Okay, what does this mean and why should borrowers care?

When you sell a home and list with a real estate broker that broker works for you as an agent. When you engage a real estate broker as a buyer broker that broker works for you as your agent.

The term “agent” is very important, it means that the individual must put your interests first, even if it means a smaller real estate commission.

With lenders, we’re told, the obligation is to serve the best interests of an investor — and not the borrower. With the huge exception of the UpFront Mortgage Brokers Association, lenders have repeatedly said they do not and cannot represent borrowers.

One result is that borrowers looking for the best rates and strongest mortgage quotes have often gotten loans with higher costs and worse terms than could be justified by their income and credit.

As an example, according to the Wall Street Journal 55 percent of all subprime borrowers qualified for FHA, VA and conventional financing in 2005, a figure which rose to 61 percent in 2006. (See: Subprime Debacle Traps Even Very Credit-Worthy, The Wall Street Journal, December 3, 2007)

New Licensure Law

For the past year or so the states and the federal government have not moved to force an agency obligation onto lenders, instead they have required lenders and loan officers to register under the NMLS. Each registrant, in turn, gets a nice, shiny number which they must attach to loan packages under the Wall Street Reform Act.

The registration number is important because there’s only a single permanent number per lender or loan officer. One result is that if you lose your license to lend in one state you cannot open shop elsewhere.

No less significant, if a given number has a high foreclosure level relative to a local area then investors might want to reject loans from that registrant for a mortgage-backed security (MBS).

Is the new FHA requirement good for borrowers? The answer is yes — after all, registrants with lousy records will be forced out of the business over time. That’s not as good as requiring an outright fiduciary obligation, but it’s a start.

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That’s the thinking of a considerable segment of the population, a segment represented in some of the email I receive as well as in the ethics classes I teach for real estate brokers.

Borrowers, according to such logic, should not be bailed out. They signed up for a loan and if it had woeful terms it was the borrower’s job to know better. Let the market take its course; if people fail they’ll know better the next time. Besides, individual responsibility counts.

It’s not up the government to rescue people who made bad financial decisions goes such thinking, especially real estate investors. As President Bush said in August 2007, “it’s not the government’s job to bail out speculators, or those who made the decision to buy a home they knew they could never afford.”

There’s much regarding the borrower-is-responsible view which is attractive, including simplicity. That said, borrower responsibility should be seen as a nuanced concept, one which requires a look at both principle and circumstances. Here’s why:

Theory Versus Reality

Personal responsibility is a great theory, but when used on an absolutist basis it denies the reality of modern life, the fact that we are each dependent on one another because no one knows everything.

For instance, when you get dental work do you check to see that the dentist properly sterilized his instruments? Why not? Dirty dental tools can lead to massive infections that can disfigure your face, cause you to go blind and lead to brain injuries and death.

The truth is you don’t check the dentist’s instruments for the same reason you don’t ask a chef when he last washed his hands or the brake repair guy if he tightened all the bolts. Instead, you expect that even the most mundane activities have standards, protections and social norms which make your dealings safe and predictable.

Unfortunately, when it comes to mortgage lending virtually no one understands the paperwork they sign at closing and thus the full content of the loans they take out.

Don’t believe it? Let’s get some testimony from people who should be supremely adept at mortgage matters, real estate attorneys with nationally-recognized expertise and credentials.

Unread Paperwork

First up we have Mel Martinez, previously a secretary of the Department of Housing and Urban Development and a former United States senator from Florida. As Mr. Martinez told The Washington Post, “you know if I’m a lawyer and the secretary of HUD and I’m not reading this junk, you know there’s work’ to be done fixing the system.” (See: HUD Chief Seeks Simpler Sale Closings, June 2, 2001)

Next we have former HUD Secretary Alphonso Jackson. According to The Washington Times, “Jackson says he knows just how borrowers must feel when they’re caught off-guard by sudden surges in their monthly payments because they didn’t read the fine print in their contracts.

“‘I’m an attorney and I’ve had eight houses and I didn’t read all that mess. If I didn’t read it — and I doubt anyone around this table read it — then we can’t hold people responsible for not reading every line when they were closing their loan.’” (See: Jackson: Mortgage fine print not read, March 20, 2008)

Bargaining Over Terms

A basic concept in the contracting process is that both parties must be able “to negotiate as equals to have a valid contract,” according to Successful real Estate Negotiation. “In situations where one party feels compelled to act because he or she believes they have no choice, or do not have a valid opportunity to understand the agreement, or finds the complex and technical language used in the contract is over his or her head, then such contracts may, in certain instances, be declared invalid by the courts because these deals lack a true ‘bargaining over terms.’ A contract in which the language cannot be understood equally by both parties is a so-called ‘contract of adhesion.’”

Missing Protection

The mortgage system has broken down because in many places the standards and protections that any normal, rational person would expect are missing. The result is that blanket expectations of personal responsibility are not possible on a playing field which is neither fair nor level.

