Mortgages: December 2007 Archives

Our home isn't worth what we owe. So say you were just an average person selling and buying a house, meaning you put your house up for sale, get a contract to purchase on it then go put in offer in on a new house. Then you generally get a pre-approval, then the loan from a lender for the new house prior to closing on the old house. You then go to the closing sign the papers for your old house and then afterwards sign the papers for the new house. How would the lender giving you the new loan know that you were short selling the old house when everything happens the same day? It's not going to show up on my credit for at least 30 days and by that time I will already own the new house. Get it? Is this possible?

This is not the first time such a scam has been tried.

The loan application asks you about what property you own now. Falsify it, and you're likely going to spend a few years in Club Fed. Since it's unlikely you'll make mortgage payments there, this will compound the problem (Just try this on the judge: "I couldn't pay because I was in jail for lying about my financial situation, so it's not my fault!")

Furthermore, the current mortgage is going to show up on your credit.

The condition the underwriter is going to put on the new loan approval is going to go something like "Show property has been sold and debt paid in full"

Believe me, they're going to investigate. They're going to want a copy of the purchase contract and a payoff on the loan for it. Since the debt isn't going to be paid in full, they're going to figure out that you've got a short sale going on. It's not going to happen "same day" if there's a short sale. They're going to want to verify that the other lender is not going to pursue a deficiency judgment. If you're still going to owe the other lender money, the payments are going to hit your debt to income ratio (DTI).

All that said, if you come clean about the situation starting with your loan application with the new lender, it's possible you'll still be approved - just not the same day you close on your sale. They're going to want something that says your current lender isn't going to pursue the deficiency, but it is possible. Theoretically speaking. They're also going to want to figure out what you're going to owe the Revenuers, and how you're going to pay it. Then they're going to take that into account in underwriting the new loan.

(NB: With HR 3648, the Mortgage Forgiveness Debt Relief Act of 2007, this may be zero on the federal level but there may still be consequences on the state and local level. Check with your CPA or EA for more information)

But trying to hide the situation is pretty much going to be a guaranteed rejection. Furthermore, whether or not you intended fraud, if you'll look up the legal definition of fraud, what you were asking about falls well within that definition, as you are deliberately attempting to conceal relevant financial information. I wouldn't be surprised to find the FBI paying you a visit. In fact, I'd be surprised if they didn't. Banking fraud having to do with amounts at risk large enough to finance real estate is a serious felony. ALWAYS tell the truth, the whole truth, and nothing but the truth on a loan application. Better to be rejected based upon the truth than accepted based upon fraud.

If you wait until the short sale is consummated to apply for a new loan, there are 13 questions on page 4 of the standard form 1003, the Federal Loan Application. At a minimum, questions a, d, and f (having to do with judgments, lawsuits, and delinquencies) are going to have interesting possibilities, but there is no question that directly asks about a short sale. It does shows up on your credit report for 10 years, as debt not paid in full. Mortgage debt not paid in full, amplifying the failure in the eyes of mortgage lenders. If there's a deficiency judgment, that will show up as well, for ten years from the date of the judgment. I can't recall ever having dealt with someone in this situation; but it's definitely a factor a reasonable person might want to consider in deciding whether to grant you additional credit, right? If your worthless brother-in-law wanted to borrow $1000 despite having stiffed you on other debts in the past, you'd be within reason to consider that fact in your decision as to whether or not to loan the money. Particularly if the purpose of this loan was directly in line with the purpose of prior defaults. The situation is no different with mortgage lenders.

Caveat Emptor

Article UPDATED here

I am currently living with my parents and they wish to deed of gift their house to me but they still have a remaining mortgage on it. Is it possible to do this or do they have to pay off the mortgage first? Thanks

They can gift the house to you without paying off the mortgage. However, the mortgage still has a valid lien on the property, and must be paid or they can and will foreclose.

The mortgage will still be in the names of the people who signed the paperwork (your parents) and therefore any credit benefit or dings will also belong to them. You could find yourself in the unenviable position of being unable to refinance, despite having made the payment for however long, because you're not getting credit for making those payments. Read the contract: it is possible that the loan is assumable. Even if it isn't, it's possible the lender will agree to add you to the list of those responsible (This can only help them; they're not letting your parents off unless/until you do a full refinance. Of course, adding you to the loan doesn't earn anyone a commission, so they might tell you that you need to refinance as it gets them paid, or helps them make a quota)

Quitclaiming is both legal and extremely simple, but has potentially severe tax consequences. Please check with an accountant in your area first. I'd also tell you to check with a lawyer, because each state has its own laws about the effects of how property is held. Nor will quitclaiming the property help if the purpose is to shelter assets from legal action, and if this is to enable your parents to qualify for Medicaid, all fifty states have "lookback" periods of at least thirty months, where the state will recover the value of any assets disposed of in that time frame.

If you are the party quitclaiming a property on which there is a mortgage, be advised that you are still responsible for payment of that mortgage. The lender has your signature on a contract that says, "I agree to pay..." They may or may not have other signatures, but all it means if they do is that other people will join in your misery. This happens all the time. Husband and wife divorce, one keeps the property, the other quitclaims but is still on the mortgage. Time goes by, and the ex-spouse who retained the property and the mortgage fails to make all of the payments on time. Bad consequences ensue for the "innocent" ex-spouse. I have seen this feature used maliciously by vengeful ex-spouses. I would advise requiring a spouse who retains the property to refinance solely in their own name, and if they are unable to qualify, requiring the property be sold. The other spouse is also entitled to a share of equity in many states.

If the property ends up being sold through a Short Payoff, the lender is almost certainly going to drag the "innocent" ex-spouse (whose signature is still on the dotted line) back into the situation. Basically like being an Alabama fieldhand prior to the Civil War or a male whose girlfriend decides not to have an abortion (Admittedly she puts up with nine months of pregnancy, but thereafter puts the child up for adoption and walks away - he gets hit with a lien for child support from the county for 18 years). Despite not having lived in or owned the property for years, they're still tied to that property by that piece of paper they signed. The ex-spouse wasn't the owner, so they had no ability to control or influence the sale, but they're still on the mortgage, so the lender can get their money out of them.

Finally, for as long as you remain on the mortgage, it will hit your debt to income ratio. You are obligated to make those payments, so it's a part of your credit-worthiness. Especially considered in conjunction with likely alimony and child support in the case of a divorce, you may have difficulty qualifying for another property, even ones that would have been well within your means before.

Caveat Emptor

Article UPDATED here

A reader named Terri at Educating the Wheelers sent me an email giving me a heads up on the antics of the state of Illinois. here is the link. Here is the original article at blackprof. The link to the original source is broken, but here is the Illinois Department of Financial and Professional Regulation, here is the full text of HB4050, the new law, here is a synopsis, among other things, and here are enforcement regulations.

