More egregious and sensational practices that happen in the Mortgage Industry**

From time to time memories come back to me of the many practices I’ve observed from the mortgage industry. The obvious assumption is that I have personally engaged in the below practices, for which I say, of course not. However, I have personally met (many) hundreds of LO’s and have been to dozens of offices over the years. Not too long ago, I visited broker offices inquiring about a job, as my ‘in’ for research purposes (secretly shopping the competition)…once inside, it wasn’t hard to peel back what likely goes on in ‘the back room’. In fact when you’re in the business *wink wink*, they’ll openly share ‘war stories’, which is what inspired much of the content below.

False Documentation:

All a borrower needs to get a Stated Income loan is a letter from a CPA and/or a business license or blacked out income copies of tax returns that only need be signed by the borrower. There are brokers who will charge consumers as much as $500 to get the CPA letter and guess what, no CPA ever writes it, the broker does. I don’t know of any CPA that charges to pen a one paragraph letter, if they’re legit.

How hard do you think it is to create false tax return schedules? Go to irs.gov, get the schedules you need, open them in a image editor, and hack away.

W2’s, paystubs, bank statements…all easy to forge. I’ve been in more than a few brokerages that have a ’special room’ where these sordid dealings go on. I’ve walked into a major lenders offices, one that still advertises on the biggest of stages, i.e. The Super Bowl, where LO’s used white out, tape, and scissors to ‘cut and paste’, right out in the open.

Just imagine what can be done with a decent scanner and printer? If you know that the only way to qualify for a loan is to falsely state your income higher or notice discrepancies between what you know and whats on the application generated by the LO…don’t sign it or engage a broker who says they can ‘get er done’. Mortgage Fraud is a popular white collar crime and the Feds are making examples of those they catch. Don’t be a willing participant in the game or you may find yourself in the middle of a s*^t storm. For a detailed X-Planation on the difference between Loan Doc Types, click here.

Points

I’ll never understand what the loan amount has to do with how much it costs to originate a mortgage. Somewhere along the line, the ‘Mortgage Cartel’ discovered that if you presented loan costs to a borrower using “points” instead of dollars, their brain activity would slow, their resistance would drop, and they’d tip like sleeping cattle.

It’s bullshit. Whether they’re called discount, buy-down, rebate or any other euphemism, points are usually nothing but verbal gymnastics designed to hide the truth. You’ve got to stop thinking in terms of “points” and get back to dollars and sense.

“Points” are converted to dollars by simply multiplying the point (%) value by the Loan Amount, ie: 1.25 “points” (1.25%) x $300,000.00 = $3,750.00.

“Discount Points” should reflect the amount the borrower must pay directly to the lender at the time of closing to obtain an interest rate below the specific mortgage program’s Par Rate. Assuming the flow of cash follows the strict straight line above, these would be true “Discount Points.”

“Rebate Points” should reflect the amount a lender will pay at the time of closing in exchange for an interest rate higher than the specific program’s Par Rate. This is Yield Spread Premium (YSP) and it’s dollar value should be 100% disclosed, broker or banker, no special privileges.

Make your mortgage professional tell you how much they are charging you in a total dollar amount.

Salesmanship

I classify salesmanship as any type of sales that moves attention away from the facts of the transaction to move you into a transaction. Some examples:

The Bait and Switch. If a broker is willing to give you a rate quote without knowing:

• Property Type
• Property Use
• Loan Purpose
• Income and Asset Documentation Ability
• Credit Score (and actual bureau review)
• Loan Amount Property Value (or Purchase Price, whichever is lower)

The lesson is: Never ever ever, ever ever, call a broker and ask for a quick rate quote…You’re setting yourself up for some variance of the bait and switch. Advertising mediums and lead aggregators are notorious for displaying bone low rates and not disclosing true costs. In any case they lure you in and switch things up after you’ve committed. Moving to another broker/banker at this time is often not an available option, especially when the transaction is a purchase.

The Double Call

You agree to give a broker Bob your info and receive a pre-qual quote. A short while after, you receive a call from another broker soliciting services. They ask if you’ve talked to any other brokers, and you say yes. They ask who, or say something to the effect of, ‘you’re not working with broker Bob are you’? You say ‘Well yes, why?’ They proceed to tell you broker Bob is the best and they cannot beat his price or service, act disgruntled and wish you a nice day.

Guess who made that second call? Broker Bob’s assistant

The Floating Lock

All your docs are in and after some discussion, it’s time to lock your interest rate. Trouble is, the loan officer doesn’t do it. He/she continues to float the rate in hopes of better pricing and then pocketing the difference. If the rate happens to float higher, the LO will mitigate the loss by increasing fees somewhere else or create a ‘it was the lenders fault’ excuse, as to why your rate is now slightly higher.