Regulators, for example, should be expected to protect the public interest yet did nothing to stop the widespread use of stated-income loans nor did they object to the unfettered use of option ARMs or interest-only mortgages, the toxic loans behind many of today’s foreclosures.

Not only did federal regulators fail to protect the public, they made sure that state regulators could do little if anything to defend borrower interests. As the federal Office of Thrift Supervision has said, state laws which “prohibit the financing of single premium credit life insurance or that restrict points, fees, and prepayment penalties or other forms of compensation are preempted” by federal regulations.

A Contract is a Contract — But Not Always

A mortgage is nothing more than a contract between a borrower and a lender. A lender provides cash in exchange for the borrower’s promise to repay the debt under certain terms and conditions.

But while the concept of a “contract” can be generally explained in just a few words, the actual mechanics of contract law fill large libraries. It’s not enough to just sign on the dotted line, a host of other factors potentially come into play.

“The case for personal responsibility is surely attractive,” says Jim Saccacio, Chairman and CEO at RealtyTrac.com, the nation’s largest source of foreclosure data and listings. “But our legal system plainly recognizes that personal responsibility does not exist in a vacuum. To look only at personal responsibility when considering mortgage issues is to miss the larger picture.”

As an example, in California the Fourth Appellate District Court of Appeal heard a dispute between a builder and a home buyer. The issue in Baker v. Osborne Development: Was the buyer obligated to use binding arbitration in the event of a dispute with the builder?

The written agreement between the parties was clear: Buyer Baker had agreed to use an arbitration service named by Builder Osborne. But the appeals court ruled in January that the requirement could not be enforced. Why? Because the terms of the agreement were unconscionable.

It’s not enough to bury “overly harsh” and “one-sided” clauses in a complex legal document and then expect them to be enforced. Fairness and balance also count, said the court, which ruled for Baker the borrower.

There are other elements required to create a valid agreement besides a signature. First, said the court, there is the matter of oppression. “Oppression arises when the parties have unequal bargaining power, leading to no real negotiation and lack of meaningful choice.”

Element of Surprise

Also, said the judges, the agreement failed because it contained an element of “surprise.”

“Surprise may arise when challenged terms are hidden in a prolix printed form drafted by a party in a superior bargaining position.” (The term “prolix” means lengthy and complex.)

Hmm — a prolix printed form. That sure sounds like a toxic mortgage agreement

The Role of Lenders

But what about lenders? Can’t borrowers rely on them for advice? Don’t lenders universally try to get the best rates and terms for borrowers?

“Some have proposed,” Harry Dinham, a former president of the National Association of Mortgage Brokers told Congress, “that a fiduciary duty standard should be implemented and mortgage originators and their loan officers should act in the ‘best interests’ of the consumer. NAMB remains opposed to any proposed law, regulation or other measure that attempts to impose a fiduciary duty, in any fashion, upon a mortgage broker or any other originator.”

Another leader of the lender community, John Robbins, former chairman of the Mortgage Bankers Association, has said that “a lender underwrites, approves and funds the loan. The lender does not hold himself out as an agent of the borrower. While a lender must serve its customers fairly, and the industry has done much to assure high professional standards, a lender owes a duty to its shareholders and investors. A borrower knows a lender offers its own products and does not offer to shop for borrowers.”

While some lenders — such as those who belong to the UpFront Mortgage Brokers Association — feel they have a fiduciary obligation toward borrowers, much of the lending industry does not. How can borrowers tell the difference? It’s virtually impossible because no lender advertises that “we’re not here to get you the best possible rates.”

While there’s an important standard of personal responsibility which ought to be recognized, it’s obviously a standard which is not absolute. This should not be seen as a surprise: As Supreme Court Justice Antonin Scalia — a principled conservative by any measure — has explained, “you can make an exception without the sky falling.”

(Update: If passed, the Wall Street reform bill will finally assume that lenders have a baseline obligation to treat borrowers fairly. In fact, the bill actually allows borrowers to collect big damages for lender abuses. Stay tuned to see if it passes and if the consumer protections remain in place.)

————————

Published originally by RealtyTrac.com in 2008 and posted with permission.

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Speaking before the Senate Judiciary Committee last year, FBI Assistant Director Kevin L. Perkins noted that the FBI now has new funding to chase mortgage fraudsters under the Financial Intelligence Center (FIC).

The FIC, says Perkins, allows the FBI “to investigate mortgage fraud, predatory lending, market manipulation, and other financial frauds. The FIC is currently staffed with one supervisory intelligence analyst, eight staff operations specialists, and six intelligence analysts. In FY 2010, the FIC should be fully operational with a total staffing level of 58.”

This is a big jump in personnel and the effort should be welcomed but the problem concerns predatory lending.

What, exactly, is the FBI supposed to investigate? Predatory lending where a borrower is hurt by the actions of a lender is not a federal crime while mortgage fraud — where a lender is hurt — is entirely unlawful.

