What is the advantage of this program? Each loan officer gets a unique license number. If they lose their license in one state they cannot start lending somewhere else because state officials will not issue them a new license number.

This license number system has enormous potential. For instance, all mortgages could include a loan officer’s license number. This would make it easier to determine who is responsible for the origination of a given loan. If one loan officer has an unusual foreclosure level, then perhaps loans with that number will sell at a discount — or won’t be sold at all.

The registry program was created last year as part of the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (the “SAFE Act–). it’s the start of what in time will be tough, uniform licensing standards in all states — with no where to hide for loan officers who do subpar work.

Mortgages: 66,469 Loan Originators Now Registered is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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“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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An underwriter reviews your application file to assure you meet all program standards.

A loan officer does NOT approve your loan application. An underwriter has the authority to approve or disapprove an application.

How Do mortgage Loan Officers And Underwriters Differ? 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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