The Future is Here… and it’s a Rodeo Clown

Last week I attended a conference in Las Vegas for Mortgage Planners. It was the second meeting of it’s kind and, I believe, the largest gathering of mortgage professionals ever. The main topic of the three day conference is something you are going to be hearing a lot about over the coming months: mortgage planning as a method to increase assets and wealth. I appreciated this conference and I enjoyed the cowboy flavor that still exists in this desert town. I also came away with two things: a lot of good information and a healthy little fear of rodeo clowns and dime store cowboys.

Please do not misunderstand, I am all in favor of this movement. So much so in fact, that I and a few others here have been practicing it for years. Of course, until recently we did not know we had a name (Mortgage Planning Specialists) and there was certainly no marketing material or training. Myself and others were simply practicing what we had learned in the securities business, which is where most of us started. But as a wise man once sang , “times, they are a changin’.” This conference with over 3900 attendees included books, training programs and seminars by specialists who have been practicing fiduciary responsibility and mortgage planning for ten and even fifteen years. There was an overt emphasis on taking care of the client but there was also a more subtle message that anyone can do this with a few hours of training and some fancy software. This is the part that scares me.

The idea that a mortgage is the most important tool in a person’s investment portfolio is not new. Nor is the idea that people should be taking better care of their retirement (the average Baby Boomer has less than $56,000 put away for their golden years). The mistake of paying down your mortgage and the great lies called 401Ks are all well documented. Again, many of us have been working with our clients on their entire financial picture for years. What is new is the idea that this is another way to “generate business”… a form of marketing . This should be scary to everyone that hears it. Does it even have to be said that 18 hours of classroom training and a Certified Mortgage Planning Specialist certificate does not make you a financial planner? No more so than the idea that because you spent $1300 to get the certification you are qualified to advise others on their spending.

As this idea takes off – and it is going to be the buzz in our industry for a while – let’s make sure that our clients’ best interests come first. Ask yourself, if you get on a plane, do you want the pilot to be the guy that just passed his test and received his civil air license? Or do you want the pilot to be a former Top Gun Aviator with 15 years of experience? I am all for the client receiving the best advice possible. Based on my experience as a stock broker, options trader and loan originator, sound, experienced advice is not even enough; I believe that loans should exhibit transparency the same as investments do. Most importantly, however, debt based financial planners should not be inexperienced loan originators dressed up in the clown’s makeup of a marketing plan; fueled by seminars, slick advertising and designations short on experience and long on gravitas. That type of dime store cowboy is referred to as “all hat and no cattle”. I will finish with one last bit of cowboy wisdom: when you are approached by someone with a mortgage planning title and a well funded seminar, make sure “this ain’t their first rodeo”.

Filed under: BUYERS, INVESTORS, LENDERS, REALTORS, mortgage planning, transparency

Transparent Lender Greed

“FAIRLY WARNED BE THEE, SAYS I” fish restaurant pirate from The Simpsons

I had the privilege of meeting with the nicest couple last night. I consider it a privilege anytime someone invites me into their home and I am twice blessed if they do so for my advice or liability coaching. That being said, it was not a meeting I was overly excited to attend. You see, I had been invited at the request of their Realtor to look over loan docs and share my opinion. Based on my conversation with the Realtor beforehand, I knew this couple would have little to no options and my visit would most probably be a fruitless one. A large part of my business, however, stems from the honest consultations I provide for the Realtors who count on me. Besides which, there are a lot of good people in the lending business and anytime I have the opportunity to repair our general reputation, I consider it a responsibility; which brings us back to last night.

Some quick background: both of these fine, young people serve our nation in the military. They both work in a sensitive area requiring that they be above reproach and this means, among many other things, that their credit must remain strong. They are being transferred soon, need to sell their home and so contacted a Realtor who had impressed them with a listing down the street. During her discussion with them she learned they had recently refinanced their home and were still upset about it. She asked a few more questions, and then I received an anxious call asking if I could please meet with them. Now we are up to date save for one thing: this nice, young, military couple is facing the very real threat of losing their money, their home and their jobs.

In February these homeowners were solicited by a lender to refinance their existing loan. At the time they had a 30 year, fixed rate loan at 6.125%. This may not have been the perfect loan product for them, but it was certainly a safe, reasonable and well priced vehicle for their investment. They told this new lender they did not need any cash out of their home, but if the lender could lower their rate and payment they would be interested (who would not?). A few fast phone calls, some misleading Good Faith Estimates and one very large stack of legal documents later, this fine young couple with great credit scores and a $3000/month payment are the proud owners of a Negative Amortization or Neg-am loan (or Option Arm for those that find the honest nomenclature a little too hard to swallow). Their new interest rate is 8.858% but not to worry as it is subject to change MONTHLY! They have owned this loan for a little over a month and their mortgage has already grown over $2000. Their comparative payment, which is to say the principle and interest payment comparative to what they were paying, is now $4297. Their interest only payment, which is simply the bare minimum required to cover the cost of their money, is now $3993!!! But wait a minute, loans are not free. What did they pay for the pleasure of increasing their payment by over $1000 per month? The closing costs were almost $20,000. This new loan, the sole purpose of which was to lower their rate and payment, added $20,000 to their debt and raised their monthly payment 43%. A loan is a loan though and for good or bad the loan originator deserves to be paid right? The originator pocketed almost $29,000 for his “services”.

