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Archive for the ‘Lenders’ Category

Online lender E-Loan recently announced that they will be shutting down their mortgage operations after the first of the year.  Most people will chalk this up as another lender cratering due to the credit crisis.  I chalk it up as just a failure of the online business model for mortgages.  Ever since the internet all but destroyed travel agents, every one has been predicting the same would happen to mortgage brokers.  The failure of E-Loan puts the nail in the coffin of that theory.  The credit crisis merely exposed the flaw in the business model.

The Role of the Loan Officer

The reason E-Loan failed is because they did not understand the role of the loan officer.  The simplistic way of thinking is that you can eliminate the highly paid workforce of loan officers and pass the savings on to the consumer by opening up huge call centers staffed with hourly workers.  The problem with this approach is that it ignores the central role of the loan officer at a bank or brokerage which is to GENERATE BUSINESS (bring in mortgage loans). 

The Flawed Model

The theory behind businesses such as E-Loan is that they would be able to lower costs and pass it on to consumers.  This almost never happened.  Business models like E-Loan instead chose to spend a ton of money on advertising to bring in business and minimize the role of the loan officer as the rain maker.  There are two obvious problems with this approach.  First, it ignores the inherent cost of large scale advertising.  Second, it costs a ton of money to staff up a call center with non-productive loan officers.  As a result, E-Loan could not pass on the cost savings to consumers OR its shareholders because while the loan officers compensation may have been lower, the other expenses with running the business were a lot higher than your typical mortgage brokerage that employs loan officers that bring in business with minimal advertising.  In other words, E-Loan was simply not efficient at originating mortgage loans. 

To make matters worse, the business model only really works in booming refinance markets when mortgage loans are falling off the trees.  However, in a down market, it actually takes skill and relationships to bring in mortgage loans.  This is why many mortgage companies who employ top producers are still doing well.  There are several loan officers at Perl who will still close in excess of $75 million in loans this year in a market in which many loan officers can barely close one loan a month!

The mortgage business is very complex and is a lot more involved than simply pushing paper around.  As any great mortgage company will tell you, it is the loan officers that seperate the one company from the next.  When companies devalue their loan officers, it is almost like they are choosing to sell an inferior product.  The results are evident.

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Consumers are often confused as the various types of mortgage lenders available to them.   It is extremely important that you know who you are dealing with when it comes to your largest financial transaction.

Mortgage Brokers: Often confused with the other lenders, mortgage brokers do not actually lend their own money.  Mortgage brokers arrange financing from relationships with a number of a different banks.  The mortgage broker will provide counsel on the types of loans you will qualify for and will guide you through the loan process.  However, the mortgage broker does not actually approve the loan, nor do they actually fund the mortgage.

The advantage of a mortgage broker is that they have very low overhead and work with multiple lenders, so on average they will be cheaper to deal with.   Mortgage brokers obtain interest rates on a wholesale basis from mortgage banks.  In addition, some of the best mortgage originators tend to work for brokers.  However, the disadvantage of a mortgage broker is that there are a lot of bad ones. 

Most mortgage brokers tend to be small Mom & Pop type businesses.  Many may have very strong brand names in their local market, but rarely any kind of national brand recognition.  However, with the recent crisis in the financial markets, mortgage brokers are seeing their numbers dwindle dramatically as most are not large enough and financially stable enough to make it through these tough times.

Direct Lenders: A direct lender is a mortgage company that has the ability to underwrite and fund their own mortgages.  Typically, after the loan is funded, the lender then sells the loan to a larger mortgage bank or institution.   In fact, a large number of direct lenders still shop multiple banks like mortgage brokers, but they retain the ability to underwrite the loan and fund it so they don’t lose control of the transaction like a pure mortgage broker. 

The advantage of a direct lender is that they can be like a mortgage broker, but they tend to be larger more stable companies and have more control over the transaction.  The disadvantage is that some direct lenders can be bloated and may not pass savings on to consumers.   Many well known mortgage lenders such as Quicken Loans, E-Loan, etc are examples of large national direct lenders.  Perl Mortgage is a direct lender.  Direct lenders often times will refer to themselves as “mortgage banks” because they are actually writing the check for the mortgage, however, this can be a little misleading as they aren’t really banks.

Mortgage Banks: A true mortgage bank is also known as a depository institution.  In other words, these banks use the deposits from its customers to make other loans such as mortgages.  True mortgage banks are the large retail banks you find on your local corner – Wells Fargo, Bank of America, Citibank, etc.  

The advantage of these banks is that they have brand recognition.  Since Mortgage Banks are the source of funds, they also underwrite and fund the loans.  The disadvantage is that they are large institutions and they also only offer one mortgage product which may or may not be the best for you or the most competitive.  In addition, big banks are not known to have the most knowledgable loan officers and you may be dealing with a call center.

Regardless of which type of lender you use to get your mortgage, it is important that you spend a lot of time vetting the individual loan officer.  Mortgage may be a commodity, but the loan officer is not.  Ninety percent of your experience will be driven by the individual loan officer which can make all the difference in the world in this market.