As an example, Smith qualifies for an FHA loan but is sold a subprime mortgage by his nearby, friendly mortgage lender. The result is that Smith pays, say, 7 percent rather than 5 percent interest and his monthly cost for a $200,000 loan goes from $1,073 for principal and interest to $1,331. That’s an additional $258 a month or $3,096 a year, a loan which is less affordable and far more likely to result in foreclosure. It’s also a loan which is fundamentally unfair given Smith’s credit and financial standing.

Why is it that unfairly taking an additional $3,100 a year from borrower Smith is lawful but robbing $20 from a convenience store is a crime? As Woody Guthrie explained, some people will rob you with a gun and some with a pen. In either case, it’s still robbery.

Under federal rules, mortgage lenders have no obligation to get the best rates and terms for borrower Smith. There is no fiduciary obligation to a borrower, no agency requirement. Unfortunately, Smith has no place to get mortgage information other than, well, mortgage lenders. Smith relies on lenders for information, advice, product options and rates.

It’s great that the FBI has more funding and will be able to field more people in the fight against financial fraud. That’s right and proper. But it’s not fair to the FBI to ask for their help in the fight against predatory lending when predatory lending is perfectly lawful under federal rules.

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Technorati Tags: agency, crime, FBI, fiduciary, foreclosure, lending, loan, mortgage, predatory, Woody Guthrie

“The Wall Street reform bill in Congress represents the strongest consumer financial protections in history,” says President Obama. “You’ll be empowered with the clear and concise information you need to make the choices that are best for you. We’ll help stop predatory practices, and curb unscrupulous lenders, helping secure your family’s financial future.”

Well, yes and no.

There’s no doubt that many of the provisions outlined in the proposed legislation, S.3217 — the Restoring American Financial Stability Act of 2010 — will do much to end abuse in the mortgage lending field. And while it’s true that the version of the bill online today uses the term “mortgage” 109 times, it’s also true that it contains no federal requirement that would make predatory lending illegal. In fact, the term “predatory” does not appear once in the 1,421 pages of the proposed legislation.

What’s A Predatory Loan?

In basic terms “mortgage fraud” can be seen as some sort of abuse where a lender or mortgage investor is hurt. If you want examples of mortgage fraud just look at the annual statistics produced by the FBI. The latest edition, the 2008 Mortgage Fraud Report “Year in Review,” tells us that “fraud filings from financial institutions increased 36 percent to 63,713 during Fiscal Year (FY) 2008 compared to 46,717 filings in FY2007. The total dollar loss attributed to mortgage fraud is unknown; however, at least 63 percent (1,035) of all pending FBI mortgage fraud investigations during FY2008 involved dollar losses totaling more than $1 million.”

And what about predatory lending, instances where borrowers are screwed by lenders? Nope, not one reported case of lender abuse.

The FBI report is entirely right. Why? Because predatory lending is not a federal crime.

Attorney Benny Kass, a long-time real estate columnist for The Washington Post and an authority in his field, says “there are no federal laws making predatory lending illegal.”

The reason predatory lending is not a federal crime is allegedly that no one can define “predatory” lending. In fact, lenders and loan officers under federal rules have no duty to get the best possible rates and terms for borrowers. Instead, their obligation is elsewhere. As the Mortgage Bankers Association explains “mortgage originators already have significant ‘skin in the game’ in the form of representations and warranties that they make to their investors.”

It doesn’t have to be this way. For instance, S. 3417 talks about “rules with respect to fiduciary or suitability requirements in the sale of annuities that meet or exceed the minimum requirements established by the Suitability in Annuity Transactions Model Regulation of the National Association of Insurance Commissioners.”

Okay, so why can’t there be rules establishing “fiduciary or suitability requirements in the sale of mortgage liens?” After all, the legislation says that it’s intended to “to protect consumers from abusive financial services practices.”

Had such rules been in place five years ago there would have been no financial meltdown and no federal bailout. Mortgage-backed securities would be backed by quality paper. Insurance used to compensate investors for bad mortgage-backed securities would have had far fewer claims. Ratings agencies could correctly rate mortgage-backed securities as safe and secure. Millions of foreclosure notices would have been avoided. While home values may not of soared to the heights seen in 2007 they also would not have collapsed to the levels seen in 2010. The value of your home would be worth more today and there would be a ready market if you wanted to sell.

Predatory lending will always be legal and lawful as long as big lenders have a strangle-hold on Washington. While the new legislation potentially holds many benefits for consumers, the most important benefit of all — the right to a fair deal in the mortgage marketplace — remains missing.

_______________________

Published originally by the author on the Huffington Post.

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Fixing the mortgage system is crucial if we’re to prevent another financial meltdown. If the mortgages are done right than mortgage-backed securities will also be right — and that means there won’t be worries regarding securities ratings or insurance. Lenders will not be stuck with overvalued properties and undervalued paper.

No less important, if we fix the mortgage origination system we will also protect borrowers. No more toxic mortgages which are at the heart of our financial problems.

Here are six steps the borrowers, lenders and government officials can take now, this week, to revamp the mortgage system.

