Professional Status: Perceptions and Reality March 24, 2007
In part one of this series of blog articles about the subprime meltdown, I briefly sketched the rise and fall of subprime loan products and their relation to predatory lending practices within a capitalist system.
Today’s part two will examine the structural relationship between a professional and his or her client.
Is your barista at Starbucks or the person who bags your groceries a professional? If you answer “yes,” what makes a barista different than a doctor, or for that matter, a real estate agent or Realtor?
First we need to differentiate the use of the word professional as an adjective v. a noun. Your barista can do his job in a professional manner. Anyone can do his or her job in a professional manner. This is using the word “professional” as an adjective. Just like Schoolhouse Rock: “He was a hairy bear, a very scary bear, we made a hasty retreat from his lair….and described him with adjectives.” When we use the word Professional as a noun, there’s a classic definition that we would dial into. Here it is:
A Professional:
- Has specialized knowledge in his or her field. This person knows way more than the average random consumer about his or her area of expertise;
- Is required to complete a minimum amount of formal, academic education;
- Is tested for competency;
- Is licensed;
- Must maintain that license with mandatory continuing education;
- Subscribes to a mandatory code of ethics in an industry that is self-regulating. This is different from state or federal government regulatory oversight. The industry itself regulates ethical conduct over and above state and federal law;
- The self-regulating body enforces their code of ethics with sanctions for violations;
- Owes fiduciary duties to clients. This means the professional has the highest prescribed duty of loyalty to the client, to put the client’s interests above his or her own interests.
Real estate agents, what do you think: Do you hold professional status? Take a look at your state agency laws. Does your state mandate fiduciary duties owed to clients? Realtors, I have been told by many Realtors in many states that their local association of Realtors does not enforce the Code of Ethics. Nationwide, to elevate your professional status, raise your duties from statutory to fiduciary, self-regulate by enforcing your Code of Ethics, get rid of dual agency and continue to require more pre and post education. I have met thousands of Realtors and real estate agents. Many of you already conduct your business as a Professional. However, just because you personally conduct your business in this way doesn’t mean consumers all throughout your market area see you as professionals. Real estate agents and Realtors: The more you move towards elevating your professional status, the more value you will hold in the eyes of your clients, and the more you will be able to charge for your services.
Here is how loan originators (LOs) measure up against the above list:
- LOs, there is a power imbalance between you and the consumer. You know way more about how the machine we call mortgage lending works than the average random consumer will ever know.
- In many states, including WA, no education is required to begin originating loans, although LOs are often given sales training.
- Testing for competency has not yet begun in WA State. In other states, it is just starting.
- Licensing of LOs is currently not required in all states and for originators employed by all types of lending institutions.
- Continuing education requirements are very low if they exist at all.
- There is no mandatory code of ethics for mortgage lenders. What codes exist at the national trade level, are voluntary and offer insufficient guidance.
- Currently there is no ethical oversight in mortgage lending by the industry. There may be individual company codes of ethics for employees. Here are New Century’s best practices.
- A loan originator owes no duties to a consumer to put the consumer’s interests above his or her own interests.
The best information consumers need right now is to understand that your loan officer, loan originator, mortgage planner, loan consultant, or whatever they want to call themselves has absolutely no duty to put their client’s interests above their own. The relationship between a loan originator and his or her client is a retail relationship. One of the many reasons why predatory lending continues to persist, and why consumers were put into subprime loan products is because consumers hold a false belief that a loan originator is a “professional” and owes a duty to the consumer not to harm him or her.
Please watch this very short YouTube video titled “Mortgage Gangsters; Richard Saying Don’t Worry:”
I have met thousands of loan originators. Many of you already conduct your business in a very professional manner, but you are standing next to loan originators who prefer the ambiguous nature of a retail relationship because of the power advantage. It is up to the industry to make a choice on what path to follow: increase professional standards or leave the relationship ambiguous.
The finger-pointing blame game is in full swing. Some are pointing the finger at “greedy Wall Street investors” as the reason behind the subprime problems. Others blame the consumer for signing papers they didn’t read or understand. Banks are blaming state and federal regulators for not enforcing existing laws. Now Greenspan is being blamed. Everyone’s playing defense.
I continue to be hopeful that the current crisis will lead to positive changes. Some mortgage industry leaders are finally starting to look inward. This is a good sign. It’s like the industry is trying to quickly move through the five phases of grief. Many are in the denial/anger phase. It does not matter if we pass harsher government regulations if the industry does not also address the foundational, underlying relationship between a loan originator and his or her client. If this is ignored, predatory lending will persist, and the selling of subprime loans will return. Listen to radio ads, scrutinize lead generation banner ads, and see for yourself: now more than ever, subprime loan products are still being advertised in order to get the phone to ring.
In Part Three of this series of blog articles, I will offer an analogy of what’s happening in our mortgage market by comparing the evolving subprime mess with that of a well-known business ethics case study and no, it’s not Enron.
Check out these related posts:
- This Just In: Zero Interest Loans, at a Cost of Zero, with a Monthly Payment of Zero (APR 0%)*
- Deceptive Radio Advertising in Mortgage Lending
- Washington State Legislative Alert: SB 6381 and SB 6452
Article Tags>> deceptive-advertising | ethics | fiduciary-duties | loan-originator | professional-status | professionalism | solutions-to-mortgage-lending-problems | subprime-meltdown
- Posted in : General Real Estate
- Author : Jillayne Schlicke
Comments»
Jillayne, based on the definition you have above, would you say that an unlicesensed LO is not a professional (bankers and credit unions)?
I watched the video. It’s disgusting. At times, it looks like his lips are moving and it does not match the talk. Perhaps he’s talking out of both sides of his mouth, or this was recorded over?
I’m looking forward to being “licensed” and I hope it will help consumers with selecting a lender. It’s not an easy choice.
I am thrilled that there are more hoops being put in place for LO’s to go through to get into the field of lending. It would be even better if they were put into the same catagory as other professionals as you outline them here. We’ve seen many a consumer screwed by an unscrupulous lender because of the lack of a professional relationship and thankfully they haven’t been our clients. We make sure to refer LO’s that we feel truly do have a professional demeanor and who have high ethics.
Hi Rhonda,
In the video, there’s another guy with Richard who is holding the camera and giving the narrative.
An unlicensed LO would not fit the definition of a professional but then neither would a licensed LO if the seven other criteria were not met.
We would classify mortgage loan originators as an “emerging profession.” Over the course of our careers in mortgage lending, we can expect to see higher educational barriers to entry, tougher exams or even different tiers of exams, higher duties owed to consumers, and stronger ethical duties. If you look at the history of any profession in the U.S. you can look back and see how it happens. For example, any man use to be able to get a job as a police officer in America. You arrived direct from Ireland and if you were big and male, you could become a policeman. Now many states are requiring a 4 year degree in criminal justice for starters.
Hi Reba,
Thanks for joining in on this discussion. I know in the past you have been a strong advocate for increasing professional status for the profession of real estate.
The Realtor organization is 94 years ahead of mortgage lending in regards to joining the ranks of emerging professionals of their time.
http://www.realtor.org/libweb.nsf/pages/fg002
In classes, when Realtors say they recommend ethical loan originators, in return we ask, “how do Realtors know that their originator is ethical?”
“In classes, when Realtors say they recommend ethical loan originators, in return we ask, “how do Realtors know that their originator is ethical?”
Reputation, not a piece of paper issued by an inept agency will answer that question. I like where you go with this but refuse to give the banking lobby the ultimate competitive advantage by submitting to mandatory licensing.
Hi Brian,
How does a consumer find out a reputation of a loan originator? Where does the consumer go beyond his or her Realtor, to figure out if he or she has selected an ethical, reputable loan originator?
Let’s take a look at the consumer’s options:
1) go with whoever is recommended by the Realtor. With all the problems surrounding legal affiliated business arrangements, and the steering of service in exchange for kickbacks, this might not be the best option for consumers.
2) ask friends and family. In WA state, we recently experienced a nasty mortgage fraud case where the mortage broker solicited all her victims from inside her church. Unless your friends and family happen to be unbiased experts in mortgage lending, this also might not be a very good option.
3) check with your state regulator. Most state regulators keep a list of who is licensed, and then their “naughty” list only shows the most egregious cases of law violations. States do not regulate ethical conduct.
4) Better Business Bureau? Anyone can become a member if you pay their fee.
5) National Trade Organizations? NAMB, MBAA, and NAPMW do not provide an enforcement mechanism for ethical conduct. Their codes of ethics are short, vague, and do not help a member figure out how to act ethically in certain situations.
http://www.namb.org
http://www.mbaa.org
http://www.napmw.org
Brian, I think we will see many government agencies propose sweeping changes that will affect all originators, no matter where they work; bank, broker, credit union, finance co. I respect your opinion: What do you think we might see, in regards to the INDIVIDUAL practitioner?
Dr. Kevin Boileau in a recent Inman article Real Estate Ethicist (http://www.inman.com/inmannews.aspx?ID=54086 — registration required) says: “there really is a technical, traditional definition of “professional” status, which includes three criteria: 1) specialized knowledge; 2) group identification and membership; and 3) agreed-upon education and training, including ethics training, certification by examination and continuing education.”
So, while agents and lenders may know and have learned some specialized knowledge, they must also be obligated to follow certain, written ethical standards of practice. “This allows individuals in a specific industry to maintain specific behavioral expectations amongst themselves as well as toward their target consumers. Without a written code of ethics, standards are nebulous and therefore cannot be formally learned or enforced. This breeds moral chaos.”
