by Brian Brady
Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL
Mortgage brokers have been under assault by the extreme transparency advocates these last few years. Very smart people have embraced technology as the catalyst of change. They proclaim that technology will change how the American public compensates mortgage brokers. I think their advocacy has some merit.
Most consumers just don’t care about extreme transparency in lending.
Oh, sure. The engineers who read Milton Friedman and St. Augustine may actually adopt a moral position about the evil greed that permeates our industry. They might vent about the immoral nature of the “secret profits” earned by originators who do business the “traditional” way. These consumers, a very minor subset of the population, are predestined to mistrust anything that smacks of traditionalism. Last decade, full-service securities brokerage firms advised people that their high commissions were actually more effective to get investors to buy and hold rather than to trade incessantly. Still, the engineers distrusted the establishment while they day-traded their retirement accounts away on high-flying internet IPOs through ScottTrade.
This decade’s real estate boom brought out these “efficiency experts” again. They looked at the transaction costs in lending and proclaimed, “Something is awry!” This breed of consumer, is never, I repeat, NEVER going to trust a an originator no matter how inexpensive the service offering is. A mortgage originator can point to the value a trained advisor brings until she is blue in the face and this crew will run to Lending Tree faster than you can say free pocket protectors. This tiny portion of the population is not going to do business with me or you or your cousin Angela. Ever.
Most consumers just don’t care about extreme transparency in lending.
I sent out an e-newsletter to 300 past clients, highlighting a few articles, all dealing with extreme transparency in lending. These were the responses I received:
1- One nuclear engineer e-mailed me proclaiming that he would be processing his own files in the future and insisted that I waive the $495 processing fee. In exchange for the fee waiver, he would order his own appraisal and title reports, fill out his application online, and fax his documentation in the required order if I sent him the list. That agreement was too damned easy.
2- My CPA called me to tell me that he had perused a sampling of HUD-1 statements and determined that my fees were higher than 60% of all the other loans for his clientele. I guess that means I’m priced right in the middle of the pack. His advise was for me to charge more (remember, he is MY accountant, too).
3- My car dealer buddies e-mailed me to proclaim that they just KNEW I was getting rich off of them…then they applied for a HELOC.
4- A very small subset called to tell me that they thought I was the most honest guy in the world and that they trusted me with their children.
5- Most people just e-mailed me and asked if I gave them a good rate.
Most consumers just don’t care about extreme transparency in lending
I’m writing this because I’ve had some great conversations these past few months about the merits of flat-fee mortgage brokerage and pre-negotiated fees at application. I learned that most consumers get the deer in the headlights look when you explain the transparent compensation model to them. When I tried to have them sign a fee agreement for exclusive mortgage brokerage services, my customers screamed “You’re charging me what?” I shook my head thinking, “The more things change, the more things stay the same”.
Borrowers like the freedom to apply for a loan with more than one institution. They’ve been trained to shop for loans with two things in mind: fees and rate. Over half of my borrowers do just that. They call me and ask why their rate isn’t in line with Bankrate.com. They ask me if I’m giving them the absolute lowest fees available (I’m not because it usually doesn’t serve their best interests). They constantly question how their mortgage loan fits into their long-term financial plan. I disclose every fee, including the yield spread premium, at application. I redisclose any changes immediately. I show borrowers every single fee our firm will earn from their loan transaction; I just don’t jump up and down and demand that they shop it.
Most consumers just don’t care about extreme transparency in lending.
They just want a fair deal and a professional on whom they can rely.
Marc Brinitzer says:
Brian, I can’t get past the idea that transparency advocates seem to be suggesting we allow the consumer to dictate how much we earn. Effectively, the consumer does that now by voting with their feet. I don’t have the right to tell the grocer how much he can make on a can of beans or an ear of corn–he doesn’t have to disclose–but I’m free to shop.
And for most types of loan (pay options ARM are a notable exception) any tampering that is done to YSP is immediately reflected in the rate. If my rate is higher than yours, the consumer gets their loan from you.
We could offer flat fees as Jeff’s new model suggests, but to believe that protects the consumer against all other forms of manipulation seems naive.
May 22, 2007 — 6:02 pm
Bill Archambault says:
Brian,
Is this “Ground Hog Day”?
Consumers want to know what they are getting and what they have to pay.
Brokers practice transparency because it’s the law of the land.
Everything else (YSP) is political manipulation of the consumers ignorance.
