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It's gonna take a while to recover.
Whew. I need a break.
Tanta
A formatting thought. On many blogs when someone posts something of "tantaesque" length, they do it in a way where the first paragraph is on the main page and then it says "Read the Rest" or "Full Post" and you can link to the full post if you dare. Is that a possibility with Blogger?
Yikes, I guess we've been very bad. Tanta threatened us with this yesterday, and today, she went ahead and pulled the trigger!
Please accept our apologies, Tanta.
Is that a possibility with Blogger?
No.
Please accept our apologies, Tanta.
We only hurt the ones we love. Remember that.
Tanta,
Thanks,I never had any idea all this crap was getting rolled into the loans.
I have always bought small homes in crappy hoods with cash so I never saw this side of it...
Chris
Just so you know that I appreciate the effort and thought involved with taking a deeper look at the subject.
I like to have the opportunity to pay attention to something more thoughtful than the 20 seconds of airtime we get on teh Bubblevision.
(And 19 seconds of that is a Nancy Grace look-alike whining something unintelligible about "contrax" or something. Ugh.)
Good Work!
Yeah, she hates us, but she did throw us a crumb of mercy -- there is a two-sentence post above this one for those of us who "need to chat". See you guys there!
Tanta's content quality justifies the length every time.
Subtitles could help when it makes sense to show sections. But this might not be suitable for Tanta's great improvisational style.
Having this depth and quality of information is so much better than being spoon-fed.
No wonder you hate us. HUD can go to hell.
Very nice.
Can I haz free lunch, if I act now?
after reading your post, I'm reminded of my question why is it again that we need all these intermediaries.
and it's not just mortgages.
I feel like the financial sector has grown out of control. there are now more intermediaries to wipe your butt than there are bears on this blog. (with each one taking their cut of course)
needing to get several brokers to shop around? rediculous. what the hell is the broker for, if one must use several brokers.
it would seem that a computer could just do this... sort of like "Lending tree" or whatever.
just put in your information, and it automatically submits it to the biggest 500 companies or whatever, and you get an initial GFE from all of them.
M'dear...as an old fart real estate broker with a kind heart and a tilt toward nerdiness....you're a gem.
I already knew everything you wrote and have banged my head against the wall of my client's focus on "cash needed now" and "monthly payment"..it's a wonder that I now subsist on referrals only.
But is nice to see what I knew written by one who knows even more.
I am old enough to eschew PC, so imagine you with fire in your eyes, hair in a bun and a few escaping, good legs and delightful across a dinner table.
Ala
Clarity and transparency would result in disintermediation just like nearly every other consumer pipeline. By analogy: the Japanese retail conduit is about to meet Costco.
I LOVE these - even though I haven't had a mortgage for years and don't intend to get one again!! Tanta is so entertaining in the delivery, that I read them anyway. 'course, I am in the science field and can take looong complicated posts, unlike some people.
Plus, we have numerous family friends who are in various areas of the mortgage meltdown, so all this info is grist. Thanks tanta, for all you do.
i love posts about mortgage pricing. thanks, Tanta!
Any models in place for this or software updates?
Not rambling at all. A strong story.
Look, all of the conventional wisdom that sits inside the head of today's American consumer comes from commercial speech. All of it.
"People are sue-happy; look at that woman who sued McDonald's for hot coffee."
"You know, there were a lot fewer old people when Social Security was started."
"You always make money on stocks over the long run."
Every one of those commonly-accepted memes started with a press release or marketing campaign from a corporation or trade group. All of them are either false or radically misleading. But they do butter somebody's bread.
So, why should buyers or borrowers be any smarter? This is complex stuff. Even commenters here have trouble with it. Who is giving the consumer an education? It's not taught in schools. You can't really read about it in the paper. If anything, the real estate services consumer is in the worst position of all--surrounded by bullshit artists who pretend to be his advocate.
I'm a bit sweaty after reading that, but otherwise I think I'll be fine
Now, I do understand the use of some intermediaries. I'd rather use a broker if I were assured that he/she was doing the shopping for me. Sort of why I use a RE broker. I want to go to someone, tell them my particulars, and have them give me the options. There's nothing wrong with that.
But you realize what the issue was here. You needed a pre-committment letter for a loan before the RE agent would submit the offer. So if the RE agent worked with a mortgage broker...draw the conclusion. Everyone got a little extra...just like the whole car loan business, which is what this just became. A quarter-point here and there for everyone steering the loan to the source. So the buyers best interests get subordinated to the shave.
So how do you stop that? A change of forms or rules here? I'm not so sure. The whole speed issue was the feeding frenzy of people over-bidding and not paying attention to the terms, I reckon. Or double-talk on the refi (which I believe you have three days to get out of). In fact, I'd say that most of the problems were with the speed. When you have time to think and process or ask others, that's when flaws become apparent. Maybe that's all that is needed here...to slow the process down at bit. "what will it take for you to buy this house right now?" sounds suspiciously like "what do I have to do to get you to buy this car TODAY?".
I'll have to think more on what you presented.
I understand where Tanta is coming from. However, being a broker for over 7 years I have to respectfully disagree.
First, I specialize in the "no cost refinance." I also get the GFE out the day I talk to my customer. I do not nor have ever bait and switched anybody.
Second, the "no cost refi" where I pay the closing costs and the customer takes a rate of .25% to .375% higher is incredibly smart to do in a declining rate market. I refinanceed some customers four times in 2002 and 2003 and about 100 of them bottom ticked the market. They have a 30yr fixed at 5.00% and their mortgage balance stayed the same.
I do not see where the problem is here. I have over 850 clients in my book because people were so happy with my service they sent all their friends. Everyone made out except the banks that had to do a little extra work.
The reality is it was good clean profitability for everyone involved and lives were improved.
I think a full amortization table would be a good start. If it's an ARM, give 'em thirty potential tables.