First, in the past year a Nationwide Mortgage Licensing System supported by state regulators and the federal government has begun operations. In essence loan officers now have unique registration numbers even if they move from state to state. This means the name and registration number for a loan officer can be included in mortgage documents — and loan officer performance can then be graded in the same way that we have credit scores. It may well be that prudent investors will not want mortgages included in a mortgage-backed security from loan officers with a score below a certain level — and it may also be that lenders will not want to hire such poor performers. Of course, the same concept of registration and responsibility should be extended to mortgage underwriters.

Second, lending rules must be changed so that loan officers have a fiduciary obligation to borrowers, in the same way that lawyers have an obligation to clients and doctors have an obligation to patients. The creation of a fiduciary obligation for loan officers would mean that aggrieved borrowers could take loan officers and their lenders to court in the event of abuse, a system which seems to work well for virtually every other type of business. Members of the UpFront Mortgage Brokers Association already have adopted this standard and promise that they “will endeavor to act in the best interests of the customer,” disclose their fees up front and credit the borrower for cash they receive from third-parties.

Third, require that all loans be fully documented and that income and employment are verified. This would do away with “stated income” loan applications where lenders do not verify borrower income claims.

Fourth, have HUD set the interest rate and points for FHA loans — and post that information daily online. There’s no reason this can’t be done. In fact, until 1983 HUD actually did set FHA mortgage rates. Borrowers would then have an easy way to follow the market by using FHA rates as a benchmark.

Fifth, predatory lending is NOT a federal crime. Loan fraud — where a lender is abused — is very much a federal crime but predatory lending where a borrower is overcharged by a lender is entirely ignored by federal laws. The next time you hear a politician yammer about “predatory” lending ask if he or she would support a specific federal law against such activities.

Sixth, every mortgage-backed security which has a high level of foreclosures should be audited by the FBI to assure that all loans were properly underwritten. When that’s not the case then appropriate action should be taken against the lender, the loan officer, the underwriter and the Wall Street securities packager who were paid for such work.

Would these ideas work? You bet. Toxic loans would be impossible and there would be real penalties for abusing borrowers and investors.

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But nowhere in the news do we hear of any effort to help the mortgage borrowers whose screwing made the financial meltdown possible. While the SEC is concerned about helping securities investors who lost $1 billion, no one gives a damn about the people who lost their homes.

Let’s look at what really happened:

*We have millions of foreclosed homes, a downsized economy and massive job losses as a result of the financial meltdown.

*The federal government had to bail out Wall Street because big banks and brokerages were stuck with mortgage-backed securities (MBS) they were unable to unload on pension funds and various investors.

*The MBS were insured in case their value eroded, but the insurance was no good because there were few if any reserves set aside for claims.

*To create mortgage-backed securities, Wall Street needed an ongoing supply of mortgages. Since lenders could sell virtually all the loans they originated it made sense to lower application standards and introduce non-traditional mortgage financing and popularize option-ARMs, interest-only loans, financing with little or nothing down, piggy-back financing and “stated income” loan applications which allowed borrowers to essentially guess their income.

Bottom line: There would not have been a financial melt-down if the mortgage origination process was effectively regulated at the point of sale, the moment when loans are sold to borrowers. With good loans the mortgage-backed securities would have been fine, the ratings would have been justified, few insurance claims would have arisen and a Wall Street bailout would have been unnecessary.

Best Rates And Terms

Anyone who has ever looked for a mortgage naturally wants the best possible rate and terms for their financial situation. And lenders are happy to offer such rates and terms, at least that’s what they say. After all, no one would use a mortgage lender who advertised the second best rates in town.

In other words, virtually all borrowers rely on mortgage lenders for product options, rate information and counseling. And lenders, for their part, have no obligation under federal rules except to maximize their profits.

Don’t believe it?

“Some have proposed,– said Harry Dinham in 2007, then president of the National Association of Mortgage Brokers, “that a fiduciary duty standard should be implemented and mortgage originators and their loan officers should act in the ?best interests’ of the consumer. NAMB remains opposed to any proposed law, regulation or other measure that attempts to impose a fiduciary duty, in any fashion, upon a mortgage broker or any other originator.

“Simply put, a mortgage broker should not, and cannot, owe a fiduciary duty to a borrower. The consumer is the decision maker, not the mortgage broker,– says Dinham.

John Robbins, then chairman of the Mortgage Bankers Association, explained during June 2007 congressional testimony that “notably, MBA does not believe that a disclosure of function and fees is warranted for mortgage lenders. Unlike a broker whose role may be uncertain — agent or loan provider — a lender’s role is clear. A lender underwrites, approves and funds the loan. The lender does not hold himself out as an agent of the borrower. While a lender must serve its customers fairly, and the industry has done much to assure high professional standards, a lender owes a duty to its shareholders and investors. A borrower knows a lender offers its own products and does not offer to shop for borrowers.”

No Help For Borrowers

While the SEC is busily doing battle with Goldman Sachs, who is fighting for the borrowers who lost their homes? The SEC claims that 99 percent of the residential mortgage backed-securities (RMBS) in one loan portfolio had be to downgraded. Is there any possibility that loans which fail with such frequency were tainted from the moment of origination? Can lawyers claim an unconscionability defense on behalf of borrowers with such mortgages?