Critical sections:

Based on information submitted to the Department by the originator, requires the Department to make a determination as to whether credit counseling is recommended to the borrower. Requires the Department to notify each borrower for which it recommends counseling of all HUD-certified counseling agencies located within the State and direct the borrower to interview with a counselor associated with one of those agencies. Requires the borrower to select an agency from the notice and to interview with a counselor associated with that agency within 10 days after receipt of the notice. Prohibits the borrower from waiving the recommended credit counseling. Requires the title insurance company or closing agent to record simultaneously with the mortgage a certificate of its compliance with database reporting requirements and, if it fails to do so, provides that the mortgage is not recordable

Changes the definition of "pilot program area" to all areas designated by the Department of Financial and Professional Regulation because of high foreclosure rates due to predatory lending practices. Deletes a requirement that a broker or originator provide each borrower with a notice disclosing the names of at least 3 lenders and comparing the rates and terms of those lenders (emphasis mine). Provides that nothing in the predatory lending database provisions is intended to prevent a borrower from making his or her own decision as to whether to proceed with a transaction.

blackprof's take:

Nevertheless, Tuesday was a key moment in African-American History. On Tuesday, in addition to Mrs. King's passing and Justice Alito's elevation, the State of Illinois enacted a law that requires all mortgage applications within nine Chicago zip codes to undergo a process of review by the state's Department of Financial and Professional Regulation. The department's review process determines whether mortgage applicants in these neighborhoods must undergo compulsory credit counseling. If they must, then the mortgage lender must pay the cost of the counseling.

Anyone familiar with Chicago geography and demography knows these nine zip codes. They are all neighborhoods on the South and Southwest side of Chicago. They are predominantly African-American neighborhoods. These neighborhoods are some of the most impoverished in the City of Chicago, and indeed, the nation. On Tuesday, they suddenly became much poorer.

Although the legislators responsible for the new law were motivated by good intentions, they failed to consider the inevitable consequences of their bill. They wanted to protect poor homeowners in certain neighborhoods from high interest rates and predatory lending practices. The new law, however, necessarily increases the costs, time and uncertainty associated with mortgage applications in these black neighborhoods. The cost of credit counseling will be born by and charged to mortgage applicants. This, in turn, will necessarily decrease the price that new home-buyers can afford to pay for homes in these neighborhoods. If they can choose to buy in other neighborhoods, where housing money is more affordable, they, on the margin, will. Furthermore, recent studies of credit counseling programs suggest that these programs have little effect on borrower behavior. The end result is that homeowners in these poor black neighborhoods suddenly have less equity in their homes than they had on Monday.

Legislation like this is often motivated by an unspoken belief that poor black people are incapable of making important decisions for themselves. We see this belief reflected in the protection of failed public schools, and now with respect to personal finances. But the very people for whom such a law was enacted were responsible and wise enough to save to make the down payments necessary to buy these homes in the first place. Suddenly, these same people must have their choices reviewed and second-guessed by state bureaucrats who have no stake in the outcome, or accountability for incorrect or unresponsive decisions. It is hard to imagine the fate of a similar but broader law imposing credit counseling upon all Illinois residents, including white professionals residing in the Chicago suburbs of Evanston, Winnetka, or Kennilworth. Would there have been enough votes in Springfield to impose these "benefits" on everyone, rather than just the residents of the Southwest side of Chicago?

I'm just a nuts and bolts guy. I see some issues here:

First, by increasing the cost of doing business in the relevant zip codes, the law is increasing the lender's cost of doing business. It is not plain how the lenders will pass this on to the consumers, but pass it on they will. This has the effect of making loans more expensive. I can see two methods: either requiring everyone on the state of illinois to pay more, or requiring only those owners actually within the area to pay it. If they require only those within the area to pay, an excellent case can be made that higher loan costs makes for functional redlining, and the federal courts can intervene, and almost certainly will, possibly invalidating the law. If they require that everyone pay the extra costs, this functionally raises the cost of doing business everywhere in Illinois. This will also make it harder to qualify for loans in the requisite areas, as lenders will have incentive to throw roadblocks in the way of potential clients from those areas. Due to redlining regulations, I'm not certain how far that lenders will go, but it certainly won't make loans easier to get or cheaper.

Second issue: no matter the intent, no matter who pays, this will cause loans to take longer and cost more, in addition to previously discussed costs of the program. For previous work as to why, see my essay on Mortgage Loan Rate Locks. The point, however, is that the State of Illinois is going to take some unknown period of time to consider the case. Then the client is potentially going to have to go to a credit counselor, who is going to have to get paid before providing the necessary legal blessing to the transaction. Furthermore, if the credit counselor wants more work at the expense of delaying the transaction, they can apparently make it happen by my reading of the law. All rate locks are for a specified period of time. Given this, there are three alternatives. One, float the rate (don't lock) and hope that rates don't rise. Second, lock for a longer period, which costs more. Third, pay an extension. Since the outcome when you don't lock for long enough or don't pay extensions is pretty much universally "worst case pricing" (i.e. the worse of rates when you locked or current rates), this means significantly higher loan costs, loan rate, or (most likely) both.

Third, as I said before, since this is going to motivate lenders to not want to do business there, and makes it harder to get loans in the effected areas, and quite likely increase the rates and costs of loans in the area as a consequence. This directly restricts how much of a house, price-wise, people in the area can qualify for, which in turn will have the net effect of decreasing sales prices in the area, further hurting current residents.

There are probably further detrimental aspects to new requirements, but the Illinois legislature deleted an existing requirement that, while apparently weak and subject to abuse in that a prospective loan provider was free to provide a prospective client with information only on loans that are worse than the first proposal, at the very least gave the client some further information as to alternative loans.

In short, the actions of the Illinois Legislature in this instance could, according to my understanding, basically be taken from a manual on "How To Hurt Poor People Even More".

Caveat Emptor (and Caveat Voter)

Original here

I was thinking we were ready for a recovery here in San Diego, but if these go through unamended, that will not be the case. Just in time to be the Grinch that Stole Christmas, the Federal Reserve has decided to perform a gigantic belly-flop into a situation that was already being dealt with, and make it worse.

From the AP story:

Sen. Chris Dodd, D-Conn., chairman of the Senate Banking Committee and contender for his party's presidential nomination, called the Fed proposal a "significant step backwards." Rep. Barney Frank, D-Mass., said it shows that the Fed is "not a strong advocate for consumers, and two, there is no Santa Claus. People who are surprised by the one are presumably surprised by the other."

And these are the Democrats, who never met a government regulation they didn't like.

Alright, enough hyping it up and let's get to what's available, which isn't much yet.

Here's the Press Release, and from the Federal Reserve website, here is the summarized version (actual text not available either in Federal Register or on Federal Reserve website yet)

The proposal would establish a new category of "higher-priced mortgages" that should include virtually all subprime loans.1 The proposal would, for these loans:

* Prohibit a lender from engaging in a pattern or practice of lending without considering borrowers' ability to repay the loans from sources other than the home's value.

