Not Much To Cheer About – Part 2

In last week’s article I discussed the implications and problems associated with HUD’s new rules. I mentioned that the fees are not the issue, it’s the dishonest lenders and mortgage brokers who are the source of the problems.  

Even worse, the HUD proposal will eliminate the current ban on kickbacks.   A real estate company’s lender will be able to have its agents “refer” a client to a lender and receive compensation, a practice that is now illegal.   Does that kickback come from efficiency? Not hardly. Most big real estate companies have had affiliated lenders, settlement agents, and title companies since the 1980’s. Buyers using those services do not get any better deal than if they used their own sources.   Those companies aren’t going to absorb the cost of the kickbacks that they will pay, they just pass it on to the homebuyer. He has been led into a comfort zone because he is paying a flat fee for his closing, but in reality he’ll be paying the flat fee plus a kickback that’s buried somewhere else.

The other issue is that mortgage brokers generally do not act as agents for their clients, even in states where they are issued real estate agent licenses and should be bound by agency laws. Lenders do not allow brokers to act as their agents, so who are the brokers supposed to represent?   Clearly they should represent borrowers and should have a fiduciary obligation to them. Just as their real estate agent does.

Homebuyers and borrowers seeking a refinance should be able to hire a mortgage broker in the same way that they hire a real estate agent. The mortgage broker’s compensation should be spelled out in an agency agreement, just as the real estate agents compensation is detailed in a listing agreement.   Borrowers should have the right to sue in Small Claims Court if the compensation is increased beyond that which was agreed upon.

Finally, HUD’s fixation on costs leads them to miss the most important point of all, borrower education.   Most people, led either by their own outdated experience or misleading marketing ploys, choose the wrong loan, one not consistent with their goals.   Many others choose the wrong loan, make a non-optimal rate-versus-fee combination, or do not lock their loans in at the best time.   Add the cost of these and they end up paying much more than had they made better choices .   The fact is that when a borrower makes the best decisions, he can easily save $7,000 over the life of his loan, far more important than HUD’s $700.   That’s where an expert can help him.

Unfortunately, the mortgage industry is going through a dumbing-down process where experienced, trustworthy agents are being replaced by minimum-wage earners. That’s who you get when you call 1-800-anything, a call center employee who will recite a canned sales pitch. That will continue to happen as long as borrowers can’t figure out the difference between those people and an expert. They can easily get lulled into a false sense of security, thinking that they are saving money with a “guaranteed mortgage package,” but they are going to pay far more because they did not get help from someone   who knows what he or she is doing.

The mortgage industry has many, many customer-oriented experts who treat their customers with intelligence, care, and honesty. Borrowers will do themselves a huge favor if they find one of them to deal with instead of falling for one of the many sales pitches from the call center lenders. They can find one by getting referrals from satisfied friends and neighbors.   It may be a little harder, but the results will be worth the effort.

Good luck!