the loan originator for the cold hard keyboard. These two opinions remind me of the story about the blind men and the elephant. In this case we have two blind men and they are at opposite ends of the Transparency elephant. Those that argue for internet automation have taken a hold of the trunk and are working with the leading edge. On the other hand, those who argue the relationship driven business model are feeling around at the ‘tail’ end of the elephant and may need to wash their hands. Both blind men, however, are missing the monstrous middle ground that constitutes the bulk of the elephant.

Let’s take a look at the tail end first and get done with the messiest part. If you say that your clients come to you because of the relationships you build and that you will continue to build on those relationships, I applaud you. If, however, you are going to continue rewarding your relationships with inflated rates and hidden rebates, you had better put down your game of Pong and take one giant leap into the 21st Century. The information is on the web for anyone to see. The public is out there researching day and night. The public’s rate of learning far exceeds the industry’s rate of change. It is not too difficult to look a short distance into the future and realize that most of our clients will understand how rates, yield spread premiums and commissions work.

That’s not to say – trunk holders of the world – that the information age will drive our clients to simple online mortgage origination. It has not worked in the securities field (our most similar sister industry) and it continues to not work in the mortgage field. Why? Because point and click loans only serve two customers well: the cream-puff, 800 score, full doc, 30 year fixed client and the clients that continuously “hit themselves in the head with a hammer” because they know everything. The former group should go online and get the best deal possible (although whether or not you can actually get a good deal online is debatable). These clients are so highly sought after and so easily placed that no real commission remains in their transaction, nor should it. The latter client deserves all the help we can offer but, God bless ‘em, they will not listen and it saves me from having to deal with a client from hell. Everyone between these two extremes, however, will continue to need the advice and consultation of someone who understands the myriad options and purposes of the loans that exist.

Taking care of a client has never been about finding the best rate and fees for whatever loan the client thinks they need. That would be equivalent to Doctors quickly and inexpensively prescribing whatever medicine the client diagnosed themselves as needing. Our job is to look at a client’s complete situation: debts, equity, plans, retirement goals, risk aversion and so on. We should advise them on what tools best fit their particular scenario and in the end we should always make sure that the final loan scenario passes the simple sleep test: will the client be able to sleep at night with this loan? The internet has the information, but learning how to use it is another story. When I began in this business an old and successful veteran told me that a new loan officer needs to see 100 deals before he or she has an understanding of mortgages. He was right. Our clients will see a couple to maybe a dozen loans in their lifetime. No amount of surfing the web will give them the expertise they need.

The internet has made our jobs easier because our clients are more educated to the options that exist. The internet has also decreased the gross (and at times disgusting would be more apt) profits in our jobs for the same reason. The information out there educates our clients and makes it easier to work with them on an appropriate liability plan. At the same time, this education makes it a lot more difficult to “take” them for 2, 3, 4 and 5 points on a loan. I have no doubt that every lender reading this believes they are worth whatever it is they charge. The key is to make sure your client agrees…

Filed under: BUYERS, INVESTORS, LENDERS, REALTORS , rebate, transparency

Faulty Headlines and Defaulting Home Loans

Our local newspaper has recently been ringing the bell of fear and apprehension in regard to the housing market here in San Diego County. Has the housing market come to a screeching halt? Have people stopped buying homes? Certainly the local economy is doomed by the “shattering event” of loan defaults and foreclosures. Let’s take a closer look.

On Tuesday we were treated to an article announcing a steep slide in home sales (New Home Sales Slide 3.9% in February – 03/27/07). On Thursday the front page headlines shouted out: Home Loan Defaults Skyrocket in County – 03/29/07 (emphasis mine). As you read further into Thursday’s article you find that “…homeowners throughout San Diego County are defaulting on their loans and losing their properties to foreclosure at an increasingly rapid pace…” The key word here is pace. They are not losing their homes at a record level or even new levels. In fact, we are currently experiencing defaults at about two-thirds the level of our record setting year of 1996. What has increased is the pace of defaults as measured against this same time last year. What is needed is a little perspective: at this time last year we were still experiencing well above average appreciation and home owners were able to sell their way out of any problems. It is not so much that defaults are abnormally high today, but rather that defaults last year (and the preceding 4-5 years as well) were abnormally low. As you read further into the article you discover that the default rate in San Diego County is approximately one-third of one percent (.0033); highly stressful for the homeowners going through it, but not particularly significant to San Diego County as a whole. You must read through 8 paragraphs and reach page 10 (below the fold) before you discover that “… (The) default and foreclosure numbers… pale by comparison to the number of loans issued and homes sold.”

