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Archive for May, 2008

Who’s a Mortgage Fiduciary?

Are you ready for the next big argument about fiduciary capacity? It’s coming in the form of national loan originator licensing and it promises to be a doozy.

The Federal Housing Finance and Regulatory Reform Act of 2008 is proposed legislation that seeks to license anyone who quotes rates or fees to borrowers (among other things). It’s a political stunt, veiled as consumer protection that is yet another revenue racket for the government. It’s requiring a 20 hour pre-licensing course, with testing and national fingerprint registry.

Anyway, there’s a lot of talk about “acting as a fiduciary” to the borrower. The rhetoric leads me to this conclusion; it just can’t be done (at least under the current environment). A fiduciary is someone who subordinates her interests to her client’s. I just can’t determine how a mortgage banker can TRULY act as a fiduciary; they don’t have all the product offerings available.

Wells Fargo doesn’t offer negative amortization loans . Contrary to what you hear in the media, there are times when a negative amortization loan is JUST what the doctor ordered. If someone has a large amount of debt, it might be in their best interest to defer interest (at 6.75% pre-tax) so that they can free up some cash flow to pay down the higher interest debt (at 13% post-tax). In this flat housing market, it may be the only chance someone has to improve their credit score by swapping 13% money for 6.75% money. Many bankers can’t offer that product. Would they refer that loan out to a specialist (like an attorney or doctor would) or “sell” the client on the “in-house” loan program?

Conversely, would a Wachovia originator, who just cashed a check at Bank of America and noticed that they aggressively priced their 15-year loan, refer that loan across the street or write it at .25% higher?

Mortgage brokers, then, should be perfectly positioned to act as “true” fiduciaries. If transparent brokerage compensation was pre-negotiated in an exclusive right-to-finance agreement (much like a buyer brokerage agreement for REALTORs), mortgage brokers would be the natural choice.

Two problems arise:

1- Borrowers are contractually bound to one lending option – no more shopping.

2- The mortgage broker may be duty-bound to offer a loan program which might conflict with the timeline of the purchase contract.

Would a “mortgage fiduciary” be required to offer valuation advice? Oftentimes lenders cut loan-to-value offerings after an appraisal review. That’s done to mitigate market risk to the lender. Should the “mortgage fiduciary” insist on offering that valuation opinion to the client, so that they can instruct their REALTOR to renegotiate the transaction?

See where I’m heading with this?

The true fiduciary, in any real estate transaction, is the representing REALTOR.

REALTORs recommend financing experts based on pricing, service, and most importantly, performance. Is it a breach of fiduciary capacity to recommend a higher priced loan originator with superior performance? Not if the lower-priced lender neglects the contractual obligations which might lead to a higher-priced transaction (penalties or forfeited deposits).

REALTORs are the “pricing experts”, attuned to the machinations of the local markets. Their valuation expertise is granular by design and superior to the “ivory tower view” lenders have in with “computer-modeled” opinions.

This essay sounds like I’m glorifying REALTORs and bashing lenders- I’m not. The current system, in my opinion, offers borrowers the best opportunity to get competitive advice and financing, through an open market system. Suitability should be recognized in the underwriting guidelines and proper client disclosure. If lenders want to lend people money, why should an originator deny the client that opportunity?

Borrowers need to read their loan disclosures, do their homework, and seek good mortgage advice…all under the watchful eye of the only fiduciary in the transaction; the REALTOR.

Sorry REALTOR gang. I think it sends a mixed message to have two “bosses”. This ball belongs in your court.

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