* Prohibit a lender from making a loan by relying on income or assets that it does not verify.

* Restrict prepayment penalties only to loans that meet certain conditions, including the condition that the penalty expire at least sixty days before any possible payment increase.

* Require that the lender establish an escrow account for the payment of property taxes and homeowners' insurance. The lender may only offer the borrower the opportunity to opt out of the escrow account after one year.

The proposal would, for these and most other mortgages:

* Prohibit lenders from paying mortgage brokers "yield spread premiums" that exceed the amount the consumer had agreed in advance the broker would receive. A yield spread premium is the fee paid by a lender to a broker for higher-rate loans.

* Prohibit certain servicing practices, such as failing to credit a payment to a consumer's account when the servicer receives it, failing to provide a payoff statement within a reasonable period of time, and "pyramiding" late fees.

* Prohibit a creditor or broker from coercing or encouraging an appraiser to misrepresent the value of a home.

* Prohibit seven misleading or deceptive advertising practices for closed-end loans; for example, using the term "fixed" to describe a rate that is not truly fixed. It would also require that all applicable rates or payments be disclosed in advertisements with equal prominence as advertised introductory or "teaser" rates.

* Require truth-in-lending disclosures to borrowers early enough to use while shopping for a mortgage. Lenders could not charge fees until after the consumer receives the disclosures, except a fee to obtain a credit report.

Let's take these bullet point by bullet point, and consider their effects upon consumers and the marketplace. Actually, let's take the first two together:

Prohibit a lender from engaging in a pattern or practice of lending without considering borrowers' ability to repay the loans from sources other than the home's value.

Prohibit a lender from making a loan by relying on income or assets that it does not verify.

Goodbye, not only Stated Income loans, but NINA loans (aka "no ratio") as well.

I'm not going to pretend stated income hasn't been abused, seeing as how I've been one of the loudest voices condemning it for the past several years. Both Stated Income and NINA nonetheless have their uses, and do help significant and increasing segments of the population. Indeed, they are necessary for increasing segments of the population. Here's why: When documenting income, there are only three acceptable ways to do it. A paper is limited to income reported on the Adjusted Gross Income line of form 1040 (or the equivalent line of forms 1040A and 1040EZ), or for certain salaried employees, W-2 forms. To this, subprime adds the ability to document income via bank statements, but they don't give credit for 100% of income, and it's only net income that finds its way onto bank statements. This makes bank statements a bad way to try and qualify for a loan, because there are a lot of situations and loans where a consumer could qualify by real income, they cannot qualify based upon bank statements. Qualification by bank statements is also subject to a lot of abuse and manipulation, so I don't like to do it as it can leave me vulnerable to a scam artist.

But if you make commission or are in construction or are a contract employee or aren't an employee at all (i.e. self-employed), all of which are large and growing fractions of the population, the only acceptable way to document income is with a 1040. But if you look at form 1040, there's a whole lot of stuff that gets deducted from income prior to this determination, not to mention a lot of other expenses are deducted on Schedule C (among others) and never show up on the main 1040 at all. Upshot: People who have to qualify via form 1040 are penalized in their ability to qualify for loans. It is very common for self-employed people to be making the money to afford the loan, but to be unable to document it. This rule would prevent those people from obtaining that loan. I have seen circumstances where the secretary could document more income than the owner of the business - and it wasn't that he was hurting or that it was a new business - it was a going concern and he was donating more than the secretary's base salary to charity every year.

Similarly, the allowance for income from investments in entirely nonsense: three percent per year. For crying out loud, savings bonds pay more than that. If I have a million dollars in investments, my income had darned well better be above $30,000. What's going on is that this is a safe harbor allowance because the investment markets are unpredictable, but it's not a realistic estimate.

Finally: What about the people who got into their current homes and current loans through stated income? How in the nine billion names of god are they supposed to refinance out of their current nightmares if nobody can do stated income or NINA loans for them? This starts the tidal wave of foreclosures we just averted all over again. I realize that it's theoretically for sub-prime loans only, but expect this proposal to have a major negative impact on every local market, if enacted.

Next up:

Restrict prepayment penalties only to loans that meet certain conditions, including the condition that the penalty expire at least sixty days before any possible payment increase.

I can get behind this. In fact, I've been begging for a mostly stronger version of this for years - that no prepayment penalty can last longer than the period of fixed interest rate. Focus on the real cost of money, dadgum it! (The way the Fed puts this merely emphasizes once again that they are bankers rather than economists or financial planners). It's possible for a loan like a thirty year fixed with an initial interest only rider to increase the payment without changing the fact that it's the same rate but that's a comparatively rare thing. How about combining the two restrictions? Negative Amortization loans have a low fixed payment, but the interest rate is variable from day one. But if the Fed won't take my suggestion, I'll take what I can get.

Require that the lender establish an escrow account for the payment of property taxes and homeowners' insurance. The lender may only offer the borrower the opportunity to opt out of the escrow account after one year.

And the Fed is back to putting their foot in their mouth (after stepping in dog doo). There have been so many impound account problems over the years that many states (California among them) have dealt with the issue and actually prohibited lenders from requiring an impound account, or even from pricing the loan differently if the consumer doesn't want one. Lest there be any doubt, this is one of the few things that the state legislature of California has done right in the last thirty years. This proposed regulation is incompatible with California state law as it exists. Upshot: I'm not a lawyer, so I'm not certain. It could be that there's no more new loans in California until the discrepancy is resolved. This is a regulation to protect bankers from themselves and from the saner moments of various state legislatures. It also raises the opportunity cost of refinancing, because as I explained in my article on Impound Accounts, the consumer has to either roll this money into the balance of their new loan (where they'll pay interest on it for as long as they have a loan) or come up with thousands of additional dollars in cash until they get the check from their old impound account. Like I've said many times, the Fed is composed of bankers, and makes its decisions for the benefit of bankers, not consumers. This proposal serves nobody but bankers.

Prohibit lenders from paying mortgage brokers "yield spread premiums" that exceed the amount the consumer had agreed in advance the broker would receive. A yield spread premium is the fee paid by a lender to a broker for higher-rate loans.

This I can live with. Not that it's not subject to manipulation, but I can live with it. As I've said when I explained Yield Spread, I just plan to make my money on origination and rebate the money for the yield spread to the consumer. Alternatively, I can "pad" what I actually expect to make by a little bit when I have the consumer sign off on the yield spread. Tell them I'm going to make a full point when I'm actually looking to make eight tenths, or three quarters when it's really a half. Of course, this is bankers trying to make brokers appear less competitive by distracting consumers from the net terms to them, because if I deliver the loan I originally said I would, it makes no difference to the consumer if I make two dollars or two million via yield spread. If my loan wasn't the best they were offered, they'd have gone with someone else. One small side benefit is that it might keep some idiots from floating the rate while telling the consumer it was locked.