Lenders point out that borrowers signed all the paperwork and were free to decline loan offers. But who was the authority figure in the room? Upon whom did borrowers rely? Has anyone actually read their loan papers?

Mel Martinez, an attorney and former HUD Secretary under George W. Bush told the Washington Post, “you know if I’m a lawyer and the secretary of HUD and I’m not reading this junk, you know there’s work’ to be done fixing the system.” (See: “HUD Chief Seeks Simpler Sale Closings,” June 2, 2001)

Attorney and also a former HUD Secretary under George W. Bush, Alphonso Jackson, told the Washington Times that “I’m an attorney and I’ve had eight houses and I didn’t read all that mess. If I didn’t read it — and I doubt anyone around this table read it — then we can’t hold people responsible for not reading every line when they were closing their loan.’” (See: “Jackson: Mortgage fine print not read,” March 20, 2008)

What lenders won’t point out is this: Every loan, without exception, is underwritten. The lenders create qualifying standards for each mortgage product and have in place an extensive process to assure that the borrowers met all requirements. Lenders can decline questionable loan applications, something that no doubt would have happened were it not so easy to sell such paper on Wall Street.

To their credit, many small lenders did not and do not regard homebuyers as prey. Few community banks or credit unions, as examples, offered toxic loan products.

Think about it the next time you need a mortgage.

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But will the new collaborative really change marketplace realities? You’d like to hope that the answer is yes but traditions can be hard to overcome.

The group says its members generate mortgages worth $520 million annually and describes itself this way:

“For the first time ever,” says the Collaborative, “American consumers seeking mortgages will now have the option of using lenders that are certified as “safe,– “fair– and free of predatory lending, under a 21-member national network known as the nonprofit “Fair Mortgage Collaborative– (FMC), the members of which are committed to providing homeowners and homebuyers access to mortgages at a fair rate of compensation. The major effort supported by the Ford Foundation is the first national campaign of its kind aiming to restore consumer confidence in mortgage lending in the wake of the ongoing mortgage foreclosure crisis fueled in large part by predatory lending abuses.”

Standards

Okay, so how do we know that a lender is safe, or fair or not predatory? The Coalition has set up five standards:

___ FMC Lender Works for Customer, Not Other Way Around;

___ No Steering;

___ Absolutely No Predatory Loans;

___ Non-Standard Loans Require Clear and Compensating Customer Benefit; and

___ FMC Keeps Rules and Standards Current for New Loan Types.

Missing Lenders

The group is supported by an impressive list of housing foundations and related organizations, but what’s missing are the big banks, S&Ls, mortgage brokers and mortgage bankers who provide the overwhelming majority of the nation’s home loans.

Most lenders have traditionally opposed the concept of working for borrowers. No less important, federal rules are entirely devoid of any requirement to get the best possible deal for the borrower, what’s generally known as a fiduciary obligation.

“Fiduciary” is simply a fancy term that means when you employ someone they will put your interests first and not their own. Doctors, dentists, lawyers, buyer brokers and listing brokers all have an obligation to do what’s best for their patients and clients and if they don’t they can be sued. Lenders and loan officers under federal rules — the rules that count — have no such obligation.

Mortgage Brokers

“Some have proposed,– said Harry Dinham in 2007, then president of the National Association of Mortgage Brokers, “that a fiduciary duty standard should be implemented and mortgage originators and their loan officers should act in the ?best interests’ of the consumer. NAMB remains opposed to any proposed law, regulation or other measure that attempts to impose a fiduciary duty, in any fashion, upon a mortgage broker or any other originator.

“Simply put, a mortgage broker should not, and cannot, owe a fiduciary duty to a borrower. The consumer is the decision maker, not the mortgage broker,– says Dinham.

And where do consumers get their information? Upon whom do they rely for product options? How can a lender advertise the “best rates” or the “lowest” rates without being obligated to hold down the borrower’s costs? Would any sensible person go to a lender who advertised the highest rates?

Mortgage Bankers

John Robbins, a former chairman of the Mortgage Bankers Association, said during June 2007 congressional testimony that “notably, MBA does not believe that a disclosure of function and fees is warranted for mortgage lenders. Unlike a broker whose role may be uncertain — agent or loan provider — a lender’s role is clear. A lender underwrites, approves and funds the loan. The lender does not hold himself out as an agent of the borrower. While a lender must serve its customers fairly, and the industry has done much to assure high professional standards, a lender owes a duty to its shareholders and investors. A borrower knows a lender offers its own products and does not offer to shop for borrowers.–

The problem, of course, that in the everyday world of borrowing consumers have no idea who is or who is not a mortgage broker or a mortgage banker. What consumers do know is that they need assistance with what’s likely to be their largest purchase, a mortgage — and not a house. For example, imagine that you buy a home for $200,000. You get a $190,000 mortgage at 6 percent over 30 years. The total interest cost over the life of the loan will be $220,094.

