For all the talk of foreclosures and failing lenders, the bottom line is this: The mortgage lending system is both sound and hugely successful. Despite the headlines, most borrowers are making payments and most lenders are strongly profitable. Even among subprime borrowers — the borrowers most in the news — 87 percent are making their monthly loan payments.
“The very success of the mortgage industry creates a dilemma for those who want to reform the system,” says Jim Saccacio, chairman and CEO at RealtyTrac.com. “How do you make the mortgage industry better without ruining the present system, a system which to this point reliably makes loans available nationwide at low rates and with little down?”
By “better” a growing number of consumer groups and lawmakers mean giving borrowers a stronger shot at low rates and less-expensive loans. Forget about how loans are packaged or sold, say reformers, who instead argue that the mortgage system is enormously successful and profitable precisely because borrowers routinely overpay for their loans.
Consider “stated-income” loan applications. If you apply for a loan and with a stated-income application the lender doesn’t check your salary or income. Of course, such applications mean extra risk for the lender so the loan rate is increased. The catch is that many of those who use stated-income loan applications don’t need them and don’t need to pay a premium rate for their loans, a premium that produces additional profits for loan officers and lenders.
A 2006 study by Campbell Communications for Inside Mortgage Finance found that 39 percent of no-doc borrowers were salaried wage earners. Why such borrowers need stated-income loans is unclear given that they can easily verify income with payroll stubs and W-2 forms.
Reformers essentially argue that loan officers and borrowers are not equals. Borrowers enter the lending system every few years and are entirely dependent on experienced and skilled loan officers for current loan information. Shopping around for the best rates and terms makes no difference because loan officers have no obligation to obtain anything other than the financing which produces the highest commissions and largest profits. In effect, there’s no borrower advocate in the lending system and borrowers have insufficient knowledge and experience to make informed decisions.
Carolyn Warren, in her new book, Mortgage Rip-Offs and Money Savers, offers this example:
As a wholesale account executive, I got a loan approved for a couple who had six pages of late payments and paid-off collections. These people had stiffed everyone from Visa to the pizza delivery guy. It was one ugly credit report! But this lucky family had just inherited money, so they got their loan. The catch was that they had to make a 20 percent down payment and take a high interest rate with a two-year obligation (prepayment penalty).
What’s interesting is that the investor wasn’t the only one who wanted more money. On top of the lender’s high rate, the loan officer jacked up the rate by an additional 1.25 percent so she could collect the maximum back-end commission for herself. Then she added a couple extra points up front, too, because she figured they’d consider themselves “stuck” and wouldn’t shop around. So Mr. and Mrs. Lucky ended up paying triple for their bad credit, because on top of what the lender required, the loan officer saw an opportunity to take advantage. And that’s the way it usually goes.
But what if the system were changed? Instead of loan officers who have no obligation to the consumer, what if loan officers were required to act like doctors, lawyers and real estate brokers and put client interests first?
That’s exactly the standard being pushed by Sen. Charles Schumer, D-N.Y. Under Schumer’s proposed Borrower’s Protection Act, every mortgage loan officer would have a “fiduciary relationship with the consumer.”
Think about when you use a doctor, lawyer or real estate broker. In each case there are standards and expectations. If a doctor, lawyer or broker fails to put your interests first or does not meet basic standards of practice then you have recourse, you can sue for damages and the professional can lose his license.
However you can’t readily sue if there are no performance standards in place or if the professional does not have a “fiduciary” or “agency” obligation. In effect, you can’t sue a car salesman, loan officer or waiter if you pay too much.
In basic terms a “fiduciary” obligation means that your interests come first and that your doctor, lawyer or broker is really your agent. The word “agent” is a loaded expression because it means that an individual has defined, lawful obligations to serve your best interests.
The Schumer bill at this moment is merely a proposal, it’s not law. One can expect the lending industry to oppose Schumer’s proposal at every step in the legislative process.
“Some have proposed that a fiduciary duty standard should be implemented and mortgage originators and their loan officers should act in the ‘best interests’ of the consumer,” said Harry Dinham, president of the National Association of Mortgage Brokers, before a subcommittee of the U.S. House of Representatives in March. “NAMB remains opposed to any proposed law, regulation or other measure that attempts to impose a fiduciary duty, in any fashion, upon a mortgage broker or any other originator.
“Simply put, a mortgage broker should not, and cannot, owe a fiduciary duty to a borrower. The consumer is the decision maker, not the mortgage broker,” Dinham continued.
John Robbins, chairman of the Mortgage Bankers Association, said in a press release that the Schumer legislation “will have the unfortunate effect of limiting choice and restricting mortgage credit to the neediest borrowers, thereby hurting those people it is ostensibly designed to help.”
What are the odds that the Schumer bill will pass? In today’s financial environment, perhaps 50-50 because you have a powerful and important senator competing with a powerful and important lobby. But if foreclosure rates continue to rise, and if the lending system becomes a political hot topic in the way that telemarketing was important to voters a few years ago, then no one would be surprised if Schumer prevails.
Columnist Peter G. Miller is the author of The Common-Sense Mortgage and is syndicated in more than 100 newspapers.