Two more at once:

Prohibit certain servicing practices, such as failing to credit a payment to a consumer's account when the servicer receives it, failing to provide a payoff statement within a reasonable period of time, and "pyramiding" late fees.

* Prohibit a creditor or broker from coercing or encouraging an appraiser to misrepresent the value of a home.

I find it mind-boggling that these are not already prohibited by the Federal Reserve. I thought they were. Rock. Gravity. Use your imagination. Of course, this will have no impact upon state chartered institutions, but California must have dealt with this one a long time ago.

Prohibit seven misleading or deceptive advertising practices for closed-end loans; for example, using the term "fixed" to describe a rate that is not truly fixed. It would also require that all applicable rates or payments be disclosed in advertisements with equal prominence as advertised introductory or "teaser" rates.

I find it mind boggling that this wasn't done years ago. I've written about this many times. Must be all those congressional campaign contributions the lenders make. Once again, however, absolutely no effect upon state-chartered lending institutions.

Require truth-in-lending disclosures to borrowers early enough to use while shopping for a mortgage. Lenders could not charge fees until after the consumer receives the disclosures, except a fee to obtain a credit report.

Second part first, about not charging fees until after consumer receives disclosures: This is actually good. However, it's not a common problem, and it doesn't prohibit deposits, which a lender can then keep after they fork over the disclosures. Deposits are not fees. Once an unscrupulous lender has the money, good luck getting it back. This is why the more ethical loan providers are strictly "fees at time of service." You pay for the credit report when it is pulled. You pay for the appraisal when the appraiser does the work. You pay for the survey (in those states where it's required) when the surveyor does the work. But if the lender has your money, they can hold it hostage, even if it's not technically theirs yet. Practical effect in limiting unscrupulous practices: zero. In fact, it provides the unscrupulous with a bit of ready made misdirection. "It's just a deposit - we can't charge any fees until we give the disclosures" then immediately charge the fees out of the deposit even though the disclosures are pure nonsense.

Which is another problem. As I have gone over ad nauseum, none of the initial disclosures is in any way binding. Here is a very partial list of how lenders legally lowball each and every one of the initial disclosure forms. Truth-In-Lending, in particular, is based upon figures in the Good Faith Estimate or California MLDS, which are thus subject to low-balling. As any high school student who's ever messed up their chemistry or physics experiment can tell you, if you are basing your calculations upon bad measurements, the answer is going to be wrong. Logically, faulty premises produce a faulty conclusion. Or to quote the old programmer's maxim: Garbage In, Garbage Out. It doesn't matter how you get there. The mathematical calculations used to generate the Truth In Lending form require that the numbers used to generate the base document be complete and accurate. Since that is not the case, Truth in Lending is a joke, and for most practical purposes, you should ignore APR.

All in all, this looks somewhat like hearing Mighty Mouse's famous, "Here I come to save the Day!", only to look around and see Tennessee Tuxedo (If you're not familiar, the fact that he was voiced by Don Adams of Get Smart fame should tell you all you need to know, but the cartoon penguin was even more of a bungler). The good stuff should have been taken care of decades ago, the rest is more menace than anything else. "The Federal Reserve will not fail!" If only! I'm starting to think that Peter Sellers is not dead, only in hiding, secretly running the Federal Reserve as Inspector Closeau. It would explain a lot.

Caveat Emptor

Article UPDATED here

Article UPDATED here

If you read the papers and the congressional record on the current housing crisis, you might think yield spread is the central culprit for the entire meltdown. You would be wrong.

Yield spread is a beneficial tool, offered voluntarily by lenders, that is an alternative to consumers paying all of the costs of a mortgage themselves.

No matter who does your loan, broker or direct lender, they need to get paid for doing it. If they cannot make money at it, they won't be in the business of doing loans. There are high cost loans and low cost loans, and any number of ways of paying those costs, but there is no such thing as a free loan, and anybody who pretends otherwise is either a naive child or lying through their teeth. There are a very few loan providers out there who will finish loans on which they don't make anything in order to keep their promise about the terms of that loan to clients, but there has never been a loan in the history of the world where the provider planned not to make anything.

Yield spread arises as a by-product of the price that the lender receives on the secondary market. For thirty year fixed rate conforming loans, as of a couple days ago, at 5.5%, lenders were making about 20 cents per hundred dollars over the actual dollar value, in addition to the roughly $1.30 per hundred dollars the lowest priced lender I had was charging brokers. For a $300,000 loan, this means they were making roughly $4500 for a loan where the broker did all the work from attracting the customer onwards through the rest of the loan (the rate cost three points in the one direct branch I saw last week, so they'd be making about $9600 there). None of this covers all the fees for service, aka closing costs, or loan price adjustors. This is purely from the act of putting the money to the deal. At 6.00%, the lenders were making about $1.56 per $100 of loan amount directly, and that's about where wholesale par was, the loans that brokers could do without any explicit charge for the money. The direct branch wanted a point and a half to do that loan. Finally, at 6.5, they were making about $2.31 per hundred dollars directly from the secondary market, and they were agreeing to give brokers about seventy-five cents of that in the form of Yield Spread.

What this boils down to is that wholesale lender is looking to make about 1.5% of the loan amount, no matter what loan the consumer is put into, merely for the act of loaning the money. It is out of the difference between the number the wholesale lenders charge, and what their retail lending branches charge, that brokers make their living. If brokers can get the loan done for less than the retail branch, and still make money, the consumer comes out ahead.

There is no requirement for lenders to offer Yield Spread. They don't do so to enable brokers to hose customers that they would rather have walking into their own retail branches. They do it to compete for the business of people who have discovered that using brokers is actually a way to get the same loan cheaper. They do so because other lenders do so. Because they really want that $1.50 per hundred dollars loaned, they'll willingly give up most of any amount over that to encourage brokers to come to them, rather than the other lender. As I've said, in loans there is no difference in brand names. It's just money. So long as the terms are the same, it really doesn't matter if you're making the check for payments out to "International Megabank, Inc" or "Fifty-Third Bank of Podunk," and that really is the only difference. In fact, using brokers as a way to expand their reach is one of the ways small lenders can become major players quickly, without the expense of opening branches. More than one major household name has done precisely that. By the way, this $1.50 per hundred dollars loaned is very low by historical standards - it was roughly $2.50 twelve months ago, and twelve months before that it was more like $4.00. But there's a lot of money chasing not very many borrowers right now. Nor is any of this in any way evil. As a matter of fact, it has enabled much lower interest rates for consumers than the traditional lending model where the lenders held the loans for the duration.