Changing Industry Standards

Interestingly, I suspect that a number of mortgage brokers, mortgage bankers, community banks, credit unions and thrifts will be willing to be certified under the terms of the Fair Market Collaborative. Why? Because they realize that the best way to build “relationships” with people is not to drive them into bankruptcy. Just look at the lenders who refused to originate option ARMs, interest-only mortgages and have never accepted stated-income loan applications.

But in addition, more is needed. Federal standards must be changed to assure than when you get a mortgage and rely on a loan officer for advice that the individual who provides information is absolutely obligated to get you the best possible rates and terms.

Certified Lenders

Lenders can be certified by the Collaborative and hopefully borrowers will be educated to only deal with lenders who have agreed to the group’s standards. Those who have so far been certified to offer “safe and fair” mortgages include:

__ The Boeing Employees’ Credit Union (BECU)

___ Prime Alliance Solutions

___ The Federation of Appalachian Housing Enterprises & Just Choice Lending

___ The Mortgage Grader

___ The National Council of La Raza Homeownership Network and Direct Lending Family

___ The National Federation of Community Development Credit Unions (The Mortgage Center)

___ Neighborhood Housing Servics of America and Just Price Solutions

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Technorati Tags: bankers, brokers, clients, Collaborative, fair, fiduciary, lenders, market, Mortgages, predatory, safe

“The very success of the mortgage industry creates a dilemma for those who want to reform the system,” says Jim Saccacio, chairman and CEO at RealtyTrac.com. “How do you make the mortgage industry better without ruining the present system, a system which to this point reliably makes loans available nationwide at low rates and with little down?”

By “better” a growing number of consumer groups and lawmakers mean giving borrowers a stronger shot at low rates and less-expensive loans. Forget about how loans are packaged or sold, say reformers, who instead argue that the mortgage system is enormously successful and profitable precisely because borrowers routinely overpay for their loans.

Consider “stated-income” loan applications. If you apply for a loan and with a stated-income application the lender doesn’t check your salary or income. Of course, such applications mean extra risk for the lender so the loan rate is increased. The catch is that many of those who use stated-income loan applications don’t need them and don’t need to pay a premium rate for their loans, a premium that produces additional profits for loan officers and lenders.

Why is it that many borrowers don’t need stated-income loan applications? Because they’re employed. They can easily provide payroll stubs, W-2 forms and tax returns. For them, a stated-income loan application is unnecessary.

Reformers essentially argue that loan officers and borrowers are not equals. Borrowers enter the lending system every few years and are entirely dependent on experienced and skilled loan officers for current loan information. Shopping around for the best rates and terms makes no difference because loan officers have no obligation to obtain anything other than the financing which produces the highest commissions and largest profits. In effect, there’s no borrower advocate in the lending system and borrowers have insufficient knowledge and experience to make informed decisions.

Carolyn Warren, in her insider’s book, Mortgage Rip-Offs and Money Savers, offers this example:

As a wholesale account executive, I got a loan approved for a couple who had six pages of late payments and paid-off collections. These people had stiffed everyone from Visa to the pizza delivery guy. It was one ugly credit report! But this lucky family had just inherited money, so they got their loan. The catch was that they had to make a 20 percent down payment and take a high interest rate with a two-year obligation (prepayment penalty).

What’s interesting is that the investor wasn’t the only one who wanted more money. On top of the lender’s high rate, the loan officer jacked up the rate by an additional 1 .25 percent so she could collect the maximum back-end commission for herself. Then she added a couple extra points up front, too, because she figured they’d consider themselves “stuck” and wouldn’t shop around. So Mr. and Mrs. Lucky ended up paying triple for their bad credit, because on top of what the lender required. the loan officer saw an opportunity to take advantage. And that’s the way it usually goes.

But what if the system were changed? Instead of loan officers who have no obligation to the consumer, what if loan officers were required to act like doctors, lawyers and real estate brokers and put client interests first?

That’s exactly the standard being pushed by Sen. Charles Schumer (D-NY). Under Schumer’s proposed Borrower’s Protection Act, every mortgage loan officer would have a “fiduciary relationship with the consumer.”

Think about when you use a doctor, lawyer or real estate broker. In each case there are standards and expectations. If a doctor, lawyer or broker fails to put your interests first or does not meet basic standards of practice then you have recourse, you can sue for damages and the professional can lose his license.

However you can’t readily sue if there are no performance standards in place or if the professional does not have a “fiduciary” or “agency” obligation. In effect, you can’t sue a car salesman, loan officer or waiter if you pay too much.

In basic terms a “fiduciary” obligation means that your interests come first and that your doctor, lawyer or broker is really your agent. The word “agent” is a loaded expression because it means that an individual has defined, lawful obligations to serve your best interests.

The Schumer bill at this moment is merely a proposal, it’s not law. One can expect the lending industry to oppose Schumer’s proposal at every step in the legislative process.