Tanta you've out done yourself. I just got a finger cramp from srolling my mouse wheel on that last post... (I might have to print this one out, just dont tell the Elfs!)
I refinanceed some customers four times in 2002 and 2003 and about 100 of them bottom ticked the market.
Let me try it this way: would you have wanted to be the investor in the first three loans?
X - You were looking out for your clients best interests. The problem is that many brokers did not. Perhaps legally making brokers act as agents of the borrowers?
Perhaps legally making brokers act as agents of the borrowers?
AZ_Cowboy | 03.19.08 - 5:51 pm | #
Fine with me. I actually think the Gov. should create a higher barrier to entry to keep out all the high school drop outs that entered the business from 2004 on.
These individuals give the mortgage industry a bad name as they open up in a refi boom and close down as soon as it's over and leave a bunch of dead bodies in their wake.
We made an offer on our current house 15.5 years ago. When we were filling out the paperwork with the mortgage broker he pointed out that for an extra $200 / month we could get 15 year conventional mortgage instead of the 30 year mortgage.
Never refinanced, never took out a second trust or a home equity line, and paid it off in January. Now all we have to do is maintenance and pay the taxes.
So I think kindly of at least one broker.
X - careful what you wish for.
Let me try it this way: would you have wanted to be the investor in the first three loans?
Tanta | 03.19.08 - 5:51 pm |
It just so happens I used either JP Morgan Chase for HSBC exclusively with each transaction so I didn't have to pay recordation tax as it stayed with the same lender.
So basically it stayed with the same investor. Neat little trick huh?
I might be mistaken, but I think the thread upstairs is designed for this post to avoid it getting swamped.
X - careful what you wish for.
AZ_Cowboy | 03.19.08 - 5:56 pm
Yeah I am as anti-regulation as the next guy but it has gotten out of hand.
However, most of the individuals I know that were in subprime are now out of the business. I guess the "invisible hand" is doing the government's work?
The more I learn about this stuff, the more I appreciate our credit union.
Jan 19th on ABC7 Eyewitness News LA they had election coverage from Las Vegas of the Nevada primaries and caucuses. As part of their background reporting they talked to their driver who expressed his support for Obama based upon positions and thought it was wonderful that a fellow black man could be in the White House. Turns out limo driving was actually his third career. Until last summer he had been a mortgage broker in the hot hot Las Vegas market but that all dried up in August. The reporter proceeded to query him as to if he would be voting in the caucus. The driver replied, "Actually I cannot vote owing to a previous felony conviction." :Prior to being a mortgage broker he was a car thief. You can't make this stuff up.
Tanta, thank you again for another fine post. I appreciate the info that you give, the clarity that you bring, and especially your snarky wit. It's always a pleasure to read your UberNerd posts (man, I hate to think what that means about me).
I sure hope that when I buy, I get a mortgage broker who will arrange for me to pay the same $75 fee four times in one year, then hide it by amortizing it over 30 years.
Hope I can find one of the good ones, like that.
"JP Morgan Chase for HSBC"
supposed to JPM OR HSBC...sorry
Great writeup; very informative for where all the fees come from, and how the industry has evolved.
I remember when I was buying my condo, and people were talking about flipping every two years, and I was thinking "how can that be profitable for you after all the middle-man fees and commissions?" Just goes to show: know what you're buying before you buy it, or be prepared to lose your money (unless the government bails you out at the expense of people who were smarter, of course).
I for one really enjoy these posts. So much of the blogosphere is half-informed people at double volume; it's a joy to run into someone well-informed in the intricacies of the business and able to explain it so well to those with a bit of attention span.
Well color me nerdy. I loved it. Do we have to wait til tomorrow for the other uber post? Will you consider posting it earlier?
I learn many things each uber post, thanks again.
This blog has identifed the problems with the current business model of mortgage brokers, wholesale lending, and securitization. I would be curious to see an outline of a new business model that can provide the housing market with the capital it needs to recover and prosper.
Even without the current crisis, it sounds like the broker model wasn't terribly efficient for the borrower.
Once again, Tanta, fine work. Thank you.
And then there are the closing attorneys (or title companies) who charge doc prep fees plus fees for receipt of e-mail docs, all on top of lender fees for the same or similar 'expenses'.
Every time you turn around, somebody wants a hundred bucks.
X said: I refinanceed some customers four times in 2002 and 2003 and about 100 of them bottom ticked the market.
Tanta said: Let me try it this way: would you have wanted to be the investor in the first three loans?
I say: Tanta, no, I would not want to be the investor on these pools. The fact that they will buy TBA premium coupon MBS is probably good evidence of what Volcker said about the market being run by mathematicians who don't understand the market.
New issue premium coupons are risky for investors who should know better. However, "no cost" loans are in almost all circumstances to date can be shown to be a better deal for the consumer than a regular fee structured loan with a similar APR. It is a great deception when the regulators require a "Truth in Lending" form to disclose the Annual Percentage Rate and represent this as the true cost of borrowing. The APR is only correct if the borrower pays on the loan for the full 30 year term. Otherwise, the shorter the actual term the higher the real APR and it is different for every month the loan is on the books.
The APR requirement was originally targeted not at real estate loans, but at car loans where banks calculated their rates based on "add on" interest and then reduced the added on interest upon an early prepayment according to the Rule of 78. Brokers are not the only practitioners of scams regardless of their aptitude in doing so.
It is aided and abetted by a “consumer advocate” lobby who frequently seems to believe that “complexity of disclosures” is the problem, rather than unrealistic expectations consumers develop based on the onslaught of marketing they get from the industry
I don't think that's an accurate representation of the arguments we've been hearing. In fact, it's the opponents of the consumer advocate lobby who complain that disclosures are too complex and too long. You hear that from the American Enterprise Institute types, and not from the Center for Responsible Lending types.
