Solutions to the Mortgage Lending Crisis
The mortgage industry crisis is a gift. Mortgage lending can emerge from this mess and transform itself. I have been co-writing about predatory lending and the ambiguous professional status of retail mortgage salespeople for over 7 years. The industry has traded consumer respect for massive profits. It does not matter where you work: banker, broker, credit union, consumer finance company. It does not matter what you call yourselves: Loan officer, loan originator, loan consultant, mortgage planner. The average consumer does not understand the differences.
Solution number 1
All retail mortgage salespeople, no matter where they work: bank, broker, credit union, consumer finance company, should owe fiduciary duties to consumers, just like a doctor or a lawyer does. The process of purchasing or refinancing a home has become more and more complex over the past 20 years. This major financial decision is no less important than a medical procedure or legal matter.
Solution number 2
Let’s stop dancing around the ambiguous behavior we call “predatory lending” and define it. We use to call such actions “fraud.” There are now 24 states that have passed anti-predatory lending legislation. This means multi-state brokers must deal with a patchwork of state regulations. A federal solution is in order, but we must also make sure that funds are set aside to regulate any new federal law. An un-regulated federal law is useless.
Solution number 3
If the industry does not like paying higher costs associated with more state and federal regulations, the industry has another choice: Self-regulation. Any industry is far better of self-regulating rather than letting the government regulate for you. The last time the mortgage industry had to swallow government forced regulation, we ended up with RESPA and the Truth-in-Lending Act. Oh, yes, these are such fine pieces of federal legislation and so easy to understand that the industry joyfully and voluntarily steps up to the plate every day to willfully comply with these two gems.
Every time I ask mortgage brokers the following question, I get the same answer, 100% of the time: “If you accidentally messed up and violated a federal or state law, would you want one of the competitors in your marketplace to give you a call and say, for example, ‘Hey there, I think you missed the APR on that piece of advertising’ or would you rather have your competitor turn you in to your state’s regulator?” Everyone would rather have their competitor place a direct, friendly call to them. There’s this really cool guy named Kant who came up with one way (well he came up with many ways but we’ll just focus on one right now) to help us figure out how to act ethically. He said that if we want something for ourselves (a courtesy phone call) then we must also want it for the other person. “But, but,” you ask, ”what if that other person is our competitor?”
Self-regulation means that the industry understands that consumer respect is only as high as it’s LOWEST player. Self-regulation is a sign that an industry is moving forward and growing up. Yes, it will mean requiring more pre and post education, tougher exams, and higher duties owed to consumers, but moving into the realm of professional status also means more prestige, less government oversight, and the fees emerging mortgage professionals will charge for their services and knowledge will be higher because their knowledge and duties will be worth more. If you regularly argue for less government intrusion and you are pro-business, you understand the value in self-regulation.
There are now four national professional associations where retail mortgage salespeople can voluntarily choose to act with professional status, or at least pledge a higher level of honesty than the existing industry associations. Members of NAMB must simply look like they’re honest.
Retail mortgage salespeople who join the Mortgage Professor’s Upfront Mortgage Brokers Association will guarantee, in writing, a fixed price for their services up front. Members also pledge to put their client’s interests above their own.
The National Association of Mortgage Professionals has a Code of Ethics that is better than NAMB, MBAA or NAPMW.
The Certified Mortgage Planners have a more detailed Code of Ethics. However, all a person has to do is attend a 3 day class and pass a test and I’m not sure I agree with their premise: To help consumers plan how to use their home equity. This organization has some work to do in its intentionality. Interestingly, a regular raincityguide.com reader sent me an entire slew of articles that catch lead Mortgage Planner instructor Barry Habib with his pants down recommending consumers choose subprime products, take their equity out of their home and invest it, and other “advice.” Looks like CNBC hasn’t asked him for advice for a couple of months.
The National Association of Mortgage Fiduciaries Code of Ethics is prescriptive and detailed. We are the only professional organization whose code of ethics prescribes fiduciary duties and we are open to all people in the mortgage lending industry.
Ameriquest and Household Finance, two consumer loan lenders were forced by way of court settlement to cease rewarding their retail mortgage salespeople for steering trusting consumers into high cost, high rate loans. In contrast, Mike Dodge recently penned an Inman Guest Perspective in which his company, Internet Brands, voluntarily adopted a twelve point, detailed, home borrower’s Bill of Rights.
Solution Number 4
Require ratings agencies to do proper due diligence on pools of mortgage backed securities and dis-allow ratings agencies to be paid by the investment bankers; a conflict of interest that certainly should have been caught long ago.
Solution Number 5
Ban downpayment assistance programs which artificially inflate sales prices and are nothing more than seller money laundering according to Tanta.
Solution Number 6
Require that mortgage companies that purchase leads be held accountable for the advertising used to harvest those leads. Deceptive mortgage spam, deceptive radio ads, deceptive lead generation websites only serve to circumvent an ethical mortgage company’s attempts to advertise in accordance with state and federal laws.
Some view the mortgage industry meltdown as a threat. I see it as an opportunity to put the industry back on track ethically, to help retail mortgage salespeople transform into emerging professionals, rope predatory lending back into where it came from: the fraud corral, and open a national dialogue on self-regulation. What do you see? What solutions would you add to this list?
