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.