Marc Brinitzer has got it right the consumer is not obligated to accept your product. But, he’s wrong about the beans. The consumer can get that can of beans at the corner Stop and Rob, for a lot more. He’s wrong about the ear of corn, he can go to the farmer’s market and get it for a lot less. If he would talk to the grocer he could even negociate at the supper market, he probably won’t get anywhere but he can try.
Supper Markets are to Farmer’s Markets like Banks are to Mortgage Brokers. We don’t bargain with Super Markets or Banks because they’ve conditioned us to just accept their offering. We question the Farmer and the mortgage Broker because the same people that conditioned us to accept the Bank and the Supper Market have conditioned us to doubt about their betters. Banks would have you believe more is less if you get it from them.
Wouldn’t it be easer if we just told the consumer your cost is: $7,599.00 your payment is fixed at $1,495.00 per month for 30 years, and you should have about $3,000 available for prepaid home ownership cost. What else matters? Why does the consumer care where the money goes? In fact does the consumer care? I suspect all he wants to know is that cost and payment lower from the mortgage broker for the same money than from the bank.
Transparency is great.
Transparency is the law.
Transparency is confusing!
Bill
William J Archambault Jr
The Real Estate Investment Institute
http://www.reii.org
May 23, 2007 — 1:59 am
Bill Archambault says:
Brian,
Consumers want to know what they are getting and what they have to pay.
Brokers practice transparency because it’s the law of the land.
Everything else (YSP) is political manipulation of the consumers ignorance.
Marc Brinitzer has got it right the consumer is not obligated to accept your product. But, he’s wrong about the beans. The consumer can get that can of beans at the corner Stop and Rob, for a lot more. He’s wrong about the ear of corn, he can go to the farmer’s market and get it for a lot less. If he would talk to the grocer he could even negociate at the supper market, he probably won’t get anywhere but he can try.
Supper Markets are to Farmer’s Markets like Banks are to Mortgage Brokers. We don’t bargain with Super Markets or Banks because they’ve conditioned us to just accept their offering. We question the Farmer and the mortgage Broker because the same people that conditioned us to accept the Bank and the Supper Market have conditioned us to doubt about their betters. Banks would have you believe more is less if you get it from them.
Wouldn’t it be easer if we just told the consumer your cost is: $7,599.00 your payment is fixed at $1,495.00 per month for 30 years, and you should have about $3,000 available for prepaid home ownership cost. What else matters? Why does the consumer care where the money goes? In fact does the consumer care? I suspect all he wants to know is that cost and payment lower from the mortgage broker for the same money than from the bank.
Transparency is great.
Transparency is the law.
Transparency is confusing!
Bill
William J Archambault Jr
The Real Estate Investment Institute
http://www.reii.org
May 23, 2007 — 2:20 am
Russ says:
Brian:
I have been debating going with the set fees approach over the past couple of months. What I have found is the 1) it confuses consumers when you start throwing out YSP and rate sheets. 2) Just because I am setting my fees, it doesn’t mean the consumer is getting the lowest rate.
As you mentioned, most consumers, whether right or wrong, are trained to look at rate and fees. At the end of the day, what the bank makes is irrelevant. There are times where I have been making a ton of money on a deal but my rate quote blew all my competitors out the water. As I always tell upfront advocates, what does it matter to the consumer if my rate and fees are lower, but I am still making more money? If Shop A is at 6.25% and only making $3000k in YSP, but I am at 6% and making $5000k in YSP I don’t think the consumer cares because they are still getting the best deal available to them at that time.
Personally, I have been thinking of taking the transparent approach because I feel it might help me weed out rate shoppers more effectively if I can get an upfront commitment from them. You know, the folks who will gladly take all of your advice and counsel and then drop you in a heart beat for $10 in closing costs and .125% in rate after you helped them clean up their credit.
However, at the end of the day I still feel the best way to get a mortgage is to shop for the loan officer and not the mortgage, but that may be too radical of a concept.
May 23, 2007 — 9:06 am
Marc Brinitzer says:
“Everything else (YSP) is political manipulation of the consumers ignorance.”
I disagree. As Russ suggests, the consumer is entitled to the best deal they can obtain in the open market. Some will prefer to save money processing the loan themselves (if Brian gives them that choice). Others will buy at the Stop & Rob and pay more for the convenience. It’s a choice. We get to vote with our wallets. The consumer is entitled to know what my profit is but not to put limits on it.
There is an issue of risk that I haven’t seen discussed in this context. When I make a loan, I have to buy that loan back if it goes into early-payment default, something well beyond my control.