Therefore, unless an agent is a “Realtor”, they are not considered professionals, irregardless of somes members opinion that their complaints may not be taken seriously. “Professional membership” is still a requirement to be able to call oneself a “Professional”. Ditto for lenders membership in NAMB, MBAA or NAPMW.
There is the problem with making membership in the NAR mandatory for joining an MLS. Some agents just don’t WANT to be members. Perhaps they don’t want to have to adhere to a higher standard or they don’t see the value of doing so, or perhaps they don’t approve of the NAR’s rules and regulations or maybe they just don’t think it’s worth the membership fee. I don’t know.
But I do think it’s strange that many agents want all the benefits and good will that comes with this association, but refuse to pay their dues and continue to “Realtor bash” whenever they have the opportunity.
Hi Marlow,
Dr. Boileau is my business partner. If anyone wants to read the article mentioned by Marlow, here is a public link:
http://www.ethicallending.org/pressInmanethicist20060705.htm
[“Professional membership” is still a requirement to be able to call oneself a “Professional”. Ditto for lenders membership in NAMB, MBAA or NAPMW.]
Almost, but not quite. The above three mortgage industry trade groups have codes of ethics that are short, vague, and not action-guiding. Compare that to the very long, specific, and well-written Realtor Code.
Two classic professions are doctors and lawyers. In order to practice, one must belong to a medical association or a bar association, both of which regulate professional ethical conduct.
I have heard hundreds of stories from consumers and other Realtors about Realtors who might not be following their code. On the other hand, I have heard from hundreds of real estate agents who operate with high ethics who are not members of NAR.
One thing that we can agree on is the real estate industry, as a profession, has taken steps to help practitioners grow from just a trade to a profession.
I agree, Jillayne. I don’t think government is the answer, though. They are inept at fiscal responsibility. SRO’s ar a joke also. We had a seminar down here from Fannie Mae and the presenter didn’t know (a) that the median home price was above $250,000 (it’s closer to double that)
(b) insisted that fixed rate loan were the ONLY safe loan and that paying off your loan early was the only way to a secure future. I thought the CMPS crowd was going to have heart attacks.
The Realtor referral is a good start if you eliminate the ABAs and revenue sharing schemes. Friends and family are another source. Trusted advisors (CPA, stockbroker, financial consultants) are anothersource. The internet through advertising is quite good.
I really like the current system. Reputation and advertising works well. I know that some 8% of the homeowning/homebuying public has been taken advantage of but 92% has done real well with the current system. (I’m making up the numbers but I think you get the idea)
I don’t think a code of ethics has to be long to be effective, i.e., “Do unto others as you would that they should do unto you” is pretty succinct. But you’re right, there needs to be some consequences for violations of the code. Our MLS is so strict here, violations rarely make it to the NAR. Penalties of $10,000.00 are not unusual and all violations (WITH NAMES!) are published monthly on the MLS website. Talk about enforcement!
If someone is a member of IBA vs. NAR/WAR/SKCAR, is that a viable equivalent? Independent Broker’s Association vs. National-Washington-SouthernKingCounty Association? Seems to make sense for Independent Brokerages, especially here in Seattle were “independence” is a valued effort as in a “Danny’s Coffee Shop” vs. Starbucks mentality.
If I may, please clarify what is “predatory lending” as used here in the discussion. Does it involve the lender who issues a loan, the broker who searches and submits the loan, or is it the real estate agent who demands quick easy financing to close a sale? What would be a reasonable profit for a broker on a successful loan transaction? 5% of the total sale price ( which my understanding is typical for a realtor)? 5% of the total loan amount? Or the industry average of 1.5% ? Should a loan in subprime, which is far more intensive in work and knowledge, have fees and charges equal to or less than a conforming loan?
Does anyone really believe a realtor is concerned whether a buyer can afford the home…or is their “concern” whether the potential buyers are able to garner financing of the home? Is that not part of a “predatory lender” definition?
I read here where the “code of ethics” and “professionalism” of the realtor asscosiations are “94 years ahead of mortgage lending” , yet realtors have special exemption from W2 laws and are classified as 1099 independent contractors. Loan Officers, on the other hand, do not have that legal exemption/protection and thus Brokers have the duty as an employer of W2 labor, whether or not the loan officer is paid via 1099 or W2. That is “94 years ahead” where a Realtor has no duty or obligation (except as enforcable by consumer litigation) to police the actions of the agent?
If terms such as “predatory lending” are being tossed about, where does the predation begin?
I have yet to read about anyone bringing up the caps on what Brokers may charge. The “Section 32″ cap ( Home Ownership and Equity Protection Act of 1994 (HOEPA), Section 32) in a requirement in almost every lender funding guidelines. Section 32 caps fees at approx. 8%. It further requires a Truth in Lending statement and a Good Faith Estimate to be mailed to the borrower within three days of a loan application being taken. Has anyone realied that for a refinance to be made, there must be a demonstrated “benefit” to the borrower?
Sweeping generalizations are easy to cast. (”In many states, including WA, no education is required to begin originating loans”). Yet would education decrease the number of unsavory characters originating loans? What are the comparisons between those states requiring education before loan origination may begin versus those states which have such requirements?
I read above a statement regarding “dual agency”. Please define what “dual agencies” are involved in originating loans?
My point in all this is to emphasize the superficiality of the posts above. Define what is meant when the term “predatory lending” is used. Pinpoint the failures throughout the entire transactional system which lead an unwary consumer onto a pitfall, and suggest remedies, effective remedies.
So far, I have read “it’s all the loan officer’s fault!” bashes. Which is far from the entire picture.
A well trained crook is only harder to catch. We don’t need education, we need jail time. Even those idiot YouTube brokers would walk a strait line if the crime of misleading a consumer was criminally enforced.
Jillayne and Todd:
This post had me playing on YouTube. This may answer both of your questions about how to deal with bad originators:
http://activerain.com/blogsview/63446/One-Way-to-Deal
Hi Rand,
There are 14 questions in your comment, so I’m going to answer the biggest question: “What is predatory lending as used here in the discussion?”
First, predatory lending is not traditionally considered part of something a real estate agent would do behaviorally, unless that agent is doing any of the following as a combined agent/loan originator:
The following is from our consumer book, which is in final edit.
Q: What is predatory lending?
A: The use of deceptive or fradulent sales practices in the origination, closing or servicign of a loan secured by real estate. The loan originator deceives the borrower by hiding fees or points, a variable rate loan rather than a fixed rate loan, unneeded insurance, or a prepayment penalty, or it may take the form of selling a subprime mortgage loan when they could qualify for a lower cost conventional loan.
Examples:
Steering you to a high cost loan rather than a standard quality loan, because the originator can earn higher fees by selling you a subprime loan.
Structuring a high cost loan with payments you clearly cannot afford
Increasing your interest rate following default or missed payments
Failing to provide accurate loan balance and payoff amounts
Failing to provide all government mandated disclosures
Identifying falsely that your loan is a line of credit
Charging excessive prepayment penalties
Inserting mandatory arbitration clauses
Changing loan terms or fees at closing
Requiring credit insurance
Falsifying loan documents
Forging signatures
Low-balling quotes on the Good Faith Estimate in order to capture the client at application time, and then charging higher fees at a point in time when it is too late for the consumer to get out of the transaction
Quoting only the note rate in advertising and not quoting the annual percentage rate at the same time.
Padding third party provider fees and collecting the difference as extra profit
Not quoting a Yield Spread Premium on the Good Faith Estimate (GFE) or only quoting a “possible range of YSP” near the bottom of the GFE without placing this on line 808 or below of the GFE.
Not clearly and honestly explaining a Yield Spread Premium as money that is paid to the broker/loan originator up front, at application time and at closing.
Charging fees (junk fees) when no actual service is performed
Advertising a no cost loan, when there really are costs.
Using Lines 801 and 802 as interchangable on the GFE and HUD I. They are not interchangable.
Quoting 0 days worth of interest on the GFE when the loan originator has no way of guaranteeing that the loan will close on the last day of the month. This is part of low-balling a GFE.
Increasing fees prior to closing and not providing the required government disclosures prior to the client walking into the signing room.
Selling a client a lower monthly payment mortgage, but deceptively comparing that new lower monthly payment with a loan product that does not include monthly reserves for paying taxes and insurance.
Rand, because you’re in the business of selling subprime loans wholesale, we both know that some of the above examples are not just predatory, they are federal and state lending law violations.
[So far, I have read “it’s all the loan officer’s fault!” bashes. Which is far from the entire picture.]
Restated from above, I said “ONE OF THE MANY REASONS why predatory lending continues to persist, and why consumers were put into subprime loan products is because consumers hold a false belief that a loan originator is a “professional” and owes a duty to the consumer not to harm him or her.”
Hi Todd!
That’s funny. If all the predatory lenders were in jail right now…..LOL.
Well, I look at it from a similar yet different perspective. Yes, people who are commiting blatant fraud ought to face the consequences. I believe this to be a LOW percentage of the mortgage lenders out there. Also, in order to commit mortgage fraud, it usually takes more than just one person. Escrow, appraiser, real estate agent, loan originator, and often the borrower as well. We’ve had a couple of high-profile mortgage fraud cases where everyone went down.
Putting predatory lenders in jail? I believe most lenders out there really do want to treat the consumer well and also earn an honest wage. I believe that the majority of folks want to know what the right thing is to do, as Marlow referred to in comment number 10, the age-old golden rule.