I'm eager to read your comments about the HUD proposal, especially the 10 percent leeway thing and the requirement that the closing agent read a script summarizing the loan's particulars.
In fact, it's the opponents of the consumer advocate lobby who complain that disclosures are too complex and too long.
Well, I did put "consumer advocate" in scare-quotes.
There are plenty of folks who call themselves "consumer advocates" who are not 501c3s or grassroot groups. They're often the morons who write "personal finance" columns on websites. And a lot of them do seem to think that all life's problems would be solved if there was just one "simple" place on the form where it said "my payment can go up."
Brokers are not the only practitioners of scams regardless of their aptitude in doing so.
GP | 03.19.08 - 6:19 pm | #
Where is the scam if all the refinances stay with the same lender?
Like I said, I would use the same lender for each customer every time in order to avoid the recordation tax on a "no costs refi."
The customer is going to want to refinance anyway when rates are dropping like a rock. What do they care about the lenders models? At least with me they stay at the same place.
What is the alternative? Knock out the brokers and then create an opportunity for collusion amongst the big banks?
Believe you me, these are not nice people and will take every opportunity to screw you. For example, if you are coming up against a lock expiration and rates have gone up, they will drag their feet in order to pay less premium.
Dealing with them is a nightmare and most are complete sh*ts when they service the loan. Ever try and refi and have the lender take take three weeks for a subordination or a pay off? Wait until it happens to you and then tell me the value of a broker who knows who the good and bad lenders are.
I would be curious to see an outline of a new business model that can provide the housing market with the capital it needs to recover and prosper.
You answered your own question with your very last word; prosper dot com with some suitable firewalls and oversight. Reverse open outcry auctions based on a standardized GFE with progressive qualification tiers. Potential borrowers post up intent to borrow and reply to offers of interest with pertinent information; SSN, FICO, MLS#, etc. Lenders reply with non-binding estimates and willingness to lend conditions. Borrower formally applies (paying a fee) and gets back binding terms. Up until the binding terms the borrower and lenders participate via a "blackboard" model where all can see everything.
Results are reported back to all involved in the fee level negotiations to keep the winning bidder honest. nothing like a spurned 2nd place lender to go over the winning bid looking for issues. Ask Northrop/Airbus.
Tanta,
I actually wish I could have explained it as briefly as you did. I used to run a condo association and, although I am not a mortgage expert, I tried to explain to some onwers why refinancing their ARM every single year was costing them more than it was worth, but none of them cared to listen more than 10 minutes. They sure knew how to bitch about the association fees, though.
In any event, the sheer number of people in my building that were committing this financial suicide convinced me to get the hell out of condo living.
Yearnign to learn writes after reading your post, I'm reminded of my question why is it again that we need all these intermediaries.
and it's not just mortgages.
I feel like the financial sector has grown out of control. there are now more intermediaries to wipe your butt than there are bears on this blog. (with each one taking their cut of course)
In America we don't make things anymore. We have a service economy. Finacial services come with a fee. When you can't service the rich, you have to create the illusion of service to the subprime among us.
X said: "...The reality is it was good clean profitability for everyone involved and lives were improved."
Thanks for joining our little party.
I've been using the same broker for years, he's always done well by me, and was thrilled that I called again recently to ask for his help on a (second) refinance.
Being connected with a knowledgeable professional makes all the difference in the world.
S.
When I was a LO (after the S&L crisis) I quoted my borrowers a zero point mortgage rate at the best rate I could find that would give 125 basis points in premium and disclosed every reasonable fee and pre-paid item that we knew would be on the RESPA.
Escrow for taxes was fixed depending on the month of the year when you closed and what county you were in (we lend in Cook and Lake counties, Illinois).
If borrowers didn't like the GFE, they could walk out before they paid the $295 fee for starting the application, which immediately was committed to be spend on the credit report ($50) and the appraisal ($245).
But there is also something terribly troubling about the apparent fact that a lot of people thought they were getting a 30-year fixed rate loan at 1.95%. That is much too good to be true. Why didnÂ’t it occur to anyone that thatÂ’s much too good to be true?
Why?
Everybody knows that the Federal Reserve set "wholesale" interest rates rates at 1%.
If the Federal Reserve is giving it away almost free, why shouldn't everybody get some?
The credit card companies are almost giving money away. I've got three balance transfer offers in the last week! One of them is a zero-percenter!
It will leave me with enough money that I can afford a new house. Most of them quoted me around 5%, and another one around 8%, but I found one that quoted me 2%. It pays to shop around! Just like with credit cards!
Even at 2% those guys are making plenty of money on me.
Good thing I found a broker who was (desperate;new;drumming up business;high volume;creative;fought for me;family friend;found a loophole).
Guess what! I'm in the landscaping business! Just kidding, but thats what I have to say to get that rate (wink, wink).
But seriously, I was thinking about starting a business. Maybe I'll go into real-estate, flipping homes, like we see on all those shows. Now that I've got an "in".
The reality is it was good clean profitability for everyone involved and lives were improved
You are ignoring my point that it cannot be profitability IF everyone is involved.
It can only be profitable if some people are involved. There have to be the suckers, the hard-luck cases, and the financially unsophisticated willing to keep paying year after year to subsidize the savy borrowers who refinance four times in two years.
Look, anyone will tell you that it's in your best interest to pay off your credit card balance every month. Of course it is. But how would CC lenders make any money if everyone did that? (Fees. For everyone.)
Honestly, a lot of young first-time homebuyers are paying higher financing costs because folks who were already homeowners in 2002-2003 played the serial refinance game without paying their ticket.
Everybody knows that the Federal Reserve set "wholesale" interest rates rates at 1%.
I know you're being snarky, but seriously. People had no idea that there was a difference between borrowing money for overnight or 30 days or 30 years.
CC lenders don't give you 30 years to pay off at 0%. What we are lacking here is somebody sitting down and going through the old time/money problem with consumers.