Nor do lenders like paying yield spread. They'd rather have the entire secondary market premium for themselves. They offer it for one reason and one reason only: Because the brokers would otherwise take their clients to a different lender who did offer it. Most brokers operate on a set margin per loan, especially the better ones. The good ones are willing to disclose this margin, the bad ones will do everything they can to hide it. This margin may vary between loans. If borrower A is a slam-dunk A paper borrower, that loan can be done a lot more easily than a sub-prime borrower who needs to qualify based upon bank statements, and will eat up a lot less of my time and therefore, the loan should be done on a thinner margin. Whatever this margin is, it can be paid via origination (a charge for doing the application and getting the loan done), it can be paid via flat dollar charge to the borrower, it can be paid via yield spread, or it can be paid via a combination of these. But it is going to get paid. When I quote a loan, I quote it in terms of terms and total cost to the consumer, including what I make, and if I'm not going to make enough to make it worth my while to leave home, I'd rather not do the loan. Others quote higher, building a bit in that they're prepared to negotiate away if the client asks. Still others just make believe that they're going to deliver the loan on better terms than they will actually deliver it to get you to sign up with them - but the chances of anyone actually pricing the loan so as not to make anything are zero. Consumers looking to tell the difference between better and worse providers should ask for a Loan Quote Guarantee, as well as all the other Questions you should ask loan providers.

Yield spread is nota cost paid by consumers. It doesn't show up anywhere in the list of charges they pay. Were its disclosure not mandated by federal law, the consumer would have absolutely no evidence of its existence except, possibly, the absence of other charges or the fact that they have been paid without the consumer having to shell out a dime. I agree with the disclosure law, by the way. Indeed, I want to expand it to require lenders to disclose the secondary market premium they would be paid assuming they sold the loan. Now consumers do pay for yield spread indirectly, of course, with increased interest charges during the life of the loan. But they pay those same charges whether incurred as a result of a broker earning yield spread or a lender being able to make the money on the secondary market. Furthermore, paying those charges will be to the consumer's benefit if the increased charges for interest offset or more than offset the higher fees they would have to pay in order to get a lower rate. Most consumers do not keep their loans long enough to justify the higher fees for a lower interest loan. Similarly, if the loan is going to go to from a fixed or set rate to a variable rate loan before the higher costs for a lower rate have been recouped, whatever wasn't recovered before that happens has been wasted, as all the loans of a given type reset to the same rate when they adjust - doesn't matter whether you got a zero cost loan out of Yield Spread, or you paid five points to buy the rate down, and therefore the payment. But the 4.875% 3/1 that closes today will in three years reset to the exact same rate and payment as they 6.25% 3/1. Well, not exactly. Because assuming they did what most borrowers do and roll those costs into the loan, that 4.875% loan will have a higher balance owed than the one that was initially 6.25%, and therefore will have a higher payment when they both reset. So yield spread has done the latter borrower a favor by helping them control overall loan costs.

Let's look at what happens if we count yield spread as part of the costs of the loan. First off, it makes it appear as if loans including yield spread are more expensive than ones without. This gives direct lenders an advantage over brokers. Let's consider an actual real world example: A few days ago, a retail lending branch offered one of my prospects a 6.125% loan for one point, while he came back to me and I locked him into for 6.125% for ZERO points, a price which included me making about nine tenths of a point in yield spread. Assuming closing costs are the same (in fact, mine are lower than theirs), here's what the client sees now on a loan with a $300,000 loan payoff. (I'm also going to assume anything other than actual costs, such as prepaid interest, are paid out of pocket)

This reflects reality. The client ends up with a loan balance $3060 lower, and a payment $18.59 lower, through getting exactly the same thirty year fixed rate loan through me as he would have gotten through that lender.

But if I have to count yield spread as a part of the cost of the loan to the consumer despite the fact that he's not paying it, here's what the sheet looks like:

Note that it now looks like the consumer is paying almost as much for the broker loan as for the lender loan. They're not. Keep in mind that this is for exactly the same thirty year fixed rate loan at 6.125% - except that the consumer's loan balance if they go through the broker ends up $3000 lower. That $2726.10 in yield spread is not a cost to the consumer. Indeed, Yield Spread is only a cost to the lender. Note that the consumer's balance and payments in no way reflect yield spread, and my client has been told about it, but really doesn't care. Being a rational consumer, he shopped for the loan on the best terms to him and his family. He doesn't care if I'm making ten cents or ten million dollars. All he cares about is I get him the exact same thing for a cost that is thousands of dollars less. But if Yield Spread is listed as part of the cost on the Good Faith Estimate (or MLDS in California), then it appears as if that lender's loan is a lot more competitive than it really is, i.e. $5950 to $5626, not the reality of $5960 to $2900. Furthermore, this was an uncommonly broad difference, that still looks like the broker is offering a better loan. Far more common is a differential spread of half a point or so. If the price differential were only half a point, the broker's loan would look more expensive, while being in fact less expensive to the consumer who doesn't know yield spread is an accounting phantom as far as they are concerned. The consumer would still be saving money with the broker - about $1500, a full 25% of the actual costs of the loan, but listing yield spread as a cost makes it appear as if the lender's loan is cheaper when it is in fact more expensive.

Furthermore, listing yield spread as a cost has some other effects. Suppose you live in an area where the cost of housing is about $60,000 to $80,000 or less. Under the same bill in congress proposing to count yield spread as a cost to consumers even though it is not, is a provision limiting total costs of loans to six percent. Six percent of $60,000 is $3600. Six percent of $80,000 is $4800. There literally is not a loan that a broker can do under these limits. I can't keep the doors open on $700 per loan, which is all that's left after those $2900 of fixed closing costs at the low end. It's not like I get to spend every dollar the company makes on my family. Even at the higher end, it's probably not worth my while to accept a loan on which I can only make $1900. Effect: Brokers in those areas go out of business, but direct lenders are still in business, lessening competition. They can jack up the rates until the secondary market will pay them enough, and secondary market premiums aren't part of costs, even in the artificial environment of this new bill. Result: Rates rise, lending margins rise, competition is less. Big Winner: direct lenders, who clean up with all the extra money they make. Big Loser: brokers, who go out of business. Of course, consumers lose, too, as do real estate agents because prices are lower as a direct result of higher rates, but hey, that's okay because the bankers who bundle million dollar campaign contributions made out!