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Quite a few people who sought to refinance over the past month or so may have gotten some nasty surprises in regards to their second mortgages.  The second mortgage holder won’t let them refinance!  I know, you are saying WTF? 

What many people don’t know is that if you have a second mortgage or a home equity line of credit, the second mortgage lender has to approve the refinancing your first mortgage.  This is called subordination.  Basically, the second mortgage lender has to agree to take a back seat to the new first mortgage holder.  In the past, this used to be just some additional paperwork as part of a regular refinance.  You want to lower your first mortgage interest rate, but leave the second mortgage alone.  We simply fax a few things to the second mortgage lender and they approve it and everyone is happy.  Not anymore.

Second mortgage lenders have been bearing a lot of risk recently with the implosion of the mortgage market since they are subordinate to the first mortgage holder.  In other words, when a loan goes into default, it is the second mortgage lender who is going to really lose their shirt as the may get nothing back.  As a result, many second mortgage lenders have gone out of business altogether or significantly tightened their guidelines.  Because of the increased risk, they no longer want to be subordinate to new loans and in some cases (although they won’t come right out and say it) would prefer if the borrower just paid the loan off so they can get it off their books because the loan no longer carries the same value.

I recently had a client looking to refinance their first mortgage and they had a second mortgage with National City.  National City declined our request to subordinate to the new first mortgage even though we were shaving almost a full percentage point off in rate.  Fortunately, I was able to find my client’s a better second mortgage, so we just paid off National City and told them to go have a Coke and a smile.  What is retarded about this situation is that my clients are IMPROVING their situation so you would think banks would be happy.  But alas, they are not.  As I have mentioned in previous post, banks don’t make loans because they make sense. They make loans because they have a value to investors on Wall Street.  Often times, this dynamic results in situations like this where banks literally do some things that seem very illogical.

National City is basically refusing to subordinate any second mortgages at this point.  However, I would like to point out that they are being pretty shady about it given that they will offer to refinance the first mortgage with National City.  In other words, they won’t let you use the lender of your choice and using the fact that they have subordination rights on the second mortgage to force you to get a National City first mortgage.  Of course, their rates aren’t going to be the most competitive either.   Talk about predatory lending.

Quite frankly, I hope  enough people get pissed off about this to get a lawyer to file a class action lawsuit against some of the lenders pulling this kind of BS.  Remember, it is large mortgage banks who are screwing people over like this, not mortgage brokers as the media would have you believe.

Much to my surprise, the mainstream media is reporting on this very issue.  See an article in the Wall Street Journal today.

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bpgas1.jpgThe easiest way to explain how mortgage brokerages work is by using an unrelated industry.  Mortgages are not something people deal with frequently and because it is financial product, I can understand the confusion.  However, everyone can relate to buying gas.

Let’s imagine you are taking a road trip to visit your family this Thanksgiving.  About 300 miles in you look at your dashboard and the gas needle is at less than a 1/4 tank.  You need to fill up so you pull off the highway to find a gas station.  On the left side of the road is BP and on the right side of the road is Big Moe’s Gas Station.  The BP gas station is brand new with balloons, a kid’s play area, bright and shiny signage, etc.  Big Moe’s on the other hand is pretty rinky dink next to the BP by comparison.

You are there to get some gas, so all you are thinking about is the price of a gallon of gas.  BP has regular gas advertised for $3.00 per gallon and Big Moe’s has gas for $2.95 per gallon.  A large number of consumers are going to go to Big Moe’s to save money and some are just going to go to BP because they are familiar with BP and never heard of Big Moe. 

Most people wonder how Big Moe’s is able to undercut BP.  It is simple.  Big Moe doesn’t have the same overhead as BP.  Big Moe isn’t offering a kid’s play area.  Nor is he too particular about keeping the bathrooms clean.  He is only there for one purpose and that is to offer you gas cheaply.  Since you really don’t care about all the other extra’s BP is offering, you go get gas from Big Moe’s to save a few cents.

Most people would think that BP would be upset about losing business to Big Moe since he is undercutting them.  However, BP is smiling all the way to the bank.  See, Big Moe is actually getting his gas from BP wholesale.  Big Moe is actually selling you BP gas five cents cheaper than the BP gas station across the street.  BP produces too much gas for them to sell only through their company owned gas stations, so they sell extra gas on a wholesale market to privately owned gas stations.   The wholesale gas is cheap enough from BP wholesale so that Big Moe can buy it, add a few pennies to the price so he can make a profit and still offer the gas cheaper than BP does through it’s own retail gas stations.  

Everyone is happy.  You got cheaper gas.  Big Moe’s made a few cents profit.  BP made money selling gas to Big Moe’s.

This folks is EXACTLY how the mortgage brokerage business works.  Mortgage brokerages are just like Big Moe’s and large retail mortgage banks are BP. 

There’s more to this story though… check back tomorrow.