The areas most impacted by homeowner defaults are “…houses carrying subprime loans…newly built South County communities… and among condo conversions.” It is no surprise that sub-prime borrowers are seeing a higher incidence of default rate, especially given the “creative” financing that lenders were pushing toward the end of the boom cycle we just witnessed. If you take a borrower already in debt, give them a loan for 100% of the purchase price, throw in the closing costs and base it all on “stated” income and “stated” assets, you are going to see some foreclosures. Also, specific areas are being hit harder; South Bay is an example here in San Diego. I suggest that this has more to do with the high percentage of new construction in these areas. People were purchasing new construction homes from builders of entire neighborhoods – with literally hundreds of homes to sell. Combine the potential for home price inbreeding with builder’s in-house financing and you have a recipe for inflated values and upside down borrowers.

New construction homes also help us to understand the drop in new home sales reported earlier. As we predicted in late 2006, the condo conversion glut that was dampening new home median prices would not sell out until the end of the first quarter/beginning of the second quarter of 2007. Now we are witnessing the very depletion of this condo conversion and new home gluttony and what do we see? Why, a drop in new home sales of course. You have to read much further into the article before it is reported that “…sales of existing homes rose in February (2007)”.

Am I suggesting that we do not have any problems in the local housing market? Of course not; we are likely to see defaults continue to rise. Not to mention the “neg-am” or “option arm” iceberg that is only now coming into view on the horizon. Will the housing market safely navigate that debacle or sail USS Titanic-like straight into it? Too early to say; I am only suggesting that the current situation is not nearly so dire as the headlines would have us believe. We should read these reports with an analytical eye and remember that newspapers, like any living organism, have a survival instinct. Good news does not contribute to sales and survival in the fourth estate.

To Your Success

Sean

Filed under: BUYERS, INVESTORS, LENDERS, POLITICAL & ECONOMIC FOLLY, REALTORS, SELLERS , foreclosures, option arms, San Diego, The Press

How Fat is Your Lampshade?

As many of you know, I compete in triathlons. Last Saturday I completed the California Half Iron Man in Oceanside. I broke six hours, which is a pretty good mark for anyone; but more importantly, I set a new personal best. It was, by all accounts, a good race and one that I was very happy with afterward.

A couple of days later I received an email from the company that takes pictures during the race, extending me the opportunity to buy pictures of myself swimming, biking and running. This is quite common now at nearly all races. I sat down and looked at the pictures after this great race and all I could think to myself was: “Look at how fat you are. Why can’t you get down to the body size you should be? What are you doing out there? You do not belong in a race with all those healthy people.” Those were my thoughts. The truth of the matter is this: if they were to somehow send me the pictures before the race… I would not do the race! My hang-ups, my fears really, would actually keep me out of this race I so enjoyed.

Now I know how crazy that sounds and yet how often in life do we “get” the pictures before we ever do the event? How often do we see ourselves as too fat or too inexperienced or too old or too young or too ignorant or too sensitive? Maybe we picture ourselves not having enough, or not deserving enough, or just plain not enough. How many times have our fears prevented us from picking up the phone or knocking on a door or “asking for the sale”, or a raise, or a date?

After thinking about this a little I realized that the people who know me, the people who like me… certainly the people who love me, do not see me as fat. They see the light inside of me. Then I realized that we can take the warmth and confidence that comes from being seen only for our light and we can carry it with us to meet strangers. Soon I began to think about all the times I did not go somewhere and all the times I did not meet someone new and all the opportunities I missed throughout my life because of my fears.
I was so worried about the lampshade… that I turned off the light.

My thought for today… my wish really, for all of you, is that you go out today and you shine your light.

To Your Success,

Sean Purcell

Filed under: BUYERS, INVESTORS, LENDERS, LIFE THAT POPs, REALTORS, SELLERS, TAO OF SPORT , Success, Triathlon