Tanta
Thank you for your hard work on explaining things about mortgages.
Only once did I go to a loan broker Oh 20 years ago because I knew I needed a no income verification at that time.
The rest of the time I went into three banks and got estimates. No different to me then going to three supermarkets to see lowest price on OJ.
I am therefore surprised as their general use on the West Coast.
Any reason?
Tanta,
Tomorrow morning I'll do a second read.
I love that you take the trouble to do these - they're interesting and useful, and I can't think where else we'd get the benefit of experience you give.
So, thanks.
You would think it easy to price out a simple mortgage transaction. Interest rates and points are fixed. Everything else should be standard for these oh so efficient lenders like Countrywide.
It all just sounds like smoke and mirrors trying to make a simple transaction complicated in order to fool the "unsophisticated".
Tanta said: "It can only be profitable if some people are involved. There have to be the suckers, the hard-luck cases, and the financially unsophisticated willing to keep paying year after year to subsidize the savvy borrowers who refinance four times in two years..."
"You'll excuse me, but the problems of the world are not in my department."
or
"You have no sympathy for the fox?"
"Not particularly. I understand the point of view of the hound, too."
Seriously. I was once one of those first-time homebuyers overpaying for fees, and now I'm not. Why is this not simply the way of the world?
Sebastia
Thanks - this is a great explanation of what's happened on a very practical level. Worth the time, worth the effort.
I look forward to your analysis of the HUD proposed rule.
The funny thing is that crime pays. I have been in the industry for 30 years, a broker for over 25.Every single thing you suggest is something I have done for years. I disclose YSP. I can produce a flawless GFE accurate to $100 or so at the drop of a hat, and routinely include one with the initial application. I routinely produce in real time revised GFEÂ’s if the numbers change. My combined rates, points and other charges on fixed rate loans are consistently better than the vast majority of direct lenders. Yet I consistently lose loans to deceptive and manipulative sales practices by direct lenders, including the kind of generalized character defamation that colors your entire post. So please spare me the broker bashing.
IÂ’m not defending every mortgage broker in the industry. Since entry barriers are low, financial requirements are non-existent, and recourse in most cases is limited, itÂ’s not surprising that when rates are low, hoards of poorly trained, unethical and ignorant yahoos flood the field. No disclosure rule in the world will change that, or help the vast majority of borrowers who will not read in detail what is put in front of them (9 out of 10 times they donÂ’t, and I work with pretty smart borrowers). In particular, no wishing that everyone was as professional, experienced and ethical as you and I are will keep the thundering herd of quick buck artists out the next time rates take a dive.
So what do we do? National standards and licensing is a start, so there are real consequences to malfeasance. I like the general idea of making appraisers as independent as possible, as long as the appraisal itself is not tied to a specific lender.
The real solution, however, is in the programs offered by lenders. There’s a kind of mortgage corollary to Gresham’s Law, in that bad mortgage programs tend to drive out good ones. If all your competitors are doing no doc loans, asking a client for two years returns and a P&L becomes an unreasonable request. It leads to borrowers telling their Realtors that the loan broker is difficult because “my friend got a loan, and he didn’t need to provide this”, and that leads to the loan broker losing the next deal. The bottom line is that brokers are only going to be as honest, thorough and accurate as lenders require them to be, and if lenders want better quality loan packages all they have to do is ask and price for them. If they market liar loans and accept junk, they have only themselves to blame.
re. "X" and no cost loans. I also used no cost loans extensively in 2000-2003, and have hundreds of client who came out better for it.
I work under CA DRE rules, which puts me in a fiduciary relationship to the borrower. I owe them a higher duty than I do to the lender I am working with. This of course does not mean I can act in an unlawful or unethical way to anyone, but when it comes down to who I am working for versus who I am working with, the law is clear. Sure, if I did four no cost refi's for the same borrower over 18 months (and I did, many times), the first three lenders lost money on the deal, but that's hindsight. At the time each deal were made, neither the lender no I knew that rates would drop in the future, and taking that risk was built into the price. Sure, in hindsight, I would not have wanted to be any of the first three lenders, but I've made a lot of bad investments myself, and I don't expect the other party to bail me out.
Tanta takes every opportunity to trash-talk mortgage brokers...I wonder how many bonus checks you bad mouthed as a result of production from brokers?
You know, when I go to a soup & salad restaurant, they put a knife in with the spoon & fork & nappie. Even though I don't really need it, I'll sometimes use it to make eating my supper a little easier. Damn if that restaurant is now calling me names for being a wasteful pig because I used the knife they put there for me to use!
Funny thing, Wells, CFC, BA, tanta, they're all scapegoating brokers as they complain that their bonus checks are thin and oh-my, their jobs are no longer secure. - I never originated an OA, never made up income or assets ("I am not a crook") but those who controlled the approvals, the guidelines, the purse strings, and the UW/QA etc, are the loudest complainers now, as their work is finally getting the rewards it deserves. - Any idiot could have figured out that we'd have massive defaults as fraud was SOP. - Just think of the many honest, knowledgeable mtg brokers who passed on taking in bad deals as the bartender/mtg broker down the block did the loan and got paid for it. (luckily I concentrated on commercial loans 2 years ago and am doing quite well, thank you), but it was like being in a game with two sets fo rules. I only wish they'd start prosecuting the lenders who knowingly approved & funded fraudulent loans, which certainly conditioned mortgage brokers to keep sending in more "approveable" loans.
Hey tanta, on your company's ratesheets and flyers from the AEs, how many points rebate were they telling brokers they could get away with? (damn mtg brokers! don't they know they're not supposed to respond to those!?)
I remember when I was being hustled by a stage-coach lender to come work in a big, marble branch in La Jolla, they tried to hide their retail ratesheet from me until the 3rd interview, when I insisted in seeing it. The rates were 2 points worse than what I'd get as a lowly wholesale broker, who didn't have a sales manager, regional manager or bank branch manager to pay overrides to. - So as I see a consolidation in the distribution channels I see worse deals for consumers, not better. - We already have the Fed and Congress giving the store to the banks, what's one more gift?