The problem with the golden rule, which doesn’t work by the way, is that everyone gets to define “do unto others as if” in their own subjective way. Everyone comes from a different culture, different family, different part of the country, has a different religious upbring, works in a different company where THAT company culture has a profound effect on its employees, and so forth. Do Unto Others means radically different things to different people. For Realtors, their “do unto others” rules are codified and spelled out with specificity. For Realtors, when they enter that profession, their Code of Ethics becomes their bible.
For mortgage loan originators, there is no guidance. It is all subjective which means their industry has been in moral chaos for many years.
I vote to help people grow rather than putting them all in jail.
Jail means taxpayer dollars will be spent prosecuting, housing, feeding, and supervising them while they do their time. Tax dollars are better spent elsewhere. I vote to have the corporations earning the billion$ in profit$ use their profits to oversee their own industry.
Hit a corporation where it hurts, and it will affect change. Make it PROFITABLE to be ethical, and unprofitable to be unethical and we will see a slow, gradual change.
The practice that pisses me off the most is when the LO winds up changing the conditions after the client is so far into the process and close to closing that he usually acquiesces. I’ve cut off a few lenders from any further referrals and have gone as far as to have my client take his loan elsewhere. Most agents don’t know enough about mortgage financing to be very good at watching out for their clients plus with 27000 agents fighting for their share of the 110000 transactions that happened last year quite a few of them lose sight of their clients best interests in the pursuit of a commission check. If agents had to go through at least the1800 clock hours that a hairdresser is required to complete (30x what a real estate has to do) we’d have fewer agents doing more transactions more competently without the pressure to cut corners. There are way too many part time incompetent “hobby agents” in this business that aren’t providing the consumer protection that licensure is supposed to engender. The fact that the “industry” side of real estate (brokerages, the MLS and NAR) has a business model predicated on how many agents they can get paying fees and commission splits suggests that they’re really acting from more self serving motives and should be regulated accordingly.
Hi JD,
How’s the market hold up, up there in Marysville/Granite Falls?
Thanks for your comments. Well, we live in a democracy and inside of that lives capitalism. “A corporation must return a profit to its shareholders within the bounds of the law” (quoting Milton Friedman.)
Maybe it is time for a business model whereas a profit is made, but it is made by only hiring the absolute highest educated, full-time agents. Yet, I’m sure someone has already created it. Then the invisible hand of the free market would dictate which business models win and which lose. I remember RE/MAX had that business model for awhile; “our agents have the more experience…..” This was in a radio ad.
I spend way more time with my licensed cosmetologist over the course of my life than with my Realtor. I’m on my third single family residence and will probably buy and sell a few more before I kick off. In comparison, I have spent at least one to two hours with my cosmetologist every four weeks for the past 14 years. If he physically harms me using chemicals he has access to, the consequences are grave.
If the real estate industry itself wishes to increase minimum levels of education or mandate hours worked, the industry is free to do so. I’d love to see a four year college (business) degree program designed specifically for the real estate industry. At Bellevue Community College, this is an option for students working on an associates degree. What do you think about that idea?
Hi Ardell,
Regarding comment #11, I remember when the Independent Brokers Association was formed; it was to counter the growing power of the franchises here in the greater Seattle Puget Sound area, and give the local independent broker/owners a chance to network and share ideas with each other, and allow for such things as bargaining power for negotiating optional health insurance plans for their employees or agents among other things. I do not see an IBA Code of Ethics on their website, but since I’m set to speak at their convention, I will ask them about this next month! IBA members are a combination of real estate agents and Realtors.
Jillayne, I’d like to see a few more of Rand’s questions answered. And I wish I could see a link to his/her website. Ka-bam! I’m sorry, I know there are a lot of unsavory lenders, but it’s not all the loan originators fault for what has happened in the industry. I do get tired of all the bashing. We’re the target du’ jour. (I say we, not including myself and other decent LOs with unsavory ones…but you do feel lumped in).
Rand, I’d like to thank you for your comment and 14 questions to ponder.
Todd, can you imagine if LOs did jail time (or if the threat was real)? Big problem is that our jails are all ready crowded…so who would the prison system release? First time crack offender or a predatory lender? There’s really no room for them. Maybe the bad LOs should be sent to a special prison where they have to provide legit credit counseling or volunteer with helping people get out of BKs, or volunteer at homeless shelters…I don’t know…it’s a stretch.
Jillayne, I am a professional however, I’m cynical of the value of NAR/SCCAR/SKCAR and WAR. This is the group that at one time sold a lot of exposure on realtor.com to lendingtree.com while hitting its members up with the other hand for extra contributions to RPAC to fight the banking industry’s efforts to get into the real estate business. This old Boy Scout doesn’t need his integrity underwritten by an organization that ambivalent about what the right thing is. Some of the most egregious violators remain in business, unprosecuted and unfined while a few token examples give them something to tout. The MLS isn’t much better; the fines are seldom enough to be more than the cost of doing business for some violators and they also seem to be selective about enforcement even when it gets handed to them on a silver platter. None of this sits well with the many decent agents trying to make an honest living. I’d guess that a change in state law prohibiting NAR from requiring agent membership throughout member brokerages and expanding the MLS from being the province of “member brokers” to ”member agents” would do wonders in making both organizations more accountable to the consumer side of the business.
Hi JD,
Your ideas have merit. Do you think the industry might go this direction?
Holy Cow and thank God for JD Blackwell. You hit the nail on the head. Predetory lending with the fees and back end pay offs make me sick, but the majority of loans that are truly predetory are the ones that change the terms just before closing.
My attorney was asked to pay off his Grand Cherokee the week of closing or pay a higher rate. That gem was from Bank of America; not your common low life lending institution. As a matter of fact I was talking with a client this afternoon about his loan through Long Beach Mortgage that ended up with a three year pre payment penalty. His loan originator stopped answering phone calls when I saw the loan documents and we closed with an apology from Long Beach Mortgage. They claim the pre payment was disclosed, but I don’t see it in any of the other paper work my client has.
I do believe that the Board of Realtors is just handing jobs to any one who promises to pay dues. Education is never an answer to human compassion. Knowing the Bible doesn’t mean you understand it. There are way to many people engaged in the purchase, sale and financing of Real Estate who have no idea or concept of the industry. The solution that I have heard repeated is that there should be an apprenticeship of two years required to be a real estate agent.
For lending institutions this Loan Originator designation shouldn’t exsist. The lender needs to take full responsibility for it’s loans. After the S&L scandal I thought there were safe guards in place. Our government or specifically our tax dollars should not be going into propping up this industry again.
I look at loan documents before closing. It’s not my job, but in the interest of serving my client in the long run I do. I have worked with the same lender for twenty years and use him myself. I encourage my clients to use him because I know he is not hurting for money, but dedicated to his craft. I always talk with a lender no matter which side of the transaction I’m on. That’s in the interest of having a deal that’s going to close.
Hi Rhonda,
Rand’s comments about a real estate agent’s commission being “predatory” in nature is an answer better authored by a licensed residential real estate agent. Ardell has written extensively on agent commission in countless blog articles here on RCG.
In regards to Rand’s question about charging the subprime borrower more in fees because a subprime loan takes more time to put together: Currently I know of zero loan originators who charge on an hourly basis. LOs earn higher fees on subprime not because they worked harder on the loan. I have met zero loan originators who originate subprime because they have to work harder.
Rand’s question about Realtors only concern being that the potential buyers are able to garner financing of the home, and “Is that not part of a “predatory lender” definition?
My answer is NO.
Rand’s question about W-2 v. 1099 status of agents asks if Realtors are further ahead of loan originators.
My answer is YES. Agents have state licensing laws; many states mandate fiduciary duties. This is WAY AHEAD of loan originators.
Rand asks “where does predation begin?”
My answer is, it begins when a person A makes an intentional decision to take advantage of person B.
HOEPA does not dictate a tangible net benefit to the borrower under a refi. HOEPA is a federal law. State laws vary on tangible net benefit refis.
Rand asks “would increasing education standards decrease unsavory characters originating loans?” My answer is yes. From my experience folks like this do not want to sit in a classroom and learn ANYTHING about mortgage lending. They just want to go out and earn money now. They will find another unregulated industry.
I sent Rand an email explaining dual real estate agency.
Rand asks me to pinpoint the failures throughout the entire transactional system. Doing so would mean a 200+ page industry white paper. A blog is more fertile ground for taking segments and going deep into one segment.
In closing, I’d like to invite Rand to tell us his stories, from the perspective of being a wholesale subprime lender, as to segment failures he believes are higher on the list than the relationship between the LO and the consumer.
