Your Mortgage Matters Blog

The crash of the subprime market should come as no surprise. For the last several years subprime lenders have extended credit to non-creditworthy borrowers. Consumers with low credit scores have low scores for a reason – they are not creditworthy. When lenders ease their guidelines and provide 100% LTV (loan-to-value) financing to this class of borrowers, they should expect staggering losses.

More importantly though is the role of the loan officer. Part of their responsibility includes providing sound advice to their clients. Unfortunately, most loan officers see themselves as salespeople, so their primary goal is to close the loan so they can get paid.

The mortgage industry must address the roles and responsibilities of loan officers, and focus on the long term financial health of their business. What does that mean? Well, it means providing better training and education to loan officers to enable them to become consultants instead of salespersons.

Many consumers are somewhat lost when it comes to understanding the characteristics and features of the various mortgage products available in the marketplace today. Loan officers have a responsibility to make their clients aware that the loan amount for which they qualify may be substantially higher than their comfort level.

Additionally, lenders must redirect their primary focus from their bottom line to product suitability. Over the short term their financials may not be as rosy as they have been, but over the long term they will not experience massive foreclosures and staggering buy backs.

In short, loan officers must provide value to their clients. They must focus on the overall suitability of the product(s) they are recommending to the client, instead of selling on rate or monthly payment. This will require a change in culture for many mortgage companies, but over time it improve their reputation and set them apart for their competitors.

Why is it not surprising that Beazer Homes Investigation is the headline in today's business section of The Atlanta Journal-Constitution?  We've all known for years that some builders offer phantom incentives to buyers who use their affiliated lender.  Although regulators and other authorities never seemed to care, it appears as though they now have a keen interest in such business practices. 

Many folks don't give a second thought about using the builder's affiliated lender, but the implications can be significant.  Typically the builder will offer free upgrades to the buyer if they use their in house lender.  Sure, it sounds great, and who doesn't like getting something for free?  But is it really free?  Most of the time it isn't!

In fact, many times it's just another way to milk more money from the borrower.  How does it work?  Well, it's quite simple really.  Let me give you a common scenario.

A potential buyer walks into a new development and tours the model homes.  They identify a home plan they really like, and decide to make an offer.  During the process of making the offer, the builder's representative tells the buyer about the free upgrades they will receive if they use the builder's affiliated lender. 

Many times the stated value of the upgrades is significantly higher than the actual cost of the updgrades.  Additionally, the buyer is almost always quoted a higher interest rate that will pay back a premium that is more than sufficient to cover the costs of the upgrades. Essentially what happens is the borrower ends up paying for the entire cost of the "free" upgrades.

If the buyer is savy enough to get quotes from other lenders, they will find that the rate from the builder's affiliated lender is not competitive.  In those cases, the builder's sales representative usually tells the buyer that the other lender will be unable to honor their rate.  I've seen this happen many times.

The time has come for builder's and real estate company's to get out of the financing business.  They would be better served if they spent their time focusing on their core competancies.  Their only motive for having an affiliated lender is to put more cash in their pockets, and that, at the expense of their clients.

Thankfully these types of schemes are being exposed for what they are.  In the coming months, the federal and state governments should enact legislation to protect consumers from these types of predators.  Today's article in The Atlanta Journal-Constitution is the first step in the right direction. 

The recent woes in the subprime market clearly indicates the need for loan officers to be licensed.  Granted, some borrowers were simply poor credit risks and never should have been approved for a loan.  However, it's important to step back and understand the dynamics of the demise.

As loan officers we should be experts in our field.  After all, our clients come to us not only to get a loan, but also to get sound professional advice.  They look to us to provide guidance, explain product features (even the bad features), and help them made a decision as to which product is most suitable for their particular situation. 

You may be wondering how licensing will help.  Consider this, the majority of loan officers have no substantial financial education or background.  Many are just simply sales associates, and their primary objective is to close the loan, regardless of whether the product is suitable for the client.

Recently I was speaking with an account executive with one of the large national conforming wholesale lenders.  During our conversation she indicated that some of the subprime brokers have contacted her to establish a relationship with her company because their subprime investors have closed up, and the broker has no place to send their conforming loans.

These brokers revealed that they have pushed their conforming borrowers into subprime products simply because the broker did not know how to use Fannie Mae or Freddie Mac's automated underwriting systems.  That means these borrowers interest rates were substantially higher that they should have been.  I call that negligence and gross incompetence! 

Just take a look at some other similar professions such as attorneys, CPAs, financial planners, insurance agents, and realtors.  When clients meet with these professionals, they expect to receive sound professional advice from a competent advisor.  And these professionals must all pass an examination to obtain their license to conduct business. 

Why should it be different for loan officers?  It shouldn't!  Our clients expect the same level of professional advice that they would receive from their CPA or financial planner, and they deserve it.  It's about time for loan officers to become the experts they should be, and it's about time we implement educational and licensing requirements to make that happen.