The system's main flaw is this: The borrowers who close pay for the ones that don't. Industry practices dictate that as mortgage broker/originators we provide services to those who do not pay for them. This is across the board with the exception of appraisers. Credit reports are pulled (and paid for by broker/originators), title reports ordered, loans even processed and underwritten. Consumer backs out, pays nothing. Application fees are a thing of the past, Tanta. Competition took care of those things. Best we can do now is ask for the appraisal fee up front but that covers the appraiser, not the mtg broker/originator.
It's like an attorney who takes cases on contingency. Contingent on the cases winning (approval) and paying funds to said attorney. The attorney has to charge a higher amount to the winners because he still must service the losers.
That is what people do not understand. I wish RESPA would make it so that mtg brokers/orginators are paid an hourly fee. That way, the true cost could be disclosed accurately and consumers would pay less overall for their services.
I think it's legit to put this comment, but Tanta i don't enjoy your posts. You could have covered most of what you said in 4 sentances.
I think disclosures are futile. Borrowers only hear what they want to hear.
The longer those things are the less likely they are to be read.
Moreover, even if the disclosure that simply said in a huge red font: This is a terrible loan. The rate is too high. The amount you owe will go up. You have a 20% chance of being kicked out of your house for failure to pay.
The borrowers would still buy the house if they thought they had a good chance to pay the monthly payment for a year or 2.
Too many borrowers think of the payment as "rent". All the Cubans here call it rent, and I always, futilely correct them with the words mtg payment.
The fact that they will buy TBA premium coupon MBS is probably good evidence of what Volcker said about the market being run by mathematicians who don't understand the market.
New issue premium coupons are risky for investors who should know better.
good point. we should only have perfect current coupons and discounts, and discounts should trade at a premium because those guys pay more points and are therefore less likely to refi.
CC lenders don't give you 30 years to pay off at 0%. What we are lacking here is somebody sitting down and going through the old time/money problem with consumers.
It is difficult to get a man to understand something when his standard of living depends upon his not understanding it (twist on quote from Upton Sinclair).
While they are sitting down with them they should also go through:
Wow. This is brilliant. A job very well done, Tanta, very well done.
You raise an interesting point about full disclosure--that it should apply to both the condition of the house and the terms of the loan--and the need for specialists to educate borrowers so that they know exactly what they're getting into.
Most people are stupid and will believe anything and everything told to them. But they aren't so stupid that they don't learn real quick when pain comes around.
When this entire financial con game finally comes crashing down, as I fully expect it to in just a short while, people are going to demand reform. And they're going to get it.
I only hope it's along the lines you so eloquently expressed here.
Yet I consistently lose loans to deceptive and manipulative sales practices by direct lenders, including the kind of generalized character defamation that colors your entire post.
It's the nature of the business...
In the mortgage lending business, information is highly asymmetrical. The broker always knows more about the product than the borrower.
That almost guarantees that bad brokers will drive out the good.
There is a paper from the '70s that is a good read on the subject:
The Market For Lemons
One example he gives is of milk sellers in India. Merchants watered down their milk to increase profits. Since buyers couldn't tell if milk had been watered down they assumed all milk was and paid accordingly. Eventually forcing honest merchants out of the market.
Tanta, this is a serious question that sounds like a joke.
If mortgage brokers can compare themselves to an attorney who takes cases on contingency can we swing the same amount in the other direction and call them bookies gaming odds with inside information? The car thief turned mortgage broker I mentioned earlier speaks to a segment of the industry that has an opinion of itself out of sync with the realities.
Zarley, I'm not sure about paying anyone by the hour. But I agree with you that the "no upfront application fee" thing is part of the problem.
If originators--and appraisers--only get paid for their work at closing, they'll do what it takes to get the deal closed.
But I am uncomfortable with the phrase "industry practices dictate." Those practices came from somewhere. There really isn't some secret cartel who meets in undisclosed locations to decree "practices" for everyone.
A lot of originators--retail and broker--are getting picked off today because yesterday they were the ones picking off the lenders who charged application fees. It went like this: "walk out on the lender you're with and come with me. I won't charge you another app fee, plus I'll skip all that tedious processing work and just let you do stated income at no rate adjustment!"
What goes around tends to come around.
Owner Earnings writes:
I think it's legit to put this comment, but Tanta i don't enjoy your posts. You could have covered most of what you said in 4 sentances.
OE, I would love to read your 4-sentence rendition of this thoughtful, thought-provoking, persuasive, and entertaining post.
If mortgage brokers can compare themselves to an attorney who takes cases on contingency
As I'm sure some of our attorney friends will pipe up and agree, there's a difference between a reputable attorney working on contingency and ambulance-chasers. There has for a long time been a lot of regulation (although it is weakening) to prevent lawyers from running around convincing you you have been injured just so they can be paid to sue on your behalf.
Not so the mortgage industry.
The reality is that we long ago stopped having "loan officers" (retail or wholesale), even though we still use the phrase. They are salespeople on commission, not officers of the bank charged with making prudent use of the bank's capital.
The best solution would be to put them all back on salary, but that would be a problem for the "independent mortgage broker" who wants to patronize some corporate salary-drawer like me.
RE: X @ 5:44
Second, the "no cost refi" Where I pay the closing costs...
YOU do not pay the closing costs! Are you retarded or what? You've been a broker for 7 years and you still don't get it!!
I hope the new licensing requirements include and IQ test with a minimum score around room temp. Hey X, if I was you I'd be studying real hard for the test.
one point that has not been discussed is why banks were willing to pay a Broker that 3-5% YSP instead of doing it in house at a lower cost.On a $500k loan in California that 5% is a chunk of change.I see that now that underwriting has regained a fashionable status,there are many banks that do not want to deal with brokers at all,no matter how honest or well qualified the brokers are...fewer,smaller loans at a smaller margin,and now it is profitable to do loans in house?
now it is profitable to do loans in house?