“Some have proposed,” says Harry Dinham, president of the National Association of Mortgage Brokers, “that a fiduciary duty standard should be implemented and mortgage originators and their loan officers should act in the ‘best interests’ of the consumer. NAMB remains opposed to any proposed law, regulation or other measure that attempts to impose a fiduciary duty, in any fashion, upon a mortgage broker or any other originator.

“Simply put, a mortgage broker should not, and cannot, owe a fiduciary duty to a borrower. The consumer is the decision maker, not the mortgage broker,” according to Dinham.

John Robbins, chairman of the Mortgage Bankers Association said during June 2007 congressional testimony that “notably, MBA does not believe that a disclosure of function and fees is warranted for mortgage lenders. Unlike a broker whose role may be uncertain — agent or loan provider — a lender’s role is clear. A lender underwrites, approves and funds the loan. The lender does not hold himself out as an agent of the borrower. While a lender must serve its customers fairly, and the industry has done much to assure high professional standards, a lender owes a duty to its shareholders and investors. A borrower knows a lender offers its own products and does not offer to shop for borrowers.”

What are the odds that the Schumer bill will pass? In today\’s financial environment, perhaps 50-50 because you have a powerful and important senator competing with a powerful and important lobby. But if foreclosure rates rise, if the lending system becomes a political hot topic in the way that telemarketing was important to voters a few years ago, then no one would be surprised if Schumer prevails.

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Published originally by RealtyTrac.com during May 2007 and posted with permission.

Who Should Loan Officers Represent? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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“The system is out of balance,” says Sen. Chris Dodd (D-CT), “There is a chain of responsibility that makes these abusive loans possible.”

The way Washington works is that you have to read between the lines. Notice that Dodd’s core concern is not “predatory” loans or even “subprime” mortgages. The bigger issue — the one that impacts more households and more voters — are “abusive” mortgages, a potentially huge and important matter in every state.

Dodd says he does “not believe that all subprime or exotic lending is predatory or abusive. To the contrary, subprime credit can be a valuable tool in helping people become homeowners, and in unlocking the equity in their homes.”

But Dodd does wonder why so many people have faced foreclosure in recent years.

“I understand that many argue that the impact of the economy and other ‘life events’ such as illness, job loss, divorce, and the like, are the key variables in determining mortgage delinquencies and foreclosures,” he says.

“No doubt this is true,” he continued. “But those economic and personal factors do not fully explain the precipitous rise in defaults and foreclosures. It is time for the Congress, the Administration, and the lending industry to face up to the fact that predatory and irresponsible lending practices are creating a crisis for millions of American homeowners at a time when general economic trends are good.”

“Predatory” lending practices we understand — these are loans with unfair and unconscionable rates and terms. In many cases, predatory mortgages are “loan-to-own” financing where the lender hopes the borrower will be foreclosed. Such lenders are actually engaged in the “encouragement of default,” a process entirely at odds with the objectives of any ethical lender.

“Irresponsible lending practices,” on the other hand, are a much more interesting subject. What does such a term mean?

As Dodd explains, “the problem is, most of these loans are perfectly legal, even as they do real harm to borrowers and neighborhoods.” In other words, some of the very loans you can get today are not “predatory” in the traditional sense, but they are abusive in other ways.

Dodd does not mention the term “suitability” in his statement, but that’s really the issue. Should lenders be required to meet a “suitability” standard before granting a loan?

Lenders argue that suitability standards are actually in place — the underwriting guidelines they use concerning credit, debt, income and assets. Speaking before Congress last week, Douglas G. Duncan, Senior Vice President with the Mortgage Bankers Association, said “the data does not show that unsuitable products or predatory lending are the cause of delinquencies and foreclosures. The foreclosure problem is based on economic difficulties that confront borrowers.”

But if it’s true that the economy is expanding, income is up and the job base is growing, then why has there been such a dramatic increase in foreclosures? According to RealtyTrac.com, foreclosures topped 1.2 million units in 2006, up 42 percent from 2005.

By any standard, one of the “economic difficulties that confront borrowers” is nothing other than rising monthly mortgage payments.

Indeed, says Dodd, “Mark Zandi, Chief Economist at Moody’s Economist.com, notes that the current high delinquency rates are unusual because the economy is relatively strong. Zandi attributes the increasing delinquencies, in part, to the resetting of subprime and other ARMs at higher rates. This is particularly worrisome given the fact that about $600 billion in ARMs will reset this year.”

The worry for lenders is that a suitability standard will create new problems. First, “rigid” guidelines will cause fewer loans to be issued, thus reducing volume and profits. Second, what’s “suitable” to Jones may be unsuitable to Smith, meaning that lenders may have significant liabilities when turning down borrowers if they cannot plainly justify underwriting decisions.