Jillayne, the market up here is stirring again but it’s been the worst winter of my career. The “free market” thing doesn’t fly with me because this is already a government regulated industry. The ReMax ad you heard was just so much spin. They’re no more experienced than any other brokerage. They sell RE license courses to suckers, and “hire” them on after they get their license knowing full well that they’ll pay some fees and possibly get one or two transactions before they bail out. Look at it from a business sense; would you as a broker rather have 5 competent agents writing clean, honest deals out of an arbitrarily finite pool of 100 transactions and exceeding their commission split threshold or 25 agents doing writing sloppy deals that don’t make threshold. If you subscribe to the Gordon Gecko school of business, it’s a no brainer, more agents make more money for the brokerage. It’s not good for agents and it’s not good for consumers. An AA should be the minimum qualification including extensive coursework on the realities of being a self employed businessperson. I have a degree in business and I’m appalled at what many new agents don’t know about conducting their own affairs to say nothing of how poorly prepared they are to watch out for their client’s best interests. The precedent for requiring a four year degree to sell real estate exists in other countries, sign me up for requiring it here. This leads me to gore another sacred cow, the 6% commission. Right now it’s almost neccesary to be that high just to support the statistical “average” agent who only does 4 transactions a year. Fewer, more competent agents could comfortably manage four transactions a month providing full service and make a very respectable living at 3% total commission. This assumes that fewer of them would mean they didn’t have to spend 80% of their time getting the next client. The added benefit is that it would effectively exterminate the “limited service” blight on the industry. Good for consumers, good for agents, not so good for the brokers, NAR, NWMLS and real estate schools.
Hi David,
In WA state, a mortgage broker/LO is required to redisclose if the fees are going to increase to the benefit of the broker/LO. Read number 10 & 11 on this page for all details on redisclosure:
http://apps.leg.wa.gov/WAC/default.aspx?cite=208-660-430
Redisclose means a New Good Faith estimate (GFE) and a new Truth-In-Lending Regulation Z disclosure 3 days prior to closing. This does not mean the new GFE and TIL are given to the borrower AT closing and then backdated.
Under the WA state Mortgage Broker Practices Act, a broker is responsible for his or her loan originators.
http://apps.leg.wa.gov/RCW/default.aspx?cite=19.146.245
Under RESPA, a homebuyer can ask to review his or her loan documents one day before closing (even if it’s an estimated HUD 1, that’s better than nothing.) Once a homebuyer enters the signing room, it’s often too late for quick fixes if a homebuyer is under contract to close that day.
http://www.hud.gov/offices/hsg/sfh/res/resconsu.cfm#GS
Hi JD,
There are many in the industry who agree with you! I wonder what would happen if we got them all together in one room?
First off Jillayne, I make a definite distinction between the two aspects of real estate; the consumer side which I consider to be the relationship based part of the business that drives transactions. Then there’s “the industry”; brokers, NAR, the MLS and real estate schools. Their income is derived from agents and as such their interests aren’t the same as the consumer side of the house. Will the industry go in this direction? Not of their own free will and volition. They’ll go kicking and screaming. The consumer side is another story. In another life I was an engineer and very involved in the collective bargaining process at an executive level. I can visualize the consumer side becoming organized, starting a competing MLS, opening our own brokerages with higher standards and a lot less unmitigated greed.
Well Jillayne, this “room” is a good start.
Hi JD,
Then you, more than I, know that it is extremely difficult to make great change happen within an existing organizational system because so many of the organizations resources are allocated to keeping the current system in place, not to mention the political power struggles.
Great change like what you are proposing comes from outside of the existing power structure.
Your examples are about the real estate industry. The same can be said about the mortgage lending industry. I am a rebel. If I were an employee in part of the existing system, I would have been fired for writing this blog article.
Thank you for your insights. I am listening. Many others are reading your words. Follow the white rabbit.
Since we’re on the subject, Ed Rybczynski over at title-opoly is blogging about the little guy going up against industry giants as smaller title agencies now have to start competing against their own title insurance underwriters as the big players begin going direct-to-consumer.
http://title-opoly.squarespace.com/title-opoly/2007/3/24/title-company-innovation-film-at-eleven.html#comment739259
Jillayne,
You are right on queue with this one and right on time too. I have been reading and posting a lot on the subject of professionalism and fiduciary responsibility this week. First I should state that I do consider my self a professional in a profession that is the real estate appraisal industry. I am state licensed and do not belong to a trade group and my professional requirements in training and hours are going up dramatically in 2008. As an appraiser I have read on this subject and discussed it many times. My prospective is as basically this, there has to be changes made for most of what you posted and commented on.
The real estate sales industry needs to support the consumer and not the broker and the NAR needs to recognize this fact. Higher standards and education needs to be put into place for real estate sales professionals and I say that because I see it on a daily basis.
Please keep in mind that I am referring to the basics of what they do. The industry and state does allow for anyone who can pass a 40-question test (40 questions in Michigan) after taking a 40-hour class that is composed of 70% fair housing for about $300.00. Meet these three items and Poof you’re an agent. At the end of the class you have people who do not know what an acre is, how to read a tape measure, or understand basic business language let alone how to understand portions of a contract. You then can go to your church on Sunday or the PTA on Wednesday night meeting or where ever and have something to boast about. There are other things in the class that they learn like do not take any money unless you check with your broker first. Brokers are required to do 6 sales for three years take another 50 hours of classroom time and pass a 90-question test. Real estate con-ed hours in Michigan are 8 hours per year of which 3 hours need to be fair housing.
Currently appraisers in Michigan need to take 75 hours before they can apply for an apprenticeship that must last 2 years and consist of 2,000 hours and another 50 hours of class time before they can submit a log and documentation to gain approval to take the 130-question test and if they pass then they have the first level of licensing of which there is 4 levels (including the apprenticeship). Each level requires more time in years, more logged hours, more classroom time, more con-ed, more money, and a test of more questions for each level. As appraisers we are not allowed to do certain work unless we carry a certain license level. There are the Appraisal Institution and American Society of Appraisers as well as a couple of others that contribute to the Appraisal Foundation that was established by congress under Title XI (for you legal buffs that is a Federal Code) and our policing system is regulated at a state level. Typical fines range from 1,000 up to 10,000 per offence. If you want to work for FHA or VA then that is additional requirements and class time and test. As an appraiser you cannot have a Felony Record, have been convicted of a crime at any level pertaining to theft or fraud and must submit to a background check. Our con-ed hours are 31 hours per two years, which will increase again as of 2008. As an industry we have our problems and we are working diligently to fix them including the increase in education and licensing standards. Most of us carry the understanding that should we lose our License we lose an estimated $750,000 over the lifetime of our career.
You do not need to be licensed to work for a Mortgage Broker as a Loan Originator in Michigan. What it takes to be a Mortgage Broker in Michigan is a similar to that of a real estate sales class and payment of a bond that is usually somewhere about $5,000. Then you need to hire Loan Originators and pay for advertisement. Banks are regulated on a Federal Level and as the State of New York found out is a Federal jurisdiction.
I agree with the understanding as to why the NAR is not deemed to be important to many in the real estate sales industry and I do not agree with the requirement of many boards that you must be a NAR member to access the MLS as you do here in Michigan.
So this I can predict. The consumer will make changes through the use of the internet and retailers unless the real estate industry does something to change it’s current perception in the eyes of the consumer because I do not believe that politics alone will stop it from happing no matter how much is spent by the NAR in dues paying members money. The NAR needs to look at the lobby power of the UAW if they want to understand lost membership and how it happens. The issue is not if one is a realtor or of MLS access it is one of realtor worth and this is what the independents knew all along.
Should you want to file a complaint in Michigan there is very little legal or regulatory tools available. If you’re a service industry and do not get paid by a lender, oh well, if you’re a consumer who was not disclosed something, oh well prove it, if you’re an out of state loan broker that is in a state that requires regulation then you are suffering unfair completion should you market in Michigan. Go to any police department and they will send you to someone else, go to a prosecutor and they tell you to call the F.B.I., go to the F.B.I. and they ask did it occur over state lines if not go back to your local police. That is Reality.
Please note that I am not trying to pick on anyone here, and there are a lot of people that do the business every day that are good and ethical whether they are a lender or real estate sales person, but the industries need to police themselves and improve themselves and it starts here with post like this one so to you good job and keep up the great work!
Jillayne, I finally got around to watching the “Don’t Worry” clip. While I have a few lenders that I basically feel comfortable referring even they cross the line at times. The link to this clip is going to every client I work with from now on with the advice to run like Hell at the first utterance of the words “Don’t worry” or “Trust Me”.
“My attorney was asked to pay off his Grand Cherokee the week of closing or pay a higher rate. That gem was from Bank of America; not your common low life lending institution. As a matter of fact I was talking with a client this afternoon about his loan through Long Beach Mortgage that ended up with a three year pre payment penalty. His loan originator stopped answering phone calls when I saw the loan documents and we closed with an apology from Long Beach Mortgage. They claim the pre payment was disclosed, but I don’t see it in any of the other paper work my client has.”
David, did you check the TIL to see if the “may be a prepay” box was checked? Even if so, it would not excuse the LO for not making it loud and clear to your client at the point of origination.
FYI…Long Beach Mortgage is Washington Mutual’s subprime division.
Not to pick on banks…I would love to know on a per capita basis, where most of the complaints with LOs have been. Unfortunately, many do not get filed. A post I’ve had tucked in the back of mind to write is about a recent transaction that I closed where the borrower was previously with a bank mortgage company…how she was treated was horrible…and this was from an established LO. But I just hate to keep dredging up the bad.
Hi Rhonda,
I would like to read a blog article about the LO at a bank. Frame it with suggestions on what a reader might do if he or she selects a bank, in order to maximize chances of a positive outcome. Also add in there where a consumer can go to file a complaint. I remember a few years back when refi-mania was in full swing. Some banks were advertising great deals, and they were absolutely so overwhelmed with deals that many of them couldn’t close because the did not have the staff to push through all the paperwork. Some of my friends were caught up in this, having hired subcontractors for remodeling work and then left without their cash-out refi or second mortgage to pay their subs.