But this was always why brokers were "profitable"--they're not your employees and you can throw them under the bus when the cycle changes.
They just don't like thinking of themselves as "temps" who go first in a recession.
This reminds me of the cottage industry among CPA's who's business it is to unwind the damage done by Financial Planners and Financial Consultants who "are not paid by you, but are paid by the insurance company or brokerage house".
Ah, the allure of the free lunch.
Tanta, don't worry about the poor brokers caught up in the changing winds. They've had an unprecedented run of 8+ years where their incomes were so splendiferous that surely they were ants and not grasshoppers in their habits. Besides as insiders you know they have the absolutely best loans for themselves to protect them from the economics vagaries they profess to know so well as to presume charging high fees for the presumably exact same advice to clients whose interests they are advancing. I'll stop now and wash my mouth out.
Tanta
someday, when you get a chance, would you give a summary of what costs there should be in a closing, and roughly how much each should be? Maybe this is a silly request (because things vary too much from place to place, loan to loan, etc), but it seems that there are a bunch of costs that must be there somewhere (in the rate or as a direct payment at closing), and it would be really helpful for some of us to know what they are. For myself, in a few years when I buy a house I would love to have that sort of information in a file so I can tell if what I am given makes any kind of sense.
thanks
Luke
I have no problem being put on a salary and retaining independence. Or of being a financial services provider who is paid by the hour. I would still be able to structure my work the way I want to do it and still patronize underwriters who can deal with paper but not people.
It looks so easy from the perspective of a processor or an underwriter. I've underwritten loan files. Have you ever originated a loan Tanta? I doubt it. You are incomplete and cannot be a Captain until you have mastered both sides of the Yin and the Yang.
Going back to the old way sounds good. A locally owned and controlled bank who pays their loan officers based on the portfolio of outstanding loans. If I was getting a residual monthly income i.e. basis points of all the loans I have originated in the last 10 years, I'd be on easy street. I just don't do crappy loans. Either as a broker, or a banker. I know I'm an unusual mortgage broker though.
I agree, we should go back to the old way as it forces a lender into a long term outlook instead of a one time fee. But not all brokers are concerned with their clients long term financial well being as I have been. Clients do make their own decisions contrary to advice given however.
Great post, Tanta...thanks.
Show of hands. Has anyone here ever heard a mortgage broker so much as refer to themselves as typical? Lake Woebegone* indeed.
I had the very same sequence play out this week on the OC Register blog where someone with the screen name "ethical loan broker" said he was one of the good ones but 10% he knew were bad. When pressed he admitted he could not/would not name names. So much for ethical, caught lying about his own ethics.
Have you ever originated a loan Tanta? I doubt it. You are incomplete and cannot be a Captain until you have mastered both sides of the Yin and the Yang.
I can't criticize mortgage broker practices because I'm not a hermaphrodite? OK, I'm confused.
"The best solution would be to put them all back on salary, but that would be a problem for the "independent mortgage broker" who wants to patronize some corporate salary-drawer like me."
Oh my. Funny how we are most upset by other's faults when we share them.
There are honest and ethical people on both sides, and more than enough lying scum to go around, too. I was on the other side in the late 80's, and saw close up and personal some of the pieces of work running S&L's back then (just how many helicopters DOES an S&L need?). My take is that there's not much to choose from on either side.
I heart Tanta.
We go first in and come first out of recessions. Society needs us, albeit in cycles.
Fewer loans being made = less demand for operations folks such as risk managers and underwriters. No loans = no risk right?
Those at the top view operations folks as burdens to bear only if business justifies. Salespeople are less expensive. No sales = no pay. They're cheap to have around from a cost of labor perspective.
The key to making it through a storm like this is A) Foresee it coming B) Stock up for the winter.
It's not rocket science. There is a very good reason they say not to spend your money in one place. Or on one place as we are learning now.
You are only able to see the business from one perspective, Tanta. You have not originated a loan therefore are unqualified to judge originators be they brokers or retail lenders.
Are you still confused?
Tom O. You nailed it. Scum on both sides and honesty too.
Bravo on a wonderful brain dump, Tanta.
No, I do not claim to understand all you said and it will take time to digest.
However, your ramble makes me feel like we are all sitting down to dinner and you are sharing the day's news about what goes on at work.
And almost all lenders charge a higher rate (or more points) to borrowers who are allowed to get a “waiver” of escrow accounts.
As someone who loathes escrow (not just for the involuntary contribution of my money to the servicer, but also for fear of having my taxes messed up by anyone else)...
I just checked my local community bank's website, entering the same information twice except for the "Escrow/Impounds" combo box, closing the browser in-between, and got the same rates, points (
, costs (
, whether the answer was Yes or No. Refi Existing Balance, CA, no seconds, loans previously known as conforming, if that's relevant.
The "Escrow/Impounds" box isn't initially available. If I enter Loan Balance/Home Value combinations w/ less than 90% LTV the box appears, equal to or above 90% it doesn't. Odd...when I bought my house in 1995 this was only an option with 80% LTV.
The offered 15 year rates are equal to my current rate so I haven't verified whether the javascript programmers agree with the underwriters...
Well, if we're looking at what should and shouldn't be included in closing costs, can we at least clean up some of the sillier requirements? Like termite inspection for a brick-and-concrete condo?
(Now that actually becomes a reasonable inspection I'll know to be good and worried.)
You have not originated a loan therefore are unqualified to judge originators be they brokers or retail lenders.
Have you ever been a blogger?
Great post, Tanta. These disclosures have needed overhauling for years - I just don't think they've gone far enough. But without ethical people drawing them up and explaining them, of no real value.