If I make two loans, one for $900,000, and another for $100,000, my exposure is much larger on the first. If I build this into my “cost” and charge a flat fee, the second borrower subsidizes the first.
May 23, 2007 — 12:24 pm
Brian Brady says:
“There is an issue of risk that I haven’t seen discussed in this context. When I make a loan, I have to buy that loan back if it goes into early-payment default, something well beyond my control.”
That is correct, Marc. People are forgetting that first payment default and 6 month early payoffs get chagred back to the mortgage broker nowadays.
May 23, 2007 — 1:32 pm
Robert Kerr says:
re: Most consumers just don’t care about extreme transparency in lending.
That’s a poorly reasoned argument against transparency, Brian.
This is really no different that nutrition labels on food. It doesn’t matter if the average consumer doesn’t care, or understand them.
The only food suppliers arguing against the labels are those who want to mislead or underinform consumers.
If a business can’t stand transparency, the next question on my mind is: “What are they hiding?”
May 23, 2007 — 3:42 pm
Brian Brady says:
re: Most consumers just don’t care about extreme transparency in lending.
That’s a poorly reasoned argument against transparency, Brian.
Who is arguing against transparency here? I’m pointing out that “extreme transparency” ie- “look at me I’m honest because I follow the law” is a flawed business model.
May 23, 2007 — 6:52 pm
Marc Brinitzer says:
The arguement for transparency seems to be that it will prevent consumers from getting hosed. But what I see so far is just a new marketing angle–the “look at me I’m honest” twist–that will reassure consumers, and behind which the unscrupulous will find new ways to do what they’ve always done.
The subprime meltdown, the pending pay-option and Alt-A meltdown, the roll-back in lending guidlines, and ultimately the real estate bubble itself didn’t a result of the lack of transparency.
May 24, 2007 — 7:57 am
Jillayne Schlicke says:
“Most consumers….just want a fair deal and a professional on whom they can rely.”
Consumers don’t trust mortgage professionals because you guys aren’t professionals: you are retail salespeople.
In order to become professionals, there is way more work to be done beyond attending a 3 day class and passing a test and calling yourselves mortgage planners.
The biggest problem is answering the question, “what is a fair loan?”
The best person to answer that question is the loan originator. In today’s Wall St Journal, there is an article about the real possibility of loan originators owing fiduciary duties to consumers.
This would bring the scales of justice back into balance.
HOWEVER, Fiduciary duties should be extended to more than just loan originators/mortgage brokers. This should also extend to loan officers who work for a bank, credit union, or consumer finance company.
Then the consumer wouldn’t have to fret about getting a fair loan. This would be your job requirement.
Don’t fight it; it’s a good move and will help mortgage lending rise from the ashes of the subprime mess as an emerging professional group.
May 24, 2007 — 11:31 pm
Brian Brady says:
Transparency exists, Jillayne. Consumer advocates would be better served teaching consumers how to read or how to spend a few hundred bucks to get an attorney to read their disclosures to them.
Bu there is no money in that.
May 25, 2007 — 8:48 am
Jillayne Schlicke says:
Hi Brian,
We disagree. Transparency does not exist, which is why your last statement in the original blog post is so important. We both agree on that: Consumers want a fair loan, and they want to be able to trust their loan originator.
If transparency existed, they would know they were being treated fairly and would trust their LO.
Handing over the required real estate disclosure forms to a consumer is like a doctor handing over a medical text book and telling the consumer to read it, or hire an attorney to read it for you.
A mortgage broker smackdown is coming and everyone knows it.
An average consumer does not understand what they’re given to read, which is why transparency doesn’t exist in lending.
I assert that the best way to achieve the goal of a fair loan is to put the burden of determining fairness back on to the mortgage loan originator.
Marc, LOs wouldn’t have to guarantee that the consumer received the best rate, best fees, or best payment, just that the consumer was treated with a fair PROCESS.
This is coming. Mortgage loan originators will go there, some kicking and screaming, and certainly some LOs already treat the clients as if they had fiduciary duties.
I am absolutely thrilled to see changes coming in retail mortgage sales, that will elevate the industry to that of an emerging profession. Many, many good consequences will result for consumers and LOs.
May 25, 2007 — 9:11 am
Brian Brady says:
“A mortgage broker smackdown is coming and everyone knows it.”
Say what? Define smackdown.
May 25, 2007 — 9:36 am
Brian Brady says:
“Transparency does not exist”
Patently incorrect, Jillayne. Disclosure of costs to a borrower, including any third-party compensation has been in existence for close to 17 years.