Suppose you live in an area, such as I do, where the cost of housing and loans is enough higher for this not to be a danger. One cold hard fact is that there are still people who bought years ago that bankers have a free field with because brokers cannot legally do their loans and still make enough money to keep the doors open. Consider a $200,000 loan, where 6% is $12,000, so the maximum loan cost just isn't a factor. Such a person, realizing that they've owned this property ten years and refinanced five times, decides they want a zero cost loan, because they'll come out better. Well, a broker can still get them a loan that doesn't really cost them anything, but brokers no longer are legally capable of calling it a zero cost loan, because legally, yield spread is a cost. All we can do is call it by some name that sounds like a legalistic way to lie. So now lenders can advertise "true zero cost loans," and brokers are breaking the law if they try, despite the fact that they offer the same loan at zero real cost to the consumer with a rate a quarter of a percent less than the lender will. Indeed, for all the low cost options, the lenders now appear to be cheaper than brokers even though they are not. Also found in this same legislation currently in Congress is a provision to make it illegal for brokers to get part of their compensation via yield spread and part via origination. This is the vast majority of my current loan business, because it's the range where the Tradeoff between rate and cost is best for consumers. Say I figure I need eight tenths of a point to make a loan worthwhile for me to do. If the yield spread for the rate the customer chooses is three tenths of a point, I need a half point of origination to make it work. But now I can't do this loan the simple way. I have to charge eight tenths origination, and even though I agree to rebate the three tenths of a point of yield spread to the consumer - in other words, it's going into the borrowers pocket, not mine or anyone else's, it still legally counts as a cost of the loan. So the new accounting with the requirement of adding double counting the yield spread to the official cost of the loan makes it look like the broker's loan costs 1.1 points, even though the consumer is only paying five tenths net, getting three tenths of a point in their pocket. If the trade off was seven tenths of yield spread to one of origination, it looks like a 1.5 point loan by this new accounting, even though the consumer is only paying one tenth of a point. Result: Consumers are going to have to have an accounting degree to realize that the broker's loan, which looks more expensive, is in fact the cheaper loan.

Needless to say, this is the exact opposite of what the government should be looking to do. But the mortgage banking industry has much bigger pockets than the mortgage broker industry, and they realized quite early on in this whole meltdown that if they painted brokers and yield spread as bad and controlled the narrative and their bought friends in congress controlled congressional testimony, they could make this entire housing meltdown for which they were more responsible than any other group into a public relations opportunity to restore the dominance of residential lending they had forty years ago. Bankers don't like paying yield spread, and they don't like competing with brokers, whose costs are lower because nobody expects brokers to have flawlessly landscaped offices with three inch think carpet, security guards, and armored bank vaults, or to wear $2000 suits. They do so only through what they saw as a tragedy of the commons type mechanism, where they could compete for broker's business at the costs of lessening their own margins, or not get any. Of course, this tragedy for lenders was a boon for consumers, but their responsibilities are to their own bottom line, and if they can legally shackle brokers, not to mention legally keeping their competition among other lenders from competing for broker business, those lenders are all better off.

Who's not better off? Well, basically everyone. Lessened competition, loan documents that make it appear as if one provider's loans are more expensive than actual while not making equivalent disclosures about other provider's loans, all of this translates into higher loan prices for consumers. It may seem penny ante to object to consumers paying a few hundred dollars extra here, a few thousand dollars extra there, but when you put it together across 100 million units or more, this translates into hundreds of billions of dollars per year, all sliced into fewer pie portions because the lending industry just effectively got a lot smaller, and with brokers diminished the costs of entry just got a lot steeper for any new lenders who want a piece of the action.

Yield spread is a tool, and a highly beneficial one from consumer's point of view. It has been one of the largest contributing factors in the rise of brokers, and through brokers, of making mortgages more affordable to consumers. It is not a cost to the consumer, and should not be treated as such, although it should be disclosed, as it is required to be. It can be misused, as it was in the case of negative amortization loans, but the ultimate indictment there goes back to the lenders who offered the loans and the high yield spreads, with regulators and mortgage brokers solely in supporting roles. Indeed the best way to fix this entire problem for the future would be to fix the disclosure rules to make the process clear to the consumer, as I wrote last month in How to Avoid A Repeat of the Housing Market Mess - but if Congress starts to fix those, nobody would be able to hose the consumers, and (sarcasm on) we can't have that, can we?

Caveat Emptor

Article UPDATED here

Just got another one of those desperate consumer fishing calls.

First off, she said she had to have an Option ARM. I told her I had them available to me, but...

She interrupted me to say she had to have it Stated Income, or if necessary, no documentation. Yes, I told her, even those are still available, but...

She interrupted me again, wanting to know if they were no points and no prepayment penalty. I said that while I hadn't done a loan with a prepayment penalty in years, Option ARMS without prepayment penalties don't exist. She then said, "We've come to the end of the conversation," and hung up.

Obviously, she's been burned by someone. Just as obviously, someone else gave her a shopping checklist for a loan, or she made it up herself. She wants it all, she's not going to settle until she gets it, and she's not going to let some horrible awful salesperson lead her astray like last time. In fact, she's so determined on this point that she's not going to let anyone try to save her, either.

As regular readers have no doubt figured out by now, here's her history. She didn't tell me this, but It doesn't take much if you understand the way the market has gone these past few years.

She either bought a property more expensive than she could really afford, or refinanced a property she already owned, and could not afford to buy now, for cash out. Not understanding that minimum payment is not the same thing as the cost of the money, and that you should Never Choose A Loan (or a House) Based Upon Payment, she signed upon the dotted line, not really understanding anything that was going on except that she wanted that house, or that cash.

Along she went, happy as a clam, until she got smacked upside the head with the real cost of money, aka the interest rate she was paying. Gravity never quits, and compound interest working against you is even worse than that.

And here's where it gets really sad. Instead of figuring out her mistake, or cutting her losses, she is determined to repeat the mistake. So determined that she's not going to let anyone stop the process before it gets even worse than it is today, however bad that is. She didn't mention anything about loan to value ratio, but I'll bet it was higher than the 80% that's the most anyone will do one of those stated income now (if debt to income ratio wasn't outside of any acceptable range there would have been better loans to do in the first place). What's the definition of insanity again?

The loan she wants is not going to happen. But that won't stop people from telling her that they can do it, figuring once they get an application and psychological investment, not to mention hundreds of dollars of her cash, then they come up with something else at final loan signing, chances are that she'll sign it and they'll get paid. I went over this just a few days ago. The loan they'll get her probably won't be as bad as what she wants, but it's unlikely to do her any good. She owes what she owes. If she could afford the loan, she wouldn't need stated income or negative amortization, and she probably wouldn't have needed them in the first place.

Furthermore, she's shopping her loan from a checklist of things somebody told her were good or bad, completely ignorant of the fact that she can't have them all. There's a reason I tell people they need to ask all the questions on this list from a prospective loan provider. It's not a simple matter of shopping your loan until you get everything on a shopping list. Some things do not go together at all, like negative amortization loans without a prepayment penalty. In all cases, there are tradeoffs between A and B, C and D. You decide which you want more, or which you don't want more, or, in the case of points and cost vs. rate, where on the spectrum of the tradeoff between rate and cost you want to be. Some providers may give you a better set of tradeoffs than others, but those tradeoffs still exist, and pretending they don't is a good way to end up with a putrid loan. Somebody will tell you about a loan that doesn't exist in order to get you to sign up with them.

Before you can ask the questions, however, you've got to let a professional have a reasonable chance at figuring out the best loan for your situation. In order to do that, you've got tell them enough information so they know what your situation is. Then you can ask those questions and give me the third degree, and if you're smart, you're going to shop it around until you get a couple or three different opinions, and cross check the information each provides against the other. You might still get conned, especially if you don't make the effort of comparing and cross-checking answers. But as I went over in The Ultimate Consumer Horror Story, if you won't talk to sales persons, as in real conversations, I can pretty much guarantee you're coming away with your own private version of the Nightmare (mortgage) on Elm Street.

