loan officer, decision support, price integrity, posted prices

What to Look For In a Mortgage Loan Officer
November 21, 2013

When a mortgage borrower selects a lender with whom to deal, the identity of the firm is much less important to the borrower than the identity of the individual loan officer (LO).  

Realtors have always understood this. In looking for the smoothest possible financing process, they refer home purchasers to an individual LO, not to a firm. If one of the LOs they use moves to another firm, the Realtor usually will follow.  

This suggests that an easy way for a home purchaser to select an LO is to follow the recommendation of their Realtor, and without doubt you could do worse than following that rule. But you might also do a lot better because the Realtor’s criteria for selecting LOs are not the same as yours. The Realtor wants an LO who will get the loan processed in time for the loan to be available on the settlement date, and you want that as well. But you also are very much concerned with the price of the loan, and with the quality of decision support you receive: what type of loan and what combination of interest rate and upfront fees best meets your needs. These issues are of little interest to the Realtor.  

The problem is that the typical borrower has no reliable way of determining which LOs do well in providing these services, and which don’t.  I have long tinkered with the idea of providing a certification process for LOs, and finally have one in development that should become available early in 2014. In the meantime, it occurred to me that it might be helpful to prospective borrowers if I explained what will go into the certification process. Astute borrowers can do their own certification. 

Certified LOs will offer price integrity and quality decision support, which are discussed in turn. 

Price Integrity 

Price Completeness: For prices to have integrity, they must include interest rate, upfront charges expressed as a percent of the loan, called “points”, and upfront charges expressed in dollars. On adjustable rate mortgages (ARMs), they must include the margin, index value, maximum and minimum rates, and rate change caps. It is not unusual for LOs quoting prices to omit fees expressed in dollars, and omitting important ARM features is more the rule than the exception. 

Posted Prices: Mortgage prices have integrity only if they are the lender’s “posted prices” -- those  at which the lender is actually prepared to lend at the indicated point in time.  Lenders distribute their posted prices every day to all LO employees through a variety of electronic systems. Borrowers seldom have access to these systems. 

Actual prices may differ from posted prices at two critical points in the loan origination process: the point where a price is quoted to a shopping borrower, and the point where the price is finalized or “locked.” 

Price Quotes to Shoppers: The prices quoted to shopping borrowers are often used to select an LO. In many such cases, the shopper selects not the LO with the best posted price but the LO who is the biggest liar. The temptation to “low-ball” quoted prices is difficult for many LOs to resist. 

·   They can’t be held to the price quote because prices are not final until they are locked, by which time the market will have changed. Lenders post new prices every day, and sometimes within the day. 

·   Prices depend on numerous features of the loan transaction, including credit score, ratio of loan balance to property value, type of dwelling, and type of occupancy. The LO looking to land a client, who is asked for a price quote by an impatient shopper who doesn’t volunteer this information, will often assume the best: that all the loan features are such as to justify the lowest possible price quote. If this assumption turns out to be wrong, which is more often the case than not, the quoted price is too low and will have to be revised. By the time that happens, however, posted prices will change, wiping out evidence of the deception while providing the LO with a way to explain the price change. 

To protect themselves against this ploy, the shopping borrower must have access to the prices posted on the LO’s computer, and must make sure that all the transaction features that affect the price have been properly entered. Don’t expect this to be easy, if it was easy my job would be done with the completion of these articles. The LO certification I have under development will require LOs to make this process easy for borrowers. 

Locking the Price: At the point where the mortgage price is locked, a home purchaser with a scheduled closing date may be fully committed, which provides a second temptation for the LO to cheat -- this time by locking a price above the posted price. The protection against this abuse is the same as the protection against low-balling: the borrower must have direct access to the posted price. 

Quality Decision Support 

Decision support means that the LO offers expert counsel to the borrower on the type of mortgage, and the combination of interest rate and upfront fees on that mortgage type, that best meets the borrower’s needs. These decisions, which can have very important consequences for the borrower in future years, are often made in haste, subject to bias or questionable rules of thumb, with little or no consideration of alternatives. Here are some common examples: 

·   Some borrowers opt for 30-year fixed-rate mortgages (FRMs) for no other reason than its popularity, without considering the possibility that an adjustable-rate mortgage (ARM) would reduce their interest cost over the period they are likely to have it. 

·   Some borrowers opt for ARMs for no other reason than their relatively low initial monthly payment, without considering the risk of future payment increases 

·   Some borrowers select the rate/fee combination that involves the lowest upfront fee without considering what this will cost them in higher interest payments down the road. 

·   Some borrowers fail to take advantage of their transaction being close to a pricing “notch point”, where a small reduction in the loan amount or increase in fees will reduce their interest rate. 

·   Strangest of all, some borrowers select an FHA over a comparable conventional mortgage, disregarding that the FHA is more costly. 

A good LO will prevent borrowers from making such mistakes, but many won’t and there is no good way for a borrower to know in advance whether an LO will be helpful. The natural bias of LOs is in getting the deal done as soon as possible, and they have no financial stake in how it works out for the borrower in the future. If a borrower has made her own decision and expresses no interest in the LO’s views, the natural tendency of the LO is to go along. This makes certifying LOs on the quality of decision support a formidable challenge. 

We have confronted the challenge by developing a unique decision-support program with the following features: 

·   It calculates the total cost to the borrower of each type of mortgage, and each combination of interest rate and upfront fees, over the period the borrower expects to have the mortgage.  

·   Costs incurred at different times are adjusted for the time value of money.  

·   Tax savings and amortization are deducted from total costs. 

·   On ARMs, costs and payments are shown for both “no-change” and “worst case” scenarios. 

·   Because comparative results in many cases depend on how long the borrower has the mortgage, which few borrowers know for sure, the program makes it easy to see how changes in the period affect the results.  

The program forces the user to look at alternatives, and quantifies the differences between options.  It does not eliminate the need for judgment, but informed judgment replaces preconception and bias.  

To be certified by us, LOs must master the program, must inform borrowers that the program is available, and must offer to guide them through it. Some borrowers will refuse, but those who want expert help will be assured of receiving it.  

While the certification process has not yet begun, the program is freely available on my web site to anyone. Resourceful borrowers can access it on their own, and those who want to work with an LO don’t have to wait for my certification. They can ask any LO they approach to work through the program with them. If the LO says no, that should tell you something about the LO.

 

 

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