May 25, 2007 — 9:38 am
Jillayne Schlicke says:
Smackdown:
More and stronger state and federal government regulations aimed at mortgage brokers.
May 25, 2007 — 9:50 am
Jillayne Schlicke says:
What transparency is NOT:
Handing a consumer a stack of government-mandated disclosure forms.
How does Brian define transparency?
May 25, 2007 — 9:52 am
Marc Brinitzer says:
“Marc, LOs wouldn’t have to guarantee that the consumer received the best rate, best fees, or best payment, just that the consumer was treated with a fair PROCESS.”
What would you change to make it “fair” Jillayne?
Mortgage brokers must already disclose everything including estimated YSP within 72 hours of taking the application, and redisclose throughout the process. As you probably know, mortgage bankers–meaning LO’s working for Countrywide, Ditech, BofA, or any of the other banks, S&L’s, credit unions–are exempt from this requirement. That would be a good place to start protecting the consumer by the way–but that’s a whole other discussion.
But if mortgage brokers don’t adhere to the requirements, and many don’t, then it’s an enforcement issue, and I’d be the happiest mortgage broker in the world if somebody would throw those bums.
As a former CFP and holder of NASD Series 4,7, 24, 53 licenses, I can also speak from experience about the type of suitability standards Congress is now considering for our industry. And frankly I think I would welcome those along with the fiduciary obligation and expose to litigation they carry.
I have declined to do loans for people when I can’t see how they can possibly make their payments or when they are obviously lying about their income. Some are offended, and I’ve had some threaten to sue me for discrimination after they doctored their own W-2’s. I couldn’t even find a place to turn them in for the obvious fraud. In the end, I’m sure they went down the street and got their loan somewhere. Let’s put a stop to that.
Yes, we need to fix the mortgage industry, and the consumer needs to take responsibility for their actions too. The bulk of the boilerplate disclosures don’t hide anything terrible. I don’t read all that stuff when I refinance. However, a careful review of the Note, ARM Rider, and Prepayment Rider–about 4 or 5 pages in all, would reveal the dark secrets of any bad loan. Surely that’s not too much to ask when borrower several hundred thousand dollars. Common sense should tell people that the 1% rate can’t be fixed for 30 years when their friends are all getting 6.25%.
One big problem IMHO is that consumers think rate and payment are the whole story. They’ll take a “deal” from their friend or family member 6 months in the business, or from an on-line advertiser, trying to shave an eighth off the rate and loose their home because of the loan they got an inappropriate loan.
May 25, 2007 — 10:18 am
Jillayne Schlicke says:
Hi Marc,
I am currently co-drafting an article on fair process and informed consent for mortgage lending.
It will be similar to what doctors are required to do for their patients. Would you like to preview a draft before it’s published?
A fair process would include going over the documents with the consumer to make sure they read the important documents, for example, that you mention in the last comment, and also the LO would go further to make sure that the consumer understands what they are reading and understands the possible consequences.
Again, this is similar to how we are treated as patients in a doctor’s office when consenting to a medical procedure where an average consumer could not reasonably be expected to understand all the medical terminology in disclosure forms, and could not reasonably be expected to understand all the possible consequences. We don’t run to an attorney every time we need a medical procedure, because we TRUST our doctor.
I believe that laying out a fair process will help the industry grow from where it is now to a place where consumers can, as Brian pointed out, trust LOs as professionals.
May 25, 2007 — 10:38 am
Marc Brinitzer says:
I’d love to read that draft Jillayne.
I was thinking about your comment regarding the process at the doctor’s office and going over my last few visits. I really can’t remember the last time anyone at my doctor’s office did anything but shove a form on a clipboard at me and ask me to read it and sign. No explanation by the receptionist, much less the doctor.
If I am going to call foul on the doctor, my signature on a form won’t protect him. As the “poor, helpless consumer”, I just claim that I still didn’t understand when he said.
May 25, 2007 — 10:47 am
Bill Archambault says:
Brian,
I want to address and challenge Marc Brinitzer. His May 23rd letter starts by quoting me,
“Everything else (YSP) is political manipulation of the consumers ignorance.”
He then goes on,
“I disagree. As Russ suggests, the consumer is entitled to the best deal they can obtain in the open market. Some will prefer to save money processing the loan themselves (if Brian gives them that choice). Others will buy at the Stop & Rob and pay more for the convenience. It’s a choice. We get to vote with our wallets. The consumer is entitled to know what my profit is but not to put limits on it.”