Caveat Emptor

Article UPDATED here

Just got another in a long series of emails about this horrid product: (identifying details redacted)

Learn How To Make More Money Per Client ($500-$1000)

In This Workshop You Will Learn Why The Most Successful Mortgage & Real Estate Professionals Across The Country Partnering With DELETED?

To Maximize their Income

To Gain and instill Loyalty with current and past clientele

To Exponentially amplify their business success

A Win/Win decision that will impact your business and your client's lives

Because the Demand for Mortgage Protection Insurance is exploding across the country

You notice how "helping your clients" is nowhere on the list of benefits?

Here's another ad of theirs I found online, in the help wanted section:

DELETED is now looking for former Account Executives of Direct Mortgage Lenders, former Account Executives for Title companies & Current Life insurance salespeople that are licensed. DELETED Insurance is offering a new way for Mortgage companies to add an additional revenue stream to their company. We are offering Mortgage protection to them to sell to their clients. You will be responsible of managing your pipeline and territory management. This position is 100% commission. We offer the highest commission splits in the business. First year earning potential can be a 6 figure income. There is also opportunity for you to become an area sales manager in your area. If you are familiar with Mortgage protection insurance or Mortgages, you will know why mortgage professionals will say yes to this product.

Notice how they say they'll take currently licensed people, but those are not the candidates they're really looking for? There's a reason for that. People who have been around the insurance business know about this market sector's history of abuse, and how it always seems to be the sales people who take the fall when the regulators shut it down, while the higher ups walk because they "have it right here in writing that we told those people what they were doing was illegal," while winking at anything that brings in more sales, if not actually encouraging it - just not in writing.

and one more ad, on lendertalk

I am offering Mortgage companies to sell mortgage protection insurance.

Here now simple it is to sell.

1. get your lifie insurance license (sic)
2. sell to past and exsisting clients (sic)
3. Earn 80% of the total commission
4. wrap the first year premium into the loan (emphasis mine)
5. Never have to meet the client
6. everything is done at the time of close
7. Recieve check 72 hours after closing (sic)

average commission is $650

Look forward to speaking with you on this.

At purchase, you can't really put the premium into the mortgage. The only way to do so is fraud. You're either paying for it in cash, or you're paying for it by effectively decreasing your down payment. You cannot do it in conjunction with 100% financing, unless the seller is paying, and I wouldn't want my clients doing so. At refinance, it's at least a possibility. But does a sane financial planner want you increasing your mortgage by about $1000, paying interest on it and possibly kicking the loan over into the next higher Loan to Value category (thereby effectively raising the rate on the whole loan) so that you can purchase the most awful policy of life insurance going? Additionally, many states have rules on buying insurance with borrowed money, and agents knowingly accepting such. California is one of these. This entire pitch element would appear soliciting someone to break the law, perhaps in multiple particulars. Experienced agents know this - newly licensed ones may not.

In order to understand what's going on with this product, you have to understand what Mortgage Protection Insurance is and what it is not. First, what it is not: It is not Private Mortgage Insurance (PMI). Private Mortgage Insurance is an insurance policy that insures the lender against loss, which you pay for as long as you require it. Private Mortgage Insurance can be a required item in getting a certain loan, and as much as I detest it, for loans above 90% of the value of the property, it's the only real alternative as of this writing, for reasons I go into in 100% Financing or Low Down Payment or Low Equity: PMI May Be The Only Option.

Mortgage Protection Insurance is a decreasing term life insurance policy, which is supposed to pay the lender off directly in the event of your demise. It is not required by any lender. If lenders were going to require some insurance policy, they'd require disability insurance, which is needed three times more often than life insurance, with worse longer term consequences for loan viability. Lenders do not waive requirements or fees for Impound Accounts because you buy Mortgage Protection Insurance. As I said, disability is a far more common cause of lender losses than life insurance. But I got email from someone in California who was told that by a loan officer who wanted to sell Mortgage Protection Insurance (FYI, in California it is a prohibited practice to require an Impound Account, or to charge a higher fee for not having one. Yes, this means that we all pay for it with a slightly higher rate/cost tradeoff. But we all have to live within the law, and my point is that purchasing Mortgage Protection Insurance makes no difference to the impound account, despite what this person was told).

This is a very lucrative field as far as making money goes, as you can see not only from the advertisements above but also a on-line search. The ability of practitioners and sales persons to make money is not an indication that a product is bad, but it is a sign of potential abuse. Any time you have the potential for a lot of money by cutting not very many corners, it's a warning sign that says in no uncertain terms to be careful.

The first real objection I have to this product is that decreasing term life insurance is probably the worst life insurance policy that it's possible to buy, and I'm telling you this from the point of view of someone who wants life insurance and can't get it on any kind of reasonable terms (This is not an invitation to a solicitation. I tried very hard to get life insurance on reasonable terms when I was licensed, because I understand what a good investment it can be). First off, it's term life insurance, with all the issues inherent in term insurance: rising cost of insurance, no use of tax advantages, likelihood of voluntary cancellation, likelihood of wasting every single penny you pay. Now add the fact that as your overall cost of insurance goes up, your coverage goes down. It doesn't take any kind of genius to tell you that increasing revenue for decreasing liability is an insurance company's dream scenario, while not being nearly so wonderful from the consumer's point of view. At some point before the insurance company's risk of (decreasing!) payout becomes significant, actuarially speaking, the vast majority of consumers simply cancel. Their premium tables are calculated to encourage this.

Next to consider, we have health considerations. Entropy hits us all. More and more health conditions start happening as we get older. It's scary to think about, but right now is probably the best health you will be in for the remainder of your life, and you're buying a policy of life insurance where the benefits decrease in absolute terms when most people need them to at least stay constant, if not increase. Inflation isn't going to stop because you bought a policy of life insurance. Thirty years ago, $25,000 was a fairly serious policy. These days, most companies don't sell amounts that small, and the ones that do, charge much higher rates for such small policies. The more you understand about financial planning, the more you understand that your ability to profit from life insurance is likely to increase as you age, not decrease. But when you go to buy more later, because you've finally figured all this out, you find out (as I did) that now you've got health conditions that either disqualify you, or raise your rates outrageously. And you want to buy decreasing term insurance?

