We Need “Stupid Stickers” for Home Loans

Do you know that there are only a couple of ladder manufacturers still in business in America?  The rest have been sued out of business or forced to headquarter in countries far superior to ours when it comes to litigous common sense.  People would literally lean their ladder against a plate glass window, fall through, and then sue the ladder company!  If you do not believe me take a look at the “stupid stickers” on a ladder in your local building supply store some time.  Covered with labels that basically say “Hey, if you are so stupid that you would (fill in the dumbest thing you can imagine here), then please read this ‘stupid sticker’ and do not do that”.

Now I am watching the lending industry go the way of the ladder industry.  We have a (very) small group of people going through a very difficult event: they are losing their homes due to their inability to pay their mortgage.  It can not possibly be their fault – that would leave them no one to sue.  So it is the lenders’ fault.  Now they have someone to blame.  The press eats this up.  Brian Brady wrote a great piece over on BloodHoundBlog regarding the San Diego couple that appeared on Good Morning America to discuss their lawsuit.  I have written previously about the two couples who appeared in the 60 Minutes segment.  Kris Berg has a current piece on a California couple initiating their law suit.  What do all of these people have in common (besides appearing in the media to tell their story)?  Every last one of them refuses to accept the responsibility of being an adult.  I am sick and tired of the lending industry being blamed for foisting “exotic” loans on an unknowing public.  What geniuses those lenders must be, what masters of double talk, what scam artists… what balderdash.

I spent years talking to clients about the loan process and advising them on how mortgages work and how they fit into a family’s financial health.  I gave countless presentations on full disclosure lending designed to save the client from themselves and you know what I learned?  People do not want to be saved.  They want the home they want and they want it now.

Can we please bring some honesty back into this discussion?   I watch people put more research into a $40,000 car purchase than they do a $400,000 mortgage.  Sometimes that abdication of responsibility comes back to bite you.  I can not decide which should be more embarrassing: going on national TV and saying “this was the largest investment of my life but I did not read the paperwork, ask questions or pay attention to the specifics of the loan” or going on national TV and saying “this was the largest investment of my life but I made a mistake and now I want someone else to pay for it”?  Maybe we should just create “stupid stickers” for loan packages that read “If you cannot afford to buy this home, do not buy this home.”

Filed under: BUYERS, INVESTORS, LENDERS, REALTORS, foreclosures, responsibility

Some Borrowers are Made Like Sausage

Over the weekend I enjoyed a lively debate regarding the couple that is suing their Real Estate agent in Carlsbad.  Brian Brady wrote a humerous post and it generated a lot of comments.  The idea that I walk away with on so many of these issues is this: what ever happened to personal responsibility.  We are all so up in arms over the housing mess and we automatically blame the lenders.  I am just as guilty.  As a matter of fact, one of the reasons I stopped blogging for a while was my disgust with the mortgage industry.  But the main reason I stopped blogging: my disgust with the average borrower that had no interest in hearing the truth!  Before concentrating on coaching real estate agents I was  a very active lender and one of the leading proponents of Transparent Lending.  (If you are unsure what that is you can search my site or Google it and you will have loads of reading material.)  Yet the more I explained to people the more loans I lost.  I guess it is a lot like the old joke about everyone liking sausage but no one wants to know what goes in them.  My clients did not want to hear how the industry really worked and how I was going to save them money in the long run.  They were interested in the quick deal with the made-up interest rates and fancy web sites.  They wanted to know how much home they could buy, not afford.  They came equipped with no knowledge of yield spread but a thorough understanding of ‘stated income’.  In short, I saw an awful lot of borrowers that brought the current problems on themselves.

 Please do not misunderstand.  There are a lot of unscrupulous lenders out there and I have written about some of the most eggregious I have seen.  I am just saying that I think, every now and then, we need to acknowledge the borrowers that lied about their income, throwing caution to the wind and stop pointing the finger solely at the lenders.

Filed under: BUYERS, INVESTORS, LENDERS, REALTORS, SELLERS, foreclosures, responsibility, stated income

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