Alternatively, we have in place a system where we allow lawful loans that produce curious results. Dodd raises these points:

• Over half of subprime mortgages are stated-income loans, loans which the industry often refers to as “liars loans.” The question is, who’s lying? According to a survey of over 2,000 mortgage brokers, 43% of brokers who make these loans do so because they know that their borrowers don’t have the income to qualify for the loan. Why do they make these loans? Because they are paid more to do so.
• Brokers “upsell” borrowers. That is, they put borrowers in loans with higher interest rates than they could otherwise qualify for, because the brokers make greater commissions, called “yield spread premiums,” by doing so. YSPs are a perfectly legitimate tool to provide borrowers with no closing cost loans. But HUD has told us that half of the YSPs paid, about $7.5 billion, do not go to closing costs, but go simply to increase broker profits.
• Minority borrowers are being targeted for higher cost subprime mortgages, regardless of their financial health. The 2005 Home Mortgage Disclosure Act (HMDA) data show that over half of African-American borrowers and 46% of Hispanic borrowers were given high cost subprime loans. By comparison, only 17% of whites took out such loans. Yet, according to the Federal Reserve, borrower-related characteristics such as income could explain only about 20% of this disturbing difference

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• About 70% of subprime loans have costly prepayment penalties that trap borrowers in high cost mortgages, mortgages that strip wealth rather than build it, and these penalties keep borrowers from shopping for a better deal. Unfortunately, living in a minority neighborhood puts a homeowner at significantly higher risk of having a prepayment penalty.
• Approximately 8 in 10 subprime loans today are 2/28 adjustable rate mortgages, mortgages whose monthly payments will spike up by as much as 30% to 50% or more. Many of the borrowers who take these loans — unaware of the payment shocks that await them — have no prospects of being able to make the higher payments, and are forced to refinance the loan, if they have sufficient equity to do so. Each refinance generates new fees for the lenders and brokers, and strips more equity from the homeowner. One lender, in discussions with my office, called subprime 2/28 loans “foreclosure loans.”

“When it comes to real estate financing we don’t want mortgages which promise ownership today but result in foreclosure tomorrow,” says Jim Saccacio, RealtyTrac’s Chairman and CEO. “Both our borrowers and lenders have a stake in making the system better and more secure, and so do our neighbors and communities.”

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Published originally by RealtyTrac.com during February 2007 and posted with permission.

Must Mortgages Be “Suitable” For Borrowers? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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On one side we have those who argue that only licensees who never take listings are properly entitled to use the term “EBA.” On the other side, we have those who contend that the term “EBA” can also be used by licensees who both represent buyers and represent sellers — as long as such representation does not occur within the same transaction.

For a very long the practice in real estate was to have brokers represent only sellers. Why? Because at the end of a transaction the buyer got the property and the owner got cash — money that could be used to pay brokerage fees.

The result was that you routinely had a situation where there was a broker who listed a home, and a broker who worked with a buyer, and they both represented the seller.

Why did the broker who worked with the buyer have an obligation to the seller? Because when the home was listed, the owner and the listing broker established a commission arrangement and the broker became an agent of the seller. The broker who assisted the buyer obtained permission to sell the property by becoming a “subagent” of the listing broker.

In the 1970s, brokers such as James B. Warkentin of McLean, VA began doing something different: They started to identify themselves as “buyer brokers” and began representing purchasers. Rather than being “sub-agents” of a seller, they became agents of the purchaser. Instead of working under the authority of the listing broker’s contract with an owner, buyer brokers worked directly for purchasers.

While it may seem obvious today that buyers and sellers have conflicting interests and thus benefit from separate representation, at the time the concept of buyer brokerage was regarded as revolutionary — and threatening. Some listing brokers refused to show their properties to buyer representatives, while others were entirely perplexed by the notion.

All of which gets us back to the term “EBA.”

Within real estate are those who believe that use of the term “EBA” should be reserved for licensees who only represent purchasers and never take listings. On the other side, we have those who argue that the term “EBA” can be used by licensees who represent buyers one day and sellers the next.

Despite loud, lengthy, and repeated efforts to dance around the issue, the term “EBA” has not been copyrighted or trademarked. Period.

• If “EBA” is not trademarked and not copyrighted, it’s not owned by anyone. It’s in the public domain. No association, coalition, or cabal can control the use of this term. (It may be possible for a state regulatory body to govern the use of a given expression, as — for example — use of the term “no cost” financing is regulated in California. Brokers should speak with attorneys for specifics.)
• If “EBA” is not trademarked and not copyrighted, it does not matter that other terms have been trademarked and copyrighted. They are not the issue.
• If “EBA” is not trademarked and not copyrighted, then there can be no test of purity, no standard to determine who is most virtuous and who is not, and no penalty for the alleged mis-use of the term.
• If a group or individual has attempted to trademark or copyright the term “EBA” and failed, then it is not trademarked or copyrighted.
• If “EBA” is not trademarked and not copyrighted, then any licensee can use the expression “EBA” anyway he or she elects.
• If “EBA” is not trademarked and not copyrighted, then to say that a licensee cannot use a term which is manifestly public may well raise cries of restrained competition.

There have been good and honorable folks on both sides of this debate, but it’s time to move on and not be distracted from the central question which concerns consumers: Will you represent my interests and seek the best possible price and terms for me in my transaction?

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Published originally by Realty Times on October 19, 1999 and posted with permission.

Must Buyer Brokers Be “Exclusive”? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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