Jillayne write: “Rand asks me to pinpoint the failures throughout the entire transactional system. Doing so would mean a 200+ page industry white pape. A blog is more fertile ground to take segments and go deep into one segment.
In closing, I’d like to invite Rand to tell us his stories, from the perspective of being a wholesale subprime lender, as to segment failures he believes are higher on the list than the relationship between the LO and the consumer”
Whew..so much to read, to ponder, to learn eh? First off..Jillayne, when you mentioned it would take a 200 page “white paper” to pinpoint the institutional weaknesses throughout the transactional system..I believe you were either a) overly optimistic or b) commenting on what the length of Chapter One would be.
You are correct, to go in-depth about any stage of a transaction involving real estate involves detailed lengthy correspondence (as we’ve found out ;), so I’ll try and keep it succinct (HA!).
When I first wrote, I asked 14 questions ( was it really 14?). I did so to highlight that the entire process is geared towards taking the borrower to the highest possible amount affording the highest income for those involved. I could have, probably should have, tossed in a few involving appraisers, title/escrow officers, and attorneys. At each stage, one of the goals is not only to “make the sale”, but to have the largest possible sale. It wasn’t I wanted those answers, and they were not meant to cast out definitive answers, it was to have posters think about the transactions and that it is not the sole efforts of loan officers that take advantage of a borrower/buyer. (for those who may wonder about my credentials, just ask… I trust you will find them satisfactory:)
Just for kicks, I went to three web sites off the list of “active contributors” for this blog. Each one highlighted that they would advise the Seller so as to ensure maximum sales pricing. Thus arise the “dual agency” issues Jillayne spoke of. Yet, we have the “Buyer Agent” whose income is predicated on the dollar amount of a purchase. Would anyone seriously make an effort to argue that an agent isn’t seeking to place the buyer in a purchase of the highest possible affordability? If a buyer states ” I can afford $150.00″ that the agent won’t start out showing $200.00 properties in the hopes they will bite?
We have the appraiser. Their job is to find and set a value to the property. Ask an appraiser if they are pressured to find a value enabling the sale. Although they cannot be instructed a value “needs to be” at a certain level, there are ways, legal ways, to let them know the need…and they darned well know if they don’t find values they will quickly find their services are no longer requested by that realtor or mortgage broker.
We have title and escrow. They describe to the buyer the details of the transaction, explain the fees and costs incurred, the terms of the loan, and they close the deal. Wait a second..they are paid if the deal closes. They are pressured to have as many closings as they can schedule. But…they have at a minimum 43 places for the buyer to sign, and to fully detail every aspect of the transaction it will take hours.
We have the loan officer. They are pressured by the realtor to find financing. Oft times, it is 100% financing with no closing costs ( Seller contributions paying the costs incurred…which of course are built into the sales price, which of course inflates the value of the property, which of course the appraiser does not disclose).
You asked me to detail what I believe are the “segment failures … higher on the list than the relationship between the LO and the consumer” My point was and remains…there is no segment which the buyer is not exposed to predation. My view is the two most dangerous areas for a buyer is the realtor relationship and the broker relationship. Each is no more dangerous or reliant than the other.
My own opinion of the largest segment to be a danger to the buyer? It’s a simple one…one that is fed, encouraged, repeated and enhanced by every real estate professional out there. Each and every one of us is guilty of encouraging, advertising, and enhancing it.
Somewhere in the past 10 years the mind set of the consumer went from ” Making money to buy a home” to “Buying a home to make money”. From that point onward, our world as professionals changed.
Some side points on several posts I read to date.
A mortgage broker IS NOT a lender.
The one tale about the attorney asked to pay off his Cherokee. Trust me, it wouldn’t have been requested had he not had a debt to income (DTI) issue. Let me guess, he was complaining about it..and had he went “Stated” and it wasn’t forced upon him…he would have gladly taken the loan, kept the auto debt, and stretched for the mortgage payment given at a higher rate (and increased mortgage payment). Was that a realtor who used that as a basis for complaining? Ooops…
There is a great need for loan officer education. My “territory” is SW Washington and Northern Oregon. Far and away I find Washington loan officers to be more “problem” than Oregon’s. Oregon is much stricter requiring education, guidelines and regulation on brokers for loan officer behavior.
I am a member of the OAMP Convention Committee. We plan the Oregon convention. Not because I am required, but because I enjoy enhancing my education, contacts, and knowledge..I attend the conventions for Idaho and Washington ( and with NAMB having the National in Seattle this year, I’ll be there). The OAMP convention and the IAMB convention are far and way geared more towards “education” than WAMB’s. And both organizations are pushing for more policing of the industry than the third. Both OAMP and IAMB run advertisements that the consumer should look for the association sticker when looking for a broker. Coincidentally, data shows Oregon and Idaho having less delinquencies, less foreclosures, and higher loan profitability than Washington..to the extent I have a rate spread to work with allowing lower rates for a loan than if it were based out of Washington.
I can tell within 30 seconds of a conversation with a Washington loan officer if it’s Rhonda calling or “Joe/Jane Newbie”. If it’s Oregon or Idaho calling, I cannot make such easy determination. However, “Joe/Jane Newbie” does not get taken advantage of. However, I hear far more from brokers in Washington the complaint “The realtor is threatening to pull the deal” or “the realtor is a jerk” or “the realtor is calling and pressuring me”. (BTW…that last call would be one which can be reported to the state agency here in Oregon.)
There are “chop shops” in all three states. I dread going into a “fraud central”, I love and look forward to going into offices such as Rhonda’s. She gets the exceptions and easy approval processing..the “chop shop” gets the scrutiny and loans ground with conditions.
OK OK eyes are glazing over. I’ll quit. (Jillayne..did you say 200 pages ?)
One last comment…it’s not a “meltdown” in the subprime industry. Far from it.
I just did!
This one is on a different buyer. I have many stories and I don’t know why they’re all “big bank mortgage”. That’s why I would like to understand the difference in requirements to work at BBM vs. a mortgage broker.
“There is the problem with making membership in the NAR mandatory for joining an MLS. Some agents just don’t WANT to be members. Perhaps they don’t want to have to adhere to a higher standard or they don’t see the value of doing so, or perhaps they don’t approve of the NAR’s rules and regulations or maybe they just don’t think it’s worth the membership fee. I don’t know.
But I do think it’s strange that many agents want all the benefits and good will that comes with this association, but refuse to pay their dues and continue to “Realtor bash” whenever they have the opportunity.”
The problem with mandatory membership is that with a captive cash cow there really is no incentive to be responsive to the folks who are paying the freight. Membership also means you effectively give up your right to judicial remedies and are left to the mercy of a NAR hearing board with no background in the legal process who levy fines that strangely enough go to further benefit NAR. So much for disinterested third parties. Perhaps now and then the Board does get it right but I’ve heard enough judges and lawyers wax incredulous over decisions handed down to take even the remotest chance of being subjected to NAR’s judicial incompetence. It’s a great idea in theory but the practice falls far too short. As for the great benefits NAR purported showers down on us all, I’m a bit skeptical of their existence and whether NAR was the definitive driving force in their existence. King Co got a CAO despite a huge Realtor presence, WAR wasn’t very effective in influencing the GMA and I’ve yet to talk to a single legislator that will admit to thinking that the buyer’s excise tax is a good idea. Meanwhile WAR spins and fluffs this non-issue into a big boogie man designed to extract more money from agents into RPAC. If NAR really is such a good deal for all of us who do the real work of real estate perhaps the dues should be based on a percentage of our gross. I’d buy into that but then I’m the kind of guy who doesn’t mind paying my fair share of taxes either. NAR has evolved into an institutional juggernaut more concerned with its own survival than the principles on which it was founded. When that changes and when mandatory membership ceases I think you’d be surprised how many of us Realtor bashers would be lined up to join.
Hi Rhonda and David,
In regards to the prepayment penalty discussed in comments #34 and #23
(Readers, like Rhonda said, prepayment penalties are disclosed on the Truth-in-Lending form, also known as the Reg Z (Regulation Z) or the TILA (Truth-in-Lending-Act).)
This is a great example of how higher duties are needed. By giving the consumer the form, an originator has met the requirements under state and federal law. A person who holds fiduciary duties has a further duty to make sure the consumer understands what is on the form. Those of us in the industry know where the “prepay” box is on the TIL form. An average, random consumer would not know.
As I stated in the original blog article, many LOs already work as if they do have fiduciary duties, and take great care of their clients.
“As I stated in the original blog article, many LOs already work as if they do have fiduciary duties, and take great care of their clients.”
Send me a list?
I’ll throw you all an interesting twist. There are two licensing bodies in California for loan origination: The Department of Corporations( no originator license required) and the Department of Real Estate (originators must have a real estate sales license and work for a real estate broker).
Both bodies receive equal consumer complaints. The DOC handles consumer complaints more effectively and more timely. Why is that?
The DOC license is considered to be far more valuable (and more costly) so the burden of compliance shifts to the responsible individual. Every single loan is ultimately the responsible individual’s responsibility.
DRE brokers can always claim that the licensee should have known better and absolve themselves.
Training? Same issue. DOC licensees are expected to provide proper training while DRE licensees do not have that requirement.
I think the answer is to eliminate the tiered licensing. License the originators and eliminate the requirement of a supervising broker or abolish licensing altogether.
Hi Rand,
Regarding comment #36, I think it would be easy to write a thousand page white paper. It is far more difficult to write something shorter by editing it down. It is being drafted. When it is finished, I will send you a copy.