There must have been some particulary serious violations that prompted this law. Wouldn't it have been easier just to make ...
When the issue of fudicial responsibility began coming to the forefront I felt a sense of relief. I guess I ...
Comment by Laura Young on 16 September 2008:
As a Loan Originator it is our responsiblity to make sure that the consumer has a full understanding of their loan. We have to be held accountable in our fiduciary duties. When a consumer purchasing a home it is an investment and looked at as retirement planning. Our state and federal regulators need to implement a stronger code of ethics requirements accross the board.
Comment by Susan Lohse on 19 September 2008:
I do feel that one day we will break out of this Mortgage crisis. With the more strict laws and regs, the industry is really going to see a “weed out” of Loan Officers. Lending will become more of a respected career in years to come. I don’t think that it’s there yet. It will take a while for the average consumer to not feel that they’re being ripped off every time they take out a home mortgage, but eventually they will grow to trust mortgage lenders again.
Comment by Bridgette Verna on 20 September 2008:
When the licensing regulation came about it “weeded’ out those predatory lenders and those LO’s who really should not have been lending. This was a good thing thing. Those people gave good Lo
s a bad name and it hurt our industry. It would be nice to see the reforms in government and the banismnet of those who acted unethically, but it would also be nice to show applause for those who acted ethically when they had the opportunity to act otherwise. Additionally, I would like to add, it was not only the Lo’s who were so unethicial it was the lenders seeking the loans who “allowed” such occurance, and an allowance of such an inflation of “real estate’ market. It is sad to see customers who cannot refinance out of the nasty loan they were in simply because they are now negative in their house 3 years after their purchase. I hope the mortgage crisis ends, not just for us but for everyone. Loan officers need loans but customers need solutions to their financing situations as well.
Comment by David Hopkins on 2 October 2008:
Self regulation is the best way to police an industry because the industry itself knows the details that are needed and not needed, not the politicians. The new laws that are getting passed that are designed to help protect the consumer in reality are making it worse for many of them.
Comment by Sandi Paradiso on 27 October 2008:
I agree with solution 5 and 6. I believe this is a wake up call to LO’s and leders both. This is what happens when you get greedy. The Lo’s couldn’t do any thing unless the lender approves, so these lenders that want to get any one in a house at any cost wasn’t looking out for the cusumers best interest, they were lining there pockets. We as Lo’s need to care about our clients, not just look at them as a pay check. If there was more LO’s out their that really wanted to help this might not be an issue. You will allways have those individuals the want a house no matter what, they will do what ever to get one. they will evintualy find someone to lend to them. I agree with Laura we need to help our clients understand what is going on with them, not everyone is in the possition to buy a house and thats ok, some day they will be, but putting people in houses, that aren’t capabel of paying the morgtage payment, so we sell them on interest only, that’s just setting them up to fail and lose everything and shame on the lenders and LO’s for doing that, If we can’t protect them no one will. We do need a code of ethics and we all should feel bless to live by them.
Comment by Garry Carlin on 7 November 2008:
No offense all, but self-regulation is the stuff fairy tales are made. I have seen hundreds of high-visibility lenders come and go over the years whose lending practices crossed over the line so far that they were outrigt criminals. We all knew who they were and the type of people who worked for them. Even in this market each of us know at least one company who is still doing this kind of lending.
Fiduciary lending always comes down from the top. If you work for a crooked company you’re probably a crook. The state has the responsibility for putting these folks out of business and for holding the rest of us accountable.
Comment by Denise Swafford on 10 November 2008:
Even with federal regulations loop holes will be found and exploited. There is a large portion of the industry has has passed the sad excuse for state testings and applications. The WA state test in my opinion was a joke. I have been in this industry over 20 years and watched the evolution.
Until there is an equal playing field between banks and brokers in the mortgage realm it will be difficult at best to make fair regulation. I agree that self regulation of an industry is far better than goverment envolvment in making those decisions. However there needs to be a shift in thinking to doing what is best for the consumer…rather than your own personal gain.
I am all for free enterprise however the common customer doesn’t understand the lovely indept nuances of goverment disclosure and doesn’t take the time to read it either. Disclosures need to be in plain English for the consumer. Loan agents need to clearly explain the product and clearly work as an advocate to place a borrower in a loan that they can pay. Realtors need to sell a home within the actual budget of the client not the wishful budget of the client.
Until there is a common ground in which all real estate professionals can agree on it will be next to impossible.
I would like to see that all real estate professionals test based rules and regulations and then on specific test cases. Applying the rules and regulations currently out there into a “real life” scenario. Test cases with documentation to review, ratios to address, properties to consider, and fees to quote and disclosures and forms to provide. Just because someone can pass a test on what the rules and regulations are doesn’t mean that they can apply them.
Applying rules and regulations to an actual scenario is what will determine additional educational needs. This should be done prior to issuing a license.
Comment by jae cavner on 14 November 2008:
I’m not really sure if there are any surefire fixes for the current situation we are all in, but I do have an idea that could possibly help.
> the financial institutions could renegotiate interest rates with the homeowners that are falling behind in their mortgage payments, this would still allow for a positive cash flow and allow the homeowners to stay in their homes. at some point the mortgage holder should realize that reduced income is more desirable than a vacant foreclosed home in a down market