X - You are a blood sucking vampire. Feeding off your customers over and over again. They now have a lower rate and no higher balance (you say) and have made payments for how many years for nothing? But you got paid over and over and I guarantee your lenders didn't make much off closing your churned loans. I see these often as an underwriter and it makes me sick. Balance is the same, almost, rate is better by an .125, payment is down $12.00 a month but term of loan is 5-6 years longer than the one they have now. ....? No harm done really but everyone is dancing so YOU can get paid....pretty pathetic.
Zarley writes:
You are only able to see the business from one perspective, Tanta. You have not originated a loan therefore are unqualified to judge originators be they brokers or retail lenders.
You just called all astronomers idiots because they haven't visited other solar systems. The broker doth protest too much, methinks.
Balance is the same, almost, rate is better by an .125, payment is down $12.00 a month but term of loan is 5-6 years longer than the one they have now. ....? No harm done really but everyone is dancing so YOU can get paid....pretty pathetic.
As long as we're talking about disclosures, I'd really like to see the refi-existing-balance disclosures indicate the payment that would be required to repay the new loan at the same schedule as the existing loan, not simply at the new schedule. I work that out for myself in Excel and pay accordingly, but the entire point of "disclosing" should be that the disclosure should tell me the relevant number!
A meta thing for Tanta:
I have seen someone on Blogger who has a "Read More!" ability to chop up his long posts. Whether it may be applicable to your situation is beyond my knowledge. Check at Rabett Run, if you wish to see someone who has it. It does appear to be a kludge of some kind, and may be too ugly for you to use.
I was stunned to learn that people actually believed they were gonna get a 30 year fixed for 2% or that some actually refied from a fixed to an ARM when interest rates were at rock bottom.
Oh, I knew that a few did, but it is still hard for me to believe that significant numbers were that idiotic.
Any guesstimates of what those numbers are? That is a serious question. I listened in horror to media reports that as many as a third of all new mortgages were ARMs or other insanities in recent times. My hair stood on end as I listened to Greenspan open the floodgates in congressional testimony (suggesting that banks engage in "creative financing" in mortgages as he crashed interest rates - and the dollar), but in my wildest paranoid fantasies, I never expected things to get this crazy (and as my handle suggests, my fantasies get pretty effin paranoid.)
Either I'm getting smarter, or your writing style is getting more easily digestible, Tanta. (I suspect the latter.) Not only was I informed, but I finished completely unbefuddled.
Another serious question. Is it possible for a reasonably intelligent consumer who falls in the hands of an unscrupulous broker to protect himself anyway? How would one avoid that in the first place? Are there signs, things to watch out for, ways to arm oneself? I have seen lawyers on the tube claim that they tried - and failed - to read and understand everything they were signing at closing.
Thanks for doing your best to educate us poor schlubs.
Not to be too naive as a borrower, but why isn't there someplace you could email or fax your GFE and they tell you whether its good or bad? Seems like the industry would like to foreshorten these kind of issues. Maybe in the future?
Thank you Tanta. Insightful and brilliant as always. Thank you for making me smarter.
Wow! That was an awesome post.
When are we going back to typewriters, calculators and snail mail? Ahhh....so much nostalgia for the 70's.
Question for you Tanta:
What would all these brokers do if they weren't brokers?
On second thought....buying a car would really suck.
Leggo
Definitely an uberpost.
If the financial health of the country depended on rationalizing this process, it would be hopeless. Fortunately, the market for idiotic loans has disappeared, and I don't think there will be a big demand for them anytime soon.
Since mortgages are commodities, I have a hard time understanding why people don't just look up the rates. The newspapers used to have tables of locally available mortgage rates. I don't know if they still do. You can also look on bankrate.com. It's not like these things are a secret. However, if you get a monthly payment buyer, they are dead meat for a car dealer, and also a mortgage broker.
One of the most interesting graphs posted here was a long term (40 year) graph of annual home price appreciation less interest rates. The most favorable period was the 02-06 period. People were able to get a positive carry with leverage. That almost explains it all. The rest is detail. So everyone that jumped on that gravy train and didn't get out at the optimum time got crushed. The funny thing is, thats pretty much the same formula used by the financial big brains - leverage + positive carry. The little guy had his private hedge fund.
Rob's idea of an electronic reverse auction sounds good, but it has never (yet) quite worked for any financial products. Things are never quite standard enough -- and the sellers do every thing possible to try to differentiate the same basic product.
Anyway, great post, as usual. More then I ever wanted to know. The devil (or god) is in the details.
Another dumb question. I saw a Wachovia ad on television with their 'pick a payment' loan:
Fixed Rate Pick a Payment:\t Gives you four predicable payment options each month.
Adjustable Pick a Payment: Allows for flexible payment options with lowest possible monthly payments
Flex Fit Mortgage: Low documentation, flexible credit requirements, and larger loan values
http://wachovia.com/personal/page/0,,325_492_8681_8682,00.html
So are these things really still available?
I must admit one of the things I found so fustrating about this bubble is that people seemed to throw every element of common sense out of the window blinded by the "on paper" 20% a year rises, like it or not evrybody has to get paid and the only person bringing money to the table is the "home owner" who will pay one way or the other, so what I'm saying is that is the homeowners responsibility to shop around, if as a potential buyer you find that you only have 1 choice, then 999 times out of a 1000 you shouldn't be buying.
As long as we're talking about disclosures, I'd really like to see the refi-existing-balance disclosures indicate the payment that would be required to repay the new loan at the same schedule as the existing loan, not simply at the new schedule.
What is so strange to me is that many people (in the business, not just customers) seem to believe that the new loan in a refi must be a new 30-year term. But there's no reason that has to be, and back in the day, we used to make 336 month (or 337 or 278 or etc.) refis all the time. If you wanted your term extended out to 30 years again we'd do it, but if you didn't, we'd set the term of the new loan so you had the same maturity date as your old loan.