Q: If it is not a subprime meltdown, then what is it?
Hi JD,
I have a referral for you. This LO is based in Marysville/Granite Falls. Will that work for you? By the way, the owner of your real estate company was one of the first people to join in on what I’m advocating in this blog article and over here. He hold corporate membership.
http://www.ethicallending.org
The code mandates fiduciary duties for Loan Originators.
Hi Brian,
Thanks for the reminder about the Cali system. It is confusing. Do you believe we will see the Dept of Real Estate (DRE) option go away in California? What is the Calif Assoc of Mortgage Brokers doing about the problem?
I have a lot of respect for Bill Young. He started Preview as a small independent company in response to some shady dealings at the hands of the broker he worked for. While I don’t think he intended it to get this big it’s grown because a lot of us share his vision of what RE can and should be. With growth came the inevitable problems but they’ve become quite aggressive about enforcing standards. I’ve found it quite gratifying to see sub par agents released while at the same time attracting some really straight shooting top producers from the big corporate brokerages.
As for the LO in M’ville/Granite Falls….that’s perfect. Who is it?
In my opinion, the Seattle Area leaves the door wide open for Predatory Lenders, by having NO rate cap in the Finance Addendum. First time I have ever seen that omission in the preprinted form, in 17 years in 5 States.
Would like to know if people commenting from other states have the rate cap protection in their Board or MLS Finance Addendum forms.
It is my understanding that this consumer protection used to be in the NWMLS form, and was removed at some point. If anyone knows what influences were at play in removing that consumer protection, I’d like to know the rationale for the change.
Q: If it is not a subprime meltdown, then what is it?
Jillayne, some of this I am shamelessly copying from an email to you. My apologies if it’s not kosher.
In my opinion? It’s a major correction and hysterical reactions to the dregs being forced out of the marketplace and a few idiotic buyers of Mortgage Backed Securities whining about the losses coming from using stupidity as an investment strategy.
As to the media hype of a “meltdown” and the cry in Congress and amongst the so-called “consumer protection” groups for more regulation and a cessation in “predatory” ARMS and subprime lending?
Here’s another way to view it. Industry stats have 15% of subprime loans having at least one payment delinquent the past 12 months, 4.5% in foreclosure. That means 85% have made payments on time, and 95% of borrowers grabbed for the golden ring and are making it. Most of that 95% would not have had the chance for home ownership but for subprime.
The ruckus and noise by the “consumer protection” groups, politico’s and regulators are, in my view, purely for media attention. There is no way a politician is going to cut off 95% of the lower income, bad credit portion of his constituency by saying “you are stuck in the adjustment period of the ARMs because I just made it impossible for you to refinance out”. It ain’t gonna happen.
The “consumer protection” groups crying and screaming about the “poor ripped off consumer” are crying wolf. And, in my view, being negligent or even criminal in advocating the exact opposite of what would benefit the lower income, lower credit groups of consumers. They are advocating the death of the opportunity for those they proclaim to protect from achieving home ownership.
Something else to consider.
Looking at the overall market numbers..less than 10% of the market niche in subprime has gone out of business. The ones really hurt in this so-called “meltdown”? Those idiots who bought the paper from lenders who would give a loan to anyone walking on the street. “Conservative subprime” lenders such as Chase, Wells Fargo, etc…they are taking it in stride and laughing all the way to the bank.
Ask Rhonda ( a Mortgage Broker) if she is having major difficulty in finding subprime lenders. A few programs are gone, she needs to make a few more phone calls to place a loan, but overall the programs and lenders remain.
The consumer has not been harmed. Only those who never made their payments are the “consumers” harmed. And with signing X number of documents stating they knew exactly what they were getting into, are they being truthful in stating they were “victims”? John and Jane Doe want to buy a house. They are well aware that the mortgage they are entering is for 100% financing, and that in 2 years the payments will jump. They have two years to a) improve their credit scores to refinance into a fixed rate; or b) improve their income to be able to make those higher payments. Neither occurs. Are we now to sympathize with john and Jane when they cry ‘poor us”? They KNEW what would occur in two years. They KNEW what they had to do. They did not perform and now judgment day arrives. 85-95% of those who were in that situation did as they should have. Yet John and Jane want us to feel sorry for them? Should we?
Here’s an anecdote which I believe illustrates what is occurring with the media hype.
Last week a woman from Boston, employed as a paramedic and a single mother of two, testified before a Congressional subcommittee stating, under oath, she is a victim of subprime predatory lending and because of that she is losing her home and her family will be homeless. It didn’t ring true to me, so I did some digging, read the entire transcript of her testimony, did some more research and here are the facts.
She bought her condo in 2004 for $200,000. 100% financing, Stated Income ( as a W@ income earner), nothing down. She refinanced in the Spring of 2006 drawing out $40,000 in equity. Again, she went Stated Income. She quit paying on her mortgage from that day forward. Yes..in less than two years she took out $40 Grand and never made another payment. Mind you, she never put anything down in the original purchase. So now she’s testifying how she is a “victim” when she made $40 grand, no money out of her pocket, and she’s a deadbeat payer.
And this was the testimony highlighted on CNN as “proof” of the big bad predatory subprime lenders !
The March 13 release of fourth-quarter 2006 data on mortgage delinquencies and foreclosures by the Mortgage Bankers Association is something else to consider. The national delinquency rate rose to 4.95 percent, up from 4.70 percent a year earlier, with the increase greatest in the subprime category.
What was very interesting, clearly shown by breaking down the data and not being noted in any news articles or press releases I located, was that the high delinquency rates were concentrated in states with serious economic problems unrelated to housing ! On the list were Louisiana and Mississippi, still reeling from the hurricanes of 2005, and upper Midwest states such as Michigan, Ohio and Indiana, which have been hard hit by problems in the automobile industry.
This pattern suggests that having a subprime adjustable-rate mortgage loan isn’t, by itself, necessarily an indication of future disaster. Other factors, such as weak labor markets, a low rate of home price appreciation and slow population growth may be more important.
Putting that in perspective, with the exception of the problems found in the S. California markets, the PacNW doesn’t appear to have a similar fate in store. We just exited a mild winter and are enjoying a mild Spring, our local economy is sound, and unemployment remains at a low level in our region.
While the media is leading the headlines citing foreclosures are at record levels, the percentages are low. 0.54 percent of all mortgages were new foreclosures last quarter. Compare that to 0..50 percent in the second quarter of 2002. By the end of 2006 4.5 percent of all subprime mortgages were in the foreclosure process. Only in recent years when home equity rose at historic rates has that 4.5% ratio been lower. Yes, that’s correct, it’s no typo … 4.5% is well within the margin of statistical error in mortgage history measured for the last 30 years!
While subprime lenders seem to be dropping like flies, there are still plenty of subprime lenders to go around. Major players with deep pockets like Chase are not exiting the market and the IAMB Convention, though having empty booths from sudden cancellations, was well attended. Loans like the 80/20 100 percent financing, interest only, 40 and 50 year amortizations, and high CLTV stated income loans are available.
It has been said that an appreciating housing market covers up a lot of evils. Conversely, a flat or falling real estate market uncovers the excesses and abuses of consumers as well as over-zealous mortgage lenders. I think the fallout that we are seeing today is more likely a direct result of regional economic difficulties, consumer abuse, negligent lending by a few which practiced “if they have a pulse and can fog a mirror” lending, and falling home values rather than abusive lending tactics.
I tried to paste a chart of the Top 10 Subprime Orginators for the 4th Quarter of ‘06. It didn’t paste. Sorry. Of the Top 10, only two are gone (New Century and Fremont). That’s a meltdown?
THE MEDIA HYPING A “SUBPRIME MELTDOWN” IS THE BIGGEST FRAUD BEING PERPETRATED TODAY !
We have foreclosure numbers within historical norms, the delinquencies being reported and inflating the statistics are mainly from those who made the “if they have a pulse and can fog a mirror” loans, 95% of those who took out subprime mortgages are making it in home ownership, those who bought MSBs are being covered by insurance as well as the buy back provisions contained in the contract provisions… and of the hundreds of subprime lenders, very few programs are gone and those who are forced out of the business were making loans which guaranteed they would be hurting when the boom was over.
So where’s the “meltdown”? Who is being hurt?
Rand, here are the stats I heard; 16% of all transactions finance with subprime lending. Of that 16% New Century had fully half of them. A loss of 8% of the the available pool of buyers that just NCFC alone represented doesn’t bode well for future sales. As a mortgage broker you probably don’t get too up close and personal with a preforclusure “short” sale. Watch one from the vantage point of an agent busting his butt to save his sellers pride, dignity and credit will leave you with no doubt as to who it harms. The borrower obviously, the agents involved who typically get skinned on their commission and when the subject property falls into disrepair, the neighbors who suffer from decreased property values.
The consumers do a lot of to themselves. A few years ago, I did have a gentleman have to do a short sell. He bought a $700 a month car payment one month after closing on his 8/20 home. Who’s fault is that?
Rhonda, that is an extraordinarily stupid example of the self destructive tendencies that some folks can manifest. That was clearly his fault *BUT* the industry doesn’t do a very good job of conveying just how hard an 80/20 is to keep serviced and no one I know with one would do another. The old saw that goes “Just because you can doesn’t mean you should” has a parallel in mortgage lending. I’ve felt for few years that what the industry will preapprove you at is a lot higher than what a prudent person should sign up for. What drives that? The desire to prop up a greedy housing industry inspires FannyMae to loosen the standards? I don’t know.