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extreme_makeover_logo_reduced_size_for_site.jpgHas anyone else noticed Ditech.com’s brand repositioning? I was watching TV the other day and I noticed a Ditech.com commercial and it actually looked like they were trying to come off like a respectable mortgage company. If you remember during the refi boom Ditech was all over the TV with their slap stick commercials showing a fat mortgage broker proclaiming that he “lost another one to Ditech” and their $395 closing fee.

Of course, the TV ad was far from the truth. Most good brokers and bankers rarely lost deals to Ditech. Ditech was actually kind of considered Ameriquest-lite in the industry given how they raped their customer with fees and was one of the worst boiler room mortgage hack shops around.   The advertisements pretty much showed they weren’t necessarily targeting the sharpest tools in the shed for customers either.

Now Ditech’s new tag line is “People are smart” and they have jazzed up their website to get rid of the sub-prime bargain basement feel. On another note, Fortune Magazine ran a article about GMAC, the parent company of Ditech sending very misleading direct mail pieces trying to scare unsuspecting homeowners into refinancing. A leopard can’t change its spots and if people truly are smart they will stay away from Ditech regardless of the new image.

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85bears-1.jpgBuying a home is a complicated financial transaction.  Unlike any other purchase you make, there are a host of other parties that will be involved each with their own responsibilities and agendas. It is important that each one of the parties listed are experienced and professional because any mistakes by one individual can cause the whole transaction to come to a halt. Here is a list of the people you need to know and what their general responsibilities are in the transaction.

Real Estate Agents: It is the real estate agents job to facilitate the transaction between the buyer and the seller. The agents sell the property.  Their role varies from marketing a particular property for a seller to finding homes for buyers.  Generally, there are usually two real estate agents involved in a purchase transaction.  It is important you know which one you are dealing with.

  • Listing Agents: These are the agents that are hired by the seller to sell their home. It is this agent’s job to market the home to other agents and interested properties. Their goal is to get the highest price for the seller. 
  • Selling Agent (Buyer’s Agent): This agent represents the buyer in the transaction. It is this agent’s job to find a buyer a home. This agent will help the buyer negotiate an acceptable price from the seller, structure the offer, and guide their buyers through the transaction.

Loan Officer/Mortgage Broker/Banker:  The loan officer is the person that brings the music to the dance. Unless you are rich, you will need to get a mortgage when purchasing a home.  Your loan officer’s job is to educate you on the various mortgages available to you and counsel you on the appropriate financing for your purchase.  They ensure that on the day of closing, you will have financing available to purchase the home.

Seller’s Attorney:  This attorney represents the seller in all legal matters in the transaction.  The seller’s attorney reviews contracts and makes sure that the terms are favorable to the seller.

Buyer’s Attorney:  This attorney represent the buyer in all legal matters in the transaction.  The buyer’s attorney reviews contracts and makes sure that the terms are favorable to the buyer.

Title Company:  The title company coordinates the closing between the buyer and the seller.  They also provide title insurance coverage which ensures that the home being purchased has no other claims of ownership or liens against the property.

Inspector:  Hired by the buyer, the inspector’s job is to point out all of the warts on a particular home. If there are any issues with the property, they will need to be fixed by the seller or the new home owner should be made aware of potential future repairs.  You would be a first class fool to buy a home without an inspector.

Appraiser:  Hired by the lender, it is the appraisers job to place a value on the home.  The lender wants to ensure that the home you are buying is in fact worth what you are paying since it is the home that is securing the money they are lending to you.

Underwriter:  Underwriters work for the mortgage lender.   Consumers never deal directly with the underwriter.  However, you are likely to hear the term “underwriting” or “the underwriter” thrown around a lot, especially by the loan officer, so I felt they warranted inclusion.  The underwriter’s job is to approve or deny your mortgage.  The bottomline is that when it comes to mortgages, underwriters have God status.   Loan officers CANNOT approve mortgages because it would be a conflict of interest.  The underwriter essentially double checks all of the work of the loan officer to make sure the mortgage fits the lenders guidelines and the loan isn’t fraudulent.  Truth be told, it is rare that the mortgage of a good loan officer gets denied because most good loan officers know ahead of time if the loan will get approved.  However, we don’t have the authority to actually make the approval decision.

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Mortgage GangstersThe internet is amazing.  You can find almost anything.  The internet darling of 2006 was none other than www.youtube.com.  A collection of homemade videos from average joes.  Youtube has everything on it.  Bad recitals.  Jackass impersonators.  Commercials.  Music videos.  You name it, someone has made a video about it.  Seriously, who woulda thunk? 

Being the mortgage junkie that I am, I did a search for mortgages and what pops up?  The mortgage gangsters!  I couldn’t believe it.  The video is a must see for anyone who thinks I am lying when I say that the barriers to entry are way too low in the mortgage business or it is more important to shop the loan officer and not the mortgage.  I could not believe it, but caught on film are the antics of a typical telemarketing boiler room mortgage hack shop.  These jagbags as my assistant, Pamela likes to say, actually filmed themselves giving the mortgage business a bad name.

All I can say is I feel sorry for the people on the phone with them.

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