I talk to people who haven't been in the business very long and I find they've never heard of this practice.
Any guesstimates of what those numbers are?
Well, I don't know what kind of numbers. But I do know that several folks are suing Chevy Chase bank over this very issue, and are saying they were lead to believe that the rate on the Option ARM they got was fixed for five years.
A Fight Over the Fine Print
I have heard it claimed (in other news stories, no details given) that people believed their rates were fixed for the entire term of the loan.
but why isn't there someplace you could email or fax your GFE and they tell you whether its good or bad?
There is; you can find such things on the internet. I call them "broker brokers."
I cannot tell you if any of them really know what they're up to or not, but I can tell you you pay for this additional service.
But there's no reason that has to be, and back in the day, we used to make 336 month (or 337 or 278 or etc.) refis all the time.
the Reptilian Snout Refi?
So, then how does one shop around accurately for the best interest rate and lowest fees?
Who are "wholesale mortgage firms", how do those differ from credit unions and regular banks?
(thanks for the post, it was great to get an innumeration of which costs are necessary and which tend to simply be inflated)
As a post closing quality control reviewer, I review hundreds of HUD-1 settlement statements and compare them to the GFE. I'd like to see the settlement agent's fees added to the GFE. It's disgusting the way too many borrowers are getting ripped off with junk fees at the closing... wire fees, email fees, document storage fees, copy fees, etc. These junk fees can total several hundred dollars and they come as a complete surprise at the closing with little to no chance of negotiating.
It's amazing how many people have come to think of themselves as "savvy consumers", able to track down these incredible bargains that most of us would never find. So much of modern personal finance is built on self-delusion. My favorite is the "paid vacation" delusion. My coworker and I both make $50,000/year. We both take three weeks vacation a year. I get 49 checks for $1,020.41, she gets 52 checks for $961.54. She is convinced that she gets a much better deal than me because she gets "paid vacation".
And by the way, the long, thorough, detailed posts are much appreciated in this corner.
The end result of the increases in technology and efficiency on the wholesale side aren't necessarily higher processing costs. I don't think the cost per loan today is higher than it was 10 years ago (due to increases in technology). The fact that the wholesale lenders are doing so much of the loan processing for their brokers has allowed for very inexperienced parties to enter the market place. In the past few years it has been ridiculously easy for broker to originate non-conf products. There wasn't even the bar of learning how to use DU. Wholesale mortgage channel can provide a great service to the consumer. Eliminating the wholesale broker channel will raises costs to the consumer. Inadequately regulating brokers will continue to lead to lower quality originations
That is long. I did not read it. I am like all the deluded consumers, it must be good because the comments say so.
Why get a loan that you do not understand how you will pay it? It is that simple. Everyone needs to do due diligence.
Normally I wouldn't do this, but this is the question I really wanted some feedback for as I may be in the market for a house myself sometime fairly soon.
"Another serious question. Is it possible for a reasonably intelligent consumer who falls in the hands of an unscrupulous broker to protect himself anyway? How would one avoid that in the first place? Are there signs, red flags, things to watch out for, ways to arm oneself? I have seen lawyers on the tube claim that they tried - and failed - to read and understand everything they were signing at closing."
Any feedback would be appreciated.
Great post!
I've heard this idea kicked around quite a bit (even a few posts near the top of this), but is there serious discussion in new legislation of binding Loan Officers and Brokers to the interest of the borrower?
If brokers have a legally binding fiduciary responsibility to their clients (as some in the financial services industry have through charters and such), it would greatly reduce the need to 'shop around' for brokers and discourage all of these distortionary hidden-fee and yield spread practices. Simply put, your broker is legally bound to give you the best deal out there.
UnEasyOne- don't go to a mortgage broker. Go to the local Savings & Loan that has done business in your town for the last 75 years and talk to the branch manager. Or go to the bank where you keep your checking and savings accounts. You may not get the absolute rock bottom rate but you won't get cheated either.
Another option. Find a friend who owns her own home, has a conservative lifestyle and has her head screwed on straight and ask her for an introduction to the banker who made her mortgage.
"What is so strange to me is that many people (in the business, not just customers) seem to believe that the new loan in a refi must be a new 30-year term. But there's no reason that has to be, and back in the day, we used to make 336 month (or 337 or 278 or etc.) refis all the time."
We did the same and we had a disclosure that showed them what would happen if they continued making their original payment on the new loan with the reduced rate. Most borrowers (and as you say many lenders) don't seem to understand loan amortization constants and that the agreed upon constant payment is the minimum, not the maximum. A borrower can reduce his term to any term he wants just by changing his payment. We had many customers who voluntarily opted to reduce their term. Many of these are probably feeling pretty smart about now.
Hi Tanta,
Have you taken a look at loanace? I call it a TurboTax of loan processing. You can play with different fees on GFE to see how your overall APR keeps changing. I helped them with their formula calculation testing, but I'm sure the are more "holes" in it to pick at.
Thanks, trail. I have my checking account at WAMU - but I get the idea. Sounds like sound advice to me.
Rob Dawg and Tanta,
Can you do better than hermophrodites and astronomers? Me thinks not. Neither of you have originated a loan and are therefore ignorant to judge. Not a hard concept to understand.
There are good and bad brokers. But before I was a broker I worked on the wholesale side. The wholesale side is where the plots are hatched and then taught to brokers. I was paid bonuses based on "production" so the bankers are every bit as bad as the brokers. But the key difference for a broker vs a retail banking loan officer? Balance of power. The loan broker can choose which bank/lender to send the loan to. At a large bank, you do not have that balance of power to keep over zealous underwriters and greedy secondary marketing lock desks from totally screwing both your clients and you.
Balance of power is what mortgage brokering is all about. And that balance, believe it or not judgemental hypocrites, favors the consumer.
It looks like there is a new book in the making. Got a working title?