The APR shopper

Consumers think they are being savvier by shopping APR’s. Alas, they (APR’s) are just a manipulatable as any other number or percentage. APR’s often change multiple times before closing and get skewed into obscurity by larger loan amounts. Almost without fail, the APR on the closing docs is different than the original GFE you received. Check it out yourself.

Whats Your Credit Like?

This is common trick an LO may use to take advantage of a consumers lack of knowledege. If a consumer thinks and states that their credit is ‘fair’ but in reality has a 685 score (very good), the LO can take advantage of the consumers lack of knowledge regarding credit scores and mortgage qualification and sell them on a higher rate, because their credit is only ‘fair’, and thus comes with a higher rate, when in fact they qualify for much better.

The Takeaway

For consumers on the fence when considering a deal, an LO will often tell the consumer that if they don’t commit now, they may not qualify for the same program again, compelling them to commit under duress. The LO may even go so far as to say ‘This loan won’t get done anywhere else’, which is a crock. This is especially popular in the sub-prime lending arena.

The Quick and the “Painless”

Everything has seemingly gone pretty well so far, and closing is scheduled for tomorrow. Your broker pops you over a doc which states that he/she is going to receive $6,000.00 from the Lender for this loan.

You call the broker and ask what in the world is this? They calmly state that it is the fee the Lender pays them for delivering a great client such as yourself *smile*, you don’t have to pay it the lender does, no worries, it’s just required paperwork for my file, everything is as we agreed, *bigger smile*. Most consumers sign it and never think about it again.

Problem #1 You are paying for it, it’s the YSP game at it’s most sinister level. That $6K is what the Lender is paying for you to accept a higher rate than you qualify for. Didn’t know you qualified for a lower rate? Now you do. Problem #2 You should have been disclosed this fee at least 3 days prior to closing. It’s the law. If you looked closer you would have probably seen the document was dated earlier than when you signed.

Problem #3 The broker very likely is also charging you a foul cornucopia of junk fees that litter the HUD-1: Broker Fees, Application Fees, Processing Fees, Lock Fees, Courier Fees, Origination Fees—and a host of acronyms even I can’t decipher.

Jacking a naive consumer for big YSP’s + up-front fees is nothing more than the personal enrichment program for guilty brokers and bankers.

Im a Banker!

As if, just being a banker means they’re ‘better’. There is one distinct difference between brokers and bankers, bankers do not have to disclose YSP’s. This isn’t fair business practice to brokers or consumers. Why?

HUD proposed and passed tighter disclosure requirements for mortgage brokers. The effect the changes had, however, were not what HUD had intended. Below are a few summary discoveries:

“HUD proposed broker compensation disclosures as part of its July 2002 RESPA reform proposal (HUD 2002a, 49134).

Mortgage brokers would be required to disclose, in the Good Faith Estimate (GFE) provided to borrowers, any compensation received from the lender in connection with the origination of the loan. A major part of the compensation is any yield spread premium (YSP) paid by the lender for a loan originated at an above-par interest rate.”

“The YSP reflects the additional value to the lender of a loan originated at the higher interest rate. The proposed disclosure was motivated by a concern that brokers were placing borrowers in above par loans without their knowledge, and keeping the YSPs rather than passing them through to consumers in the form of reduced settlement costs. Direct lenders would not be required to make the same disclosure, even though they may be charging the same interest rate and settlement costs and earning the same compensation as a broker.”

“The compensation disclosures had a significant adverse impact on the respondent’s perception of loan costs and on respondents’ choice of loans. The disclosures caused a significant proportion of respondents to choose more expensive loans by mistake and caused a substantial bias against broker loans even when the broker loans cost the same or less than direct lender loans.”

“The findings of this study indicate that broker compensation disclosures are likely to harm rather than help consumers and competition in the mortgage market. The disclosures are likely to lead a significant proportion of borrowers to choose more expensive loans by mistake.”

The disclosures are likely to cause a substantial bias against broker loans that may reduce competition and increase the cost of all mortgages. All three versions of the compensation disclosure tested in the study resulted in significant consumer confusion about loan costs and a substantial bias against broker loans. This included versions that moved the disclosure to a second page of the cost information.’

Bureau of Economics Staff Report

James M. Lacko

Janis K. Pappalardo

February 2004

It’s amazing to me that these findings don’t make their way to the front pages of the news.

The moral of the stories are:

• Be careful who you deal with, ask the ‘uncomfortable’ questions, if something doesn’t feel right, it probably isn’t.
• Don’t willingly engage an unscrupulous broker, it may have serious personal repercussions.
• Bankers aren’t always better, they’re part of the collective whole.

**DISCLAIMER. Most mortgage professionals do not engage in the practices outlined above…but alot do So don’t start guys, we all know this is my opinion, and save the ‘He must have done the same things to people….’ comments please, its worthlessly circular banter.

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