JD, I’ve experienced what Rand has been mentioning. It really strikes home with me. I have had borrowers who cannot manage a debit card but feel they should have a mortgage. And their agent kept pushing for a preapproval knowing the buyers are not responsible. Guess what, I did get them approved. Luckily, the mortgage had such a high rate they were repulsed and should be. It was absolutely gut wrenching for me. I knew these guys were a default waiting to happen. Maybe they would figure it out and grow up financially…maybe not. As an originator, what am I to do when I have a consumer begging for a mortgage (that is available); and a real estate agent wanting an approval buyer (or they’ll take the buyer elsewhere)?
http://delmar.typepad.com/brianbrady/2007/03/high_noon_in_lo.html
I am highly biased in my opinion although my firm holds both licenses. I can tell you from personal experience that the DOC license was harder to obtain than the DRE license and has much more stringent auditing. I think CAMB is trying to protect its declining membership and influence.
Hi Brian,
That’s an interesting insight and an echo from this original blog article in my numbered list, number 6 in “how LOs measure up.”
Existing trade groups like NAMB and MBAA do an excellent job of lobbying our government on behalf of its members.
JD- I like your passion.
If you want to see change, stop ENABLING people by offering loan programs that have a higher likely-hood of defaulting.
Our escrow company lost a couple purchase transactions over the past several business days. They were due to sub-prime borrowers not obtaining financing for one reason or another. I would say the agents in the up-line chain of these purchases are quite “frazzled” (that’s the best PG-13 term I could use on this blog).
Earlier this year our company closed on a transaction that never funded. You want to know about problems in sub-prime? Be the escrow company on those deals trying to get the sellers house back after escrow just transfered title to the buyers—and the lender closed doors, phones cut, everything. Multiply that same scenario by the thousands across the country. Make the phone calls to the sellers who’s driveway is being occupied by Atlas Van Lines with worker-bees packing up the last few boxes to go to their other house that they were planning on buying (oops, no proceeds to buy that house.) Lovely. No sub-prime mess with no carry over to the greater market? I can’t see how it won’t. Hope I’m wrong.
Just this past week we closed some purchases with Option ARM’s. If these consumers took a class about financing with Jillayne Schlicke, I’m not certain they would have gone into these products without major reconsidering, but most of them probably just focused on the small payment.
Two weeks ago I had a LO sitting right next to me while signing clients, explain to a borrower “not to worry” about the pre-payment penalty or reset period arriving IN ONE YEAR. Yes, it was a purchase. Sub-prime. LO explained, “we’ll just refinance you again.” Good thing Ardell wasn’t there observing a closing and was present to hear that, she would have probably taken a stack of CC&R’s and slammed it on the table . Will the borrowers be able to refi in a year?
The problem as I live and see it weekly, is that lenders have ENABLED this problem to occur. And many loan officers have sipped from the “Cup of major profits” and could not get enough, many still going strong. Take away the 100% deals or other products consumers have been steered into and you have less people in a position to go into default. With so much excess going on lately, people including those in the business will drown in their own excesses.
How many loan application 1003’s have I seen where there is NO income disclosed at all on the form? I can’t count.
Sometimes as a neutral party, I really feel like I’m part of the problem when our office closes these transactions knowing full well that a good portion of them will be refinancing again, or will be selling their home out of necessity.
Remove the enabler.
JD and Rhonda,
In response to comments #50 and #51, here is an analogy. A doctor is not allowed to help a patient harm himself or herself. If a patient asks for a doctor’s help in this way, a doctor cannot do it.
Likewise, if an LO had reason to believe that a client was getting ready to take a leap off of a financial cliff, if LOs had duties similar to that of a doctor, he or she would not make that loan, and neither would your competitors.
Can you see now, how a lack of fiduciary duties puts an LOs own financial interests ahead of a client’s interests? If that LO turns down a client, the client can go to another LO. It becomes a competitive market advantage to allow the consumer to commit financial suicide.
The industry is putting their own financial interests ahead of the homebuyer.
Yes, we live in a democracy where we all value freedom of individual choice. That’s what makes this dialogue so interesting: How can we balance the two of these ideals? Care and responsibility for our client balanced with respect for an individual’s autonomy?
I’d say the bankers have better lobbies (plusher chairs…just kidding). But on a serious note, I do think they’re more powerful than NAMB.
“How many loan application 1003’s have I seen where there is NO income disclosed at all on the form? I can’t count.”
Tim,
this might be mincing words or numbers, but a NIV (no income) vs. stated (liars loan) is a MUCH better route IMO. The borrower is not put in a position to lie about their income. The u/w has to determine if the borrowers credit, assets and employment history are worthy of proceeding with this loan.
I would much rather do a NIV than stated any day. Also NIVs typically have higher requirements of credit score, more down payment, etc.
“Likewise, if an LO had reason to believe that a client was getting ready to take a leap off of a financial cliff, if LOs had duties similar to that of a doctor, he or she would not make that loan, and neither would your competitors.”
Jillayne, if my competitors would not do these of types of loans and not reem the client financially while doing so, then we wouldn’t be reading about predatory lending. I don’t buy it.
I feel it’s my job to fully explain the available financing. And the borrower’s options, which could include waiting to buy until their in a much better position.
As I mentioned when I did my 2 year business summary post on RCG, I was surprised at how little subprime I did. I do believe it just felt like more because those transactions are A LOT more work. And I have done many preapprovals and prequals for subprime buyers who, either wound up with Slick LO down the street who would do the loan without any concern OR they decided to wait after hearing about their possible options.
I am glad the bar is being raised a bit with subprime lending. But, like Rand mentioned, there are more home owners who got an opportunity that never would have AND they’re doing GREAT.
[Jillayne, if my competitors would not do these of types of loans and not reem the client financially while doing so, then we wouldn’t be reading about predatory lending.]
Right on. Rhonda, the industry needs to have this dialogue. It’s a balancing act between corporations need to be profitable, free market competition, respecting the autonomy of the homebuyer, and the nature of the existing retail relationship between the LO and the homebuyer compared to what the homebuyer believes the relationship is.
Obviously I’ve left out many other roles within a typical transaction. Tim is adding to the discussion by pointing out that the role of escrow is to be neutral. With neutrality often comes frustration for the clients who come into his office to sign. He has a distinct vantage point that others reading this series of comments may not have.
JD…you mentioned statistics involving subprime and New Century (#48). Here are the correct numbers. Subprime composed approximately 40% of mortgages last year. “Subprime” being loosely defined.
New Century was the second largest independent lender having approx. 7% of the “independent” subprime market. Of the approx. 44 subprime lenders who have gone belly up the past six months, including New Centruy, the total market share involved is approx. 13.5%.
Of that 7%, New Century was runnng about a 15% deliquency rate and around a 5% default rate. Deliquency rate is calculated by those who are 30 days or more past due within the past 12 months.
That means, of the portfolio New Century had in MSBs, only 5% are going south, and 85% are paying as agreed. The problem with New Century is..as with almost every one that has gone south, no reserves were set aside for buy backs of those loans which are being sent back from the MBS packages.
Also, I just finished presenting a class on “Short Sales” to a group of realtors and brokers given from a lender perspective.
I guess we should be asking the question, at what point does the system have as a duty or obligation to protect the cosumer from another segment? When does an escrow officer step in after hearing a LO say “no problem, we’ll refinance you in a year”, and detail to the borrower the current financing costs, the total PPP they are subject to, and the rate/payment when the loan begins adjusting if they cannot or do not refinance? At what point does a mortgage broker step in and say “you’re buying too much” ? When is it my duty as a lender to say to the Broker/Loan officer “even though this loan submission fits within my matrix, I won’t do it ” ?
At what point are we to save the consumer from themself? And are any of us really in a position to make the determination of risk for a consumer and say ‘no, we won’t let you take that risk.” ?
Rhonda, here is another idea for great blog article. How about two or three case studies where a borrower purchased a home and only qualified for subprime loan products. Revisit those same borrowers at a point in the future and find out how they’re doing; If they’re doing well, what did those homebuyers do differently than the folks who are now defaulting?
The national media is interviewing folks in foreclosure and all the stories have one thing in common: they all feature homebuyers who faced a financial hardship that they were not prepared for such as a job loss, decrease in income, medical bills or medical problems that resulted in loss of income.
I’m all for reading about people who have made their subprime loan work for them and are surviving and thriving with their pay-option, interest-only ARM. Not just financial savy investors with lots of available cash, I’m talking about first-time homebuyers.
Hi Rand,
You ask a good question:
[At what point are we to save the consumer from themself? And are any of us really in a position to make the determination of risk for a consumer and say ‘no, we won’t let you take that risk.” ?]
My answer: The industry needs to answer this question, make a decision, and execute a plan. This original blog article that brought forth all this dialogue was written to do just that: help the industry talk to each other.
If the industry chooses not to take on your question, then the federal government is going to step in and do it for you.
When that happens, in my opinion, everyone loses except the politicians.
Hi Jillayne, that is a great idea…such a great idea…that I’ve all ready been doing that.
http://www.mortgageporter.com/reportingfromseattle/2007/03/my_first_subpri.html
Payoption…I can’t help you there…I talked more people out of them and never into one. They never fit my clientele.
And the post that Ed from Titleopoly liked: http://www.mortgageporter.com/reportingfromseattle/2007/03/part_2.html
addresses the two types of subprime borrowers (in my opinion). Some of these borrowers can turn the corner others just can’t seem to help themselves.