Marc, then sights Russ May about what the consumer is entitled to.
I want to challenge Marc to explain what the consumer gains by mortgage brokers disclosing YSP? If a consumer has several loans for the same program to compare what besides cost, rate, and payment matter? Please tell us how the consumer benefits by knowing the YSP!
Please don’t tell us that more is less, because there is no YSP!
Please don’t tell us that $350,000.00 from a mortgage broker fixed at 6.000% for 30 years with $4,800.00 in closing cost is more expensive than the same loan from a bank, because the broker receives $5,250.00 from the wholesaler in YSP.
Please Marc, tell us what the consumer gains by knowing the YSP!
Marc, would you advise that if the consumer must deal with a mortgage broker they should deal with smaller firms, because larger brokers often receive premium YSPs?
Marc, please tell us do you really think Brian or anyone else would let the consumer processes his own loan? Brokers have the ability to negotiated their fees and Brian simply discounted his for this client. Would you lose several thousand dollars in points over $495.00 of processing fee? Would you risk your career and licenese by letting the consumer process their loan?
Finally Marc, you state. “The consumer is entitled to know what my profit is but not to put limits on it.” They are entitled to know what you receive in YSP, by law. It’s not profit it is part of your gross income, and in what other scenario do you know what a business gross or profit is? How does it help the consumer? Did you ever buy a new car? Did you buy it from a large dealer or a small one? Do you know that large dealers get a lager kick-back than small ones? Does it matter to the consumer what the dealer makes, as long as the consumer gets the car for less that others were asking?
Marc, I welcome disagreement, but support your position! Convince me with logic, not by shouting louder and longer.
Brian, forgive me. I know this is your forum.
Bill
May 25, 2007 — 11:07 am
Jillayne Schlicke says:
Hi Marc,
The more possible negative consequences of a procedure, the more time a doctor spends with the patient.
I recently had a tiny spot of early/pre-cancerous skin burned off my nose. The Nurse Practitioner was in the room with me for an hour.
I am of the opinion that buying or refinancing a house is like major surgery. Doctors spend more time when the possible consequences are grave.
It is not like that for you and I, because of our knowledge. To an average consumer, home buying is like major surgery.
Realize that the more professional the mortgage industry becomes, the more liability you will have….and the more you will be worth in the eyes of the consumer.
Decrease your liability and put it all on the consumer, and now you have an arm’s length, retail relationship with your consumer….and you are worth less in their eyes, and you are not trusted.
Open your spam bin. What’s there? Porn spam, penis enlargement spam and mortgage spam.
May 25, 2007 — 11:29 am
Brian Brady says:
Jillayne,
You are the best friend an experienced mortgage broker could have! I’m already in the club and my daughter will be in the club when she grows up so I’ll just shut up.
May 25, 2007 — 1:13 pm
Marc Brinitzer says:
Bill, I think I misunderstood the intent of your original statement about YSP. We may each be arguing the same side. I don’t think the consumer is better protected by knowing YSP, and I agree it clouds the issue. Crooks will still manipulate to their advantage anything this confusing.
I think Brian said it in a past quote–and I may be paraphrasing you Brian: shop the lender, not the rate.
Jillayne, that sound very reasonable.
May 25, 2007 — 3:23 pm
Bill Archambault says:
Marc,
Fair enough. My hot button may be a little to exposed, also.
Personally I believe that the only protection the consumers has is the integrity of the Loan Originator.
Brian and I agree on shopping the lender. To quote from “Get The Money / A Consumers Guide To A Successful Mortgage Application” on the subject of selecting a mortgage broker,
“So how do you select a mortgage brokerage? You don’t! You select a mortgage originator, salesman, loan officer, loan representative, the man, or the woman who you’ll be working with. Your satisfaction with your mortgage application is entirely dependent upon the person you deal with. You should start with a company with a good reputation, but there are great people at bad companies and some bad people at good companies.”
Bill
May 25, 2007 — 3:45 pm
Brian Brady says:
“How does Brian define transparency?”
That one made me break my silence. My answer is:
Much more completely than the government-required forms. I compute APR to the expected payoff as well as analyze the after-tax effect of the loan on the borrower, both today and through it’s expected life.
And that’s just it, ladies and gentlemen. Reading and explaining those forms is NOT going to adequately explain someone’s loan to them. Shifting the fiduciary responsibility to an originator will drive up costs to the consumer by eliminating competition.
As I’ve stated…wonderful. More pie for me to eat.
May 25, 2007 — 3:57 pm