There are also estate tax considerations. The Congress of 2001 understood the need for estate tax reform, but in order to get the votes to pass it, the advocates had to accept a sunset date of December 31, 2010, after which time everything goes back to the way it was prior to the reform. The people who passed that legislation knew that Congress was going to have to revisit the issue before it expired. Unfortunately, here it is December of 2007, and the current Congress has made it plain they're not going to do anything, which wipes out the possibility of reform prior to the start of the next Congress in 2009, and if nothing happens to shake the current incumbents out of their state of lethargy during the next election, there we are at the sunset date with nothing happening, and the situation resets to where it was before 2001. Ouch. As I've said, I'd rather have AMT reform because estate tax is essentially voluntary, but most people seem to volunteer to pay estate tax, which is and remains the highest rate taxation in the country, and it has crushing implications. The value of a life insurance policy, unless you've done the work necessary to avoid volunteering for estate tax, is part of your taxable estate. In this case, your family will owe taxes on on it, and the lowest bracket is almost forty percent, just on the federal level. Lots of folks assumed that estate tax was going to be going away, as that was the obvious signal sent by the Congress back then, but that's looking less and less likely given the current Congress and the unlikelihood of change in the next one. Maybe it's just me, but I don't see any advantage to paying off the mortgage only to have my heirs forced to visit a loan shark in order to pay the taxes.

But the ultimate killer objection to this product is the fact that it's just plain a bad idea to take life insurance proceeds (that can be completely tax free if you take the steps) and pay them to anyone except your chosen beneficiary. I've gone over this before, in Mortgage Life and Disability Insurance. What your heirs can do with such money, prudently invested, completely shatters any consideration of taking the money and paying off the mortgage, which your heirs can nonetheless decide to do with any policy. Why in the world would you want to take that decision out of their hands with a policy that dedicates the benefit if you should die to that lender? You buy life insurance to benefit your family, not your mortgage lender! Even if you understand nothing about leverage and how it works, this just isn't good financial planning!

So if anyone tries to sell you this product, just say, "no thank you!" and indicate in no uncertain terms that you will not be purchasing this product, and if it's a requirement to get the loan done, you're going to go elsewhere to get your loan. I'm not saying life insurance isn't a good thing - in fact, I'm saying the exact opposite - but you don't want to buy this particular sub-species of policy.

Caveat Emptor

Article UPDATED here

Ken Harney has some welcome news on Move afoot to end uninvited mortgage pitches

To a certain extent, these are a good thing for consumers. However, it gets way overdone.

What happens is this. Let's sat I get a client into my office, they apply for a mortgage, and I run their credit. The three credit bureaus, Experian, TransUnion, and Equifax, then turn around and sell the fact that this person has just had their credit run under a mortgage inquiry code, together with some of their more easily obtainable information.

Result? My clients are besieged with mortgage pitches. For months, every time they answer the phone it's likely to be someone else who has paid the money for a "red hot mortgage lead".

Needless to say, my clients aren't happy. I have had several clients come out and accuse me of selling their information to telemarketers. Now, the fact that I encourage folks who come here to shop their mortgage around notwithstanding, it would be shooting myself in the head to sell their information to other providers. I know what I've got, I know what I quoted them, and I know I intend to deliver. The only thing that will stop me is if they do not, in fact, qualify for that loan, despite leading me to believe they will. If someone is satisfied with what I intend to deliver, far be it from me to tell them to shop around because they might be able to do better. My family and I do have to live, you know. I won't stop or prevent or hinder them from shopping their loan around (which alone sets me apart from 90 percent plus of the loan providers out there), but telling them to do so is just not part of my job description at that point in time. It's like expecting the mechanic as he starts working on your car to tell you that you might be able to get a better deal somewhere else.

Indeed, if I had the option of paying extra for that credit report so my clients aren't besieged by unsolicited offers, I would take it every time. Not only would my clients be less harassed, but the prospective providers who pay for that sort of information are not precisely known for their sterling character, if you know what I mean. I've had clients tell me stories of people determined to sell them negative amortization loans without informing them of the drawbacks. I've had clients tell me of people determined to get their business that they told them of loans that do not exist, often with conspiratorial pitches like, "This is the loan they won't tell you about! You have to ask for it!" Well then, why are you offering it? By all means, put it out there on the table and let's compare the two loans by cranking the numbers, but the vast majority of the time it turns out the reason you have to ask for that sort of loan is that it's a piece of garbage and no self-respecting loan professional would expect you to accept such awful terms.

I'm going to tell you about the numbers of such pitches. Because each of the big three credit bureaus is innocent of the actions of the others, it starts in three places, each of which pitches to the prospective providers that it sells the information no more than four places. I don't know why the number four became magic, but it seems to pop up everywhere in the mortgage leads industry. So each of them sells to four, and there are three of them. That's twelve people you're going to be getting a phone call from right there, and never mind that you're on the "Do not call" list.

But what's going to happen the majority of the time is that somewhere around ten of those who initially buy the information are resellers. They pay sixty bucks a pop, and turn around and sell the information to four other folks at twenty-five bucks a pop. Some of these places are in turn resellers; indeed, some of them got this information directly, which is all that keeps the whole process from snowballing until people are besieged by what seems like every last person with a valid mortgage license for the area. So twelve, forty-eight, hundred forty four, four hundred thirty two wannabe mortgage providers swarm each person I run credit on. I try to remember to warn them, but there is nothing I can do to stop it from happening, however much I might want to. You can, if you'll contact the opt out beforehand, but no mortgage provider can opt you out of this. We have to put the correct information in the credit pull in order for it to be accepted by the lenders.

Now do not get me wrong. It is a good idea to shop your mortgage and I have even repeatedly told people who come here that they should actually sign up with at least two prospective providers, a main and a backup, because at the end of the process the power is all in the loan provider's hands and it is often abused. Having two loans ready to go defuses most of the potential for abuse, leaving aside the issue that I guarantee my quotes in writing when the client decides they want it and gets me enough information to lock the loan.

But there is a major difference between that and setting this pack of wild ravening prospective mortgage providers on my clients, willing to promise the sun, the moon, and all of the stars and planets if my clients will simply drop me and sign up with them instead. There is a major difference between agreeing that shopping the loan is a good idea, and throwing my clients to a pack of hundreds of telemarketers who call for months - sometimes as long as two years, so that they seem to be part of the next wave the next time those folks need a real estate loan - and bulk mailers who are almost singlehandedly responsible for global deforestation and accelerated filling of our urban landfills. If it does happen, I will be pleased to see it end.

I'm also gratified to see National Association of Mortgage Brokers on the correct side of this:

But the National Association of Mortgage Brokers doesn't agree. When credit bureaus sell overnight trigger lists to third-party lead generators, the brokers argue, they fail to comply with a key provision of the Fair Credit Reporting Act: that anyone receiving consumers' personal information must be in the position to make a "firm offer of credit" or have previously received permission from the consumer to obtain credit file data. Third-party lead generators obtain no permission and are in no position to make any credit offers, firm or otherwise.

There is a world of difference between suggesting you shop your mortgage and making certain you shop hundreds of providers, whether you want to or not.

I would suggest contacting your congresscritter to register your support for this proposal.

Caveat Emptor


P.S. In the meantime you can stop it from happening to yourself at www.optoutprescreen.com or by calling (888) 567-8688.

Original here