I’m making a second dash outside in the sun…going to walk my old Pug, Orson.
Rhonda, the scene you describe of an agent pressuring you to get a shakey buyer approved despite it not being in his best interests no doubt happens. Too many of us in this business can only a closing and a commission check I’m obviously not a mortgage expert so I rely on you to take care of my most cherished possession; the client I’m going to rely on to be so dazzled with his transaction that he refers his friends and family to me at the drop of a hat. If you got a referral from me in the first place it’s because somebody I respect was dazzled by you or I was personally dazzled. You’d likely have a repeat referral relationship with me because I trust you to provide guidance I’m not qualified to give. If you have misgivings about the wisdom of approving one of my clients I’d expect you to tell me so we can help him rethink his goals and map out a way for him to get there. I don’t want my lack of mortgage expertise to be the cause of my leading him where he shouldn’t be. As counterintuitive as it may seem, advising a client not to go forward with some transactions has been very good for my business; maybe not immediately but it pays off in referrals and the business I get later. Maybe I’m a freak and a bit of a pollyanna but if you help me take care of my clients, you’ll get more of my referrals. I’m not so naive as to believe that every agent will work this way with you but it’s how I operate and it’s what I expect from you (the lending industry).
JP, I would love to clone a freak like you!
With the scenario I described, I many times discussed with the realtor how the buyers were not in the best position to buy. It get’s tricky because there is only so much information, unless the buyer provides permission to discuss details of their finances…and even that can be walking on eggshells, a LO can provide an agent about a buyers finances.
Hey Jillayne…BLOG ALERT… will you please write one about what a LO can discuss ethically with an agent about the buyer?
I was feeling like a broker record. The buyers believed they “had the right” to own a home. And the agent thought, if they’re going to buy a home, she should be the one to sell it (it was a referal to her). And I had done “miracle loans” in the past (this can be a curse).
I think with all the subprime news…this agent is seeing why I was so concerned. With how crazy the loans were becoming, I can see how she could have thougth anyone could buy a home. The question of the day is…does that make it right?
Rhonda asks:
“Hey Jillayne…BLOG ALERT… will you please write one about what a LO can discuss ethically with an agent about the buyer”
Rhonda: JP Morgan/Chase Manhattan has a simple rule for what may and cannot be disclosed. Pretend it was written on paper, if you have to the shred the paper instead of throwing it the circular file..you cannot disclose it. Numbers, addresses, work history and credit information…nope. Qualify for financing, what types of remaining documentation is required and not yet provided, appraisal information…yes.
My understanding is this policy is a mirror of the disclosure laws. Enforcement by Chase is clear…if I violate it, I lose my job. No second chances. Needless to say, I like my job and my employer is a dream to work for. Given that, I err on the side of staying employed.
I don’t envy your position. I have had calls from agents demanding to know what is the loan status, because the Broker/loan officer won’t disclose information … so they decided to bypass the LO. Tough position when you feel pressured on a situation…
One of my favorite people works for Chase in my area. Anyhow, over the weekend, I had an agent with a large purchase wanting me to discuss my clients financial with him. I did not. My clients just returned from vacation and appreciated that fact. And, frankly, if they did not realize what I was doing, that’s that.
Agents do try to eeak out what ever info they can. I think the agent in this case did have best intentions (at least I hope so) and just wanted to present answers to the buyers. My response was, “I’ll talk with the buyers to review their options”. I know frustrated him.
[Hey Jillayne…BLOG ALERT… will you please write one about what a LO can discuss ethically with an agent about the buyer?]
Rand’s answer is a legal answer. If there’s a clear statement in the laws that govern mortgage lending, your quest stops there.
Rhonda is looking for an ethical answer. This existing blog comment area is an excellent forum for doing just that.
Rhonda, this is a great chance to test my assertions that more prescriptive ethical guidance is needed for loan originators. First, I checked your company website for a corporate code of ethics. If one exists, it is not available for public view, although I did find this statement under the company’s goals:
[Provide honest, clear and complete information to each client so they can make informed decisions.]
The next question becomes, who is the client? The borrower or your Realtor? Or both?
I noticed that your company is a member of NAMB, the Nat’l Assoc of Mortgage Brokers. Let’s see if the NAMB Code can help you solve this dilemma, restated, is “what can a loan originator ethically disclose to a Realtor about the buyer/borrower?”
Here is the link. Does this Code help us solve the question?
http://www.namb.org/namb/Code_of_Ethics.asp?SnID=1428682469
Oh Jillayne, don’t make ME or my company the example!
Our website needs work. It was recently revamped…and I have my own website. You know, I’ve never thought of having a “code of ethics”…but Jillayne, really what value is that? (I can hear you gasping right now). It’s just words. Anyone can say “work with me, I have integrity, ethics, low rates”, whatever! It’s text. Hopefully it means something, but in reality having a code of ethics on your website is MARKETING.
I think you’ve mentioned that NAMBs Code of Ethic’s is vague before…or am I mistaken?
At our company, Coldwell Banker Bain, we have a code of ethics and we are expected to abide by them and if we don’t, we are fired. Period. I worked at Windermere and they were also very strict. If anyone was egregiously unethical in their dealings with buyers or sellers, they were asked to leave. Period.
It’s not just marketing if the Code of Ethics is required, made mandatory and enforced.
Okay then, we can turn it into a generic case study for any loan originator.
In regards to a loan originator who is trying to answer the question “what can a loan originator ethically disclose to a Realtor about the buyer/borrower?”
I think this is a great question because it brings up duties an LO might have to the real estate agent who IS a part of a transaction. A real estate agent does need to know what’s going on. A loan originator can’t disclose confidential, private information about the borrower….Hmmm. Could an LO get something in writing from the borrower which authorizes the LO to talk to the borrower’s Realtor about some things but not others? Who would draft this? What are the consequences of drafting an agreement like that from scratch?
Right now there are a lot of Realtors out there who need to know if they have a subprime borrower with zero down who’s deal might not fund. There’s a need to know because of how a blown deal will likely affect all the other parties involved.
Here are the steps an LO would go through in trying to decide how to act in the above dilemma.
1. Gather all the facts and frame the issue.
2. Is there a clear statement of the law that directly addresses the issue?
3. Are you a corporate manager? If yes, apply managerial ethics.
4. Are you a partner in a partnership? If yes, you have fiduciary duties to your partners.
5. Are you a member of NAMB? If so, check the NAMB Code for guidance. http://www.namb.org/namb/Code_of_Ethics.asp?SnID=1428682469
6. Are you a member of any other industry association? If so, check their code of ethics.
7. Look at all possible consequences.
8. Identify your own values and examine the relationship between your values and who you want to be as a virtuous person.
9. Are there any formalized policies and procedures at your company? If so, apply.
10. Consider all alternatives.
11. Come up with reasons for each justifiable alternative.
12. Decide.
13. Act
14. Reflect.
Jillayne, I ask the borrower specifically what I can discuss of their finances with their agent. And, typically they all ready have “spilled their guts.” Other times, like a client I’ve been working with recently, they don’t want their agent to know anything about their finances…they are very discreet.
Marlow, if anyone is unethical at our company, I’m confident they would be fired as well. We just don’t have a code of ethics currently published on a web site. Promoting a code of ethics is a form of marketing–I’m not saying that’s a bad thing–but if you have it on print for the public to see, how is it not “marketing” in some degree?
I know it probably seems I’m belittling it, and that is not my intent. However, having a company’s ethics displayed is not guarantee that every employee cuts the mustard or that the employer actively enforces it. How appropriate for this post…professional status perceptions and reality!
Sometimes comments can get so off track!
[However, having a company’s ethics displayed is not guarantee that every employee cuts the mustard or that the employer actively enforces it]
Which is why going directly to step 9 and stopping there isn’t enough.
There are often a range of acceptable alternatives. Sometimes the toughest decisions are when we have to decide between more than one good alternative.
Even if your code of ethics is only promulgated internally it still sets a benchmark of what’s expected so there’s no room for subjective interpretation. Letting the public know what they can expect doesn’t have to take on a sleazy aspect of marketing. RE agents are required by license law to provide clients with a DOL published pamphlet on Agency Law which may effectively be more comprehensive than NAR as a de facto code of ethics. I don’t just hand it to them, I explain it point by point. While I think it’s good for my business I hardly consider it “marketing”. It’s only marketing when the words ring hollow as you speak them.
I don’t just hand it to them, I explain it point by point. While I think it’s good for my business I hardly consider it “marketing”
JD, you do make your COE true when it explain it. And you are, in effect, marketing (again, I’m not trying to belittle a COE) or promoting that you adhere to a Code of Ethics–you are essentiall showing (or selling) to a client that you have ethics. And although other agents are to adhere to the same COE, they are not “promoting” it like you are. This is what I mean my marketing.
Let me get this straight, Rhonda; somehow explaining a document that I’m required by law to disseminate to my clients is “promoting” it? If I were to just hand it to them, 90% would never read it just like the ream of docs they get from the loan process. To me, the difference between just handing them the document and explaining it is the difference between an agent who just does the statutorily mandated minimum and one who “adheres” to it voluntarily. Maybe at some level you could construe that as “marketing” but I’m not convinced that it’s a bad thing. In an industry with a reputation for less than ethical behavior an educated client is my best friend. I can understand at some level too that reducing one’s personal code of ethics to a single document can feel limiting but from an industry standpoint don’