This couple had no idea the type of loan they were really getting. They cannot afford the payment. They can make the “option arm” minimum payment, but then their loan grows at least $2500 per month. Since it now looks like they owe more than the home is worth they are faced with a best case scenario of losing their credit and a worse case scenario of losing their home. Either way they lose their jobs because of it.

Usually I write this newsletter with the hope of inspiring others. I know that most of you reading this are probably waiting for the inspirational lesson in all of this. I do not have one. This is simply a warning and a reminder. Whether you are a homeowner, a Realtor or just someone who actually cares about their fellow man, please get a second opinion when acting on the largest investment of your life. Preferably use someone recommended to you and always, always, always get a referred second opinion if you are considering a loan with someone who solicited you. If you need help finding a second lender, contact your Realtor. They should always have at least two lenders that they work with and trust. As in most professions, those of us that are good at what we do; those of us that care about our clients; those of us that actually understand we are coaching people on their very financial future – never have an issue with our client getting a second opinion.

As for last night’s nice young couple with the half million dollar headache, I do not know if there will be any happy ending. I have offered to refinance them out of their loan at no charge, but there will still be some third party fees and besides, they may not have enough equity now to cover the $19,000 pre-pay penalty that came with their loan… did I neglect to mention that before? So did the lender. One final bit of irony: the name of the broker that “helped” them is Veritus. “Veritas” is Latin for “truth”.

Filed under: BUYERS, INVESTORS, LENDERS, REALTORS, SELLERS, responsibility, transparency

A Transparent DRE Fumbles the Big Picture

On Friday, April 13th, 2007, CAR sent out a press release entitled: DRE Clarifies Mortgage Broker’s Duty to Explain Loan Terms. The purpose was to let real estate agents know that, thanks in no small part to CAR, the DRE had clarified a previous bulletin that “intimated that buyers’ agents have a fiduciary duty to completely explain payment option ARMs and similar loan products to their clients”. The new bulletin made clear that “it is the fiduciary responsibility of each licensee who represents the borrower in obtaining a loan to completely explain the terms and discuss the relative merits…” thus laying the onus where it belongs: on the originator of the loan (click here for the press release as well as links to the bulletins). What frightened me in this press release was the last paragraph:

…in the previous version of this article, the DRE stated that a buyer’s agent “should be aware of the type of loan being used to finance the purchase,” and for payment option ARMs or similar loans, “the licensee should confirm that all of the terms and possible effects (both positive and negative) have been explained by the mortgage broker or lender.” These statements have now been deleted from the article by the DRE. (emphasis mine)

Through the DRE, CAR has protected its members from liability regarding a service they are not providing and this, of course, is a benefit. But to summarily dismiss the idea that the agent should even be aware is downright irresponsible. Worse yet, in cases where the client is being put into a loan product that may cost them their home and their financial future, the agent need not even confirm that their client understands what is happening.

This sounds like a prime example of a labor organization doing a great job protecting themselves and their members, but missing the entire point of their existence. If the agent is not looking out for their client, who is? You may think that the loan originator is looking after the clients’ best interest when it comes to the financing aspect of a transaction, but are they? Let’s take a closer look. A loan originator has NO fiduciary relationship to the client. You may find that hard to believe – I know I did – but it is true never the less. A real estate agent has a fiduciary relationship, meaning at its most basic level that the real estate agent will put the clients’ needs before their own. There are monetary and legal ramifications to a fiduciary relationship. Loan originators, on the other hand, are not bound by fiduciary obligations and rarely exhibit them. Most often, in fact, loan originators are giving clients a “less than the best” deal in order to increase their own profits – quite the opposite of a fiduciary relationship. Is this the normal, even encouraged practice within the industry? Yes, it is. Is this understood outside the industry? No, outside the industry this is generally smoke and mirrors. One example should suffice: can anyone guess why so many people are currently in Neg-am or Option ARM loans when it is so clearly the wrong investment vehicle for them? Here’s a hint: those particular programs were paying loan originators up to 3 and sometimes 4 times more than other loan programs.

So… the DRE has clarified a position and transferred the liability from the real estate agent to the loan originator, which is where it belonged in the first place. The successful real estate agents I have talked to, however, know that they put their commission, and more importantly their future business (read: referrals), in the hands of the loan originator on every transaction. If a client ends up with the wrong loan program down the road (or worse), do they go back to the loan originator that was referred to them, or do they go back to the agent that gave them the referral. Worse yet, do they just not come back at all? Shouldn’t the agent demand – doesn’t the client deserve – a loan originator that exhibits a fiduciary responsibility whether required to or not? The DRE can change the wording all they want, but in the end it is the agent with a financial (and one hopes moral) obligation to make sure their clients’ loan is appropriate. If any part of this is confusing or disconcerting, you are not alone. Speak to a lender that practices transparent lending for a full explanation. In the case of mortgages “ignorance may be bliss”, but it costs tens of thousands of dollars. Choose your originators wisely.

Filed under: LENDERS, REALTORS, CAR, DRE, responsibility, transparency

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