Ive had some heated (and circular) conversations with many in the mortgage industry regarding how unregulated the industry actually is, how it would be near impossible for legislation to clean up the mess. The Mortgage Industry needs something more than new Statements and Policies from regulatory agencies, with a few sacrificial lambs served up for show.
Does anyone see the parallels between the Enrons & WorldComs and the mortgage industry? These books are cooked ‘X-tra well done’…ahhh, I can hear the paper hum of all the paper shredders as I type this.
Via my blogging here and ActiveRain it’s become very evident that unless you are inside the mortgage industry, you’re an outsider, and if you’re an outsider, you’ pay in cold hard cash. Even Realtors, designated and educated real estate professionals, have little idea about how the mortgage industry ‘works’. This amazes me since most Realtors tried to tell me how to do my job..? ;)
There’s no other industry that makes you pay for what you don’t know quite like the mortgage business. Michael and I like to call the greater traditional mortgage shops out there:
The Mortgage Cartel.
Here’s a little story to support ‘my claims’, followed by the Realespace.com solution…
The Mortgage Cartel has been busy burning wagons and taking scalps since the mid 1980’s, with the dawn of the mortgage broker. It was the Wild West and the Gold Rush all wrapped in one. Brokers jumped claims and worked the angles including something known as yield spread premium (YSP).
YSP was introduced by the banks as a way for borrowers to finance closing costs through a voluntary increase in their interest rates. At least that was the idea. It was only a matter of time before brokers hijacked YSP and turned it into a clandestine profit center financed by unwitting consumers who had no idea what interest rates they actually qualified for. It was a recipe for disaster.
The passage of Regulation X in 1992 defined and outlawed hidden lender kick-backs. Post Reg X, brokers were forced to be more creative in order to maintain their hefty back-end "rips." While typical loan fees ranged from 1%–3%, there was almost always another 1% - 3% in hidden YSP camouflaged by ambiguous documentation and verbal gymnastics.
The problem with Reg X was that it only addressed the mortgage broker—leaving mortgage bankers, for all intents and purposes, untouchable. To this day, direct lenders like DiTech can lawfully withhold information from the borrower during the process of mortgage program and rate selection. Things were bad, but they were about to get worse.
By the late 1990’s, networked information technology had reduced the task of pre-qualifying a mortgage to a point and click affair. Online brokerages like Ameriquest, DiTech, and eLoan emerged, waving a red cape at a bull market of consumers eager to reap the benefits of the New Economy. By 2002, the Disinformation Age of real estate finance was in full swing.
Operating beyond the reach of Reg X, online uber-shills sucked billions of dollars in overpaid interest expense out of the economy through such notorious schemes as DiTech’s "$395 Flat-Fee Loana Trojan horse packed with up to 3 points in hidden yield spread courtesy of an inflated interest rate.
At the peak of the refi boom, the Mortgage Cartel had effectively turned the Internet against consumers making the process of obtaining a mortgage online nothing more than a faster ride down the same dark alley. The disturbing truth is, if you got a mortgage between 1987 - 2007, the overwhelming odds are your monthly payment harbors a broker’s secret payday. And if you got your loan through a direct lender, you can all but guarantee it.
With bankers on one side and brokers on the other, the consumer was bound to get squeezed. When comparing identical offers from a mortgage broker and a mortgage banker, consumers routinely chose the more expensive loan.
Faced with the most uneven of playing fields, many brokers rationalized a culture of deception. One look at a typical HUD-1 broker closing statement is all the proof you need. Nevertheless, it was the online direct lender that posed the most imminent threat to consumers. Why? Because it wasn’t perceived as one.
To Be Continued….
Also See:
e-Lenders: When Thieves Compete, you Lose
Transpareny in the Mortgage Service Industries
Jeff, Nice to see you back writing again. Let's not stir things up too much around here. :)
I'm looking forward to your new business model.
To Be Continued....
Are you kidding me? I got through all that and it was just a tease? How can you leave me dangling like that? I'll have to add you to my Blogroll to stay tuned to the continuing saga
X...Y here :)
I'm checking in (good way of putting that) Miss you. Wink. Wink.
Go ahead. Delete me. LOL. You don't really think I have something serious to say during The Fool of April season, did you? SVW.
P.S. You missed <this> If you're drinking anything put it down before you read it. Trust me :)
TLW...ROAR!
Hey guys (and gals)...Great to 'see' you all....
Part Deux Following Soon!
Wow, quite a manifesto. You're not related to the Unabomber by any chance?
I agree wholeheartedly with alot of what you have said. When I mention this kind of stuff in my area, I'm almost burned at the stake. I have to admit that I do love to ruffle a few feathers, though.
It gets them thinking...
Jeff...Can you give a timeline of when you are going live?
As you know as a UMBA member, I already follow most, if not all of what you talk about, but I am interested in what you are going to roll out.
While I agree that it's BS that mortgage banking companies don't have to disclose what they are making on a mortgage and even more BS when a bank that is BROKERING a mortgage doesn't have to disclose what they are making while a broker does, I think that it's BS that the broker has to disclose this at all.
When you go to buy a car or any other product, does the dealer or the Bed Bath and Beyond have to disclose to you what they are making on your purchase?
It's not that complicated. If I'm quoting 6.125 w/0 points and my closing costs on the GFE are $1,400.00 and GMAC is quoting 6.25 w/0 points and their closing costs are $1,300.00, what does it matter what I'm making from the lender that I'm selling the mortgage to? Most people can see that I'm a better deal. To me it's nunyourbizness, what I'm making. Compare my offer and don't worry about stuff that shouldn't concern you.
As far as YSP being some kind of rip off, that's non-sense! People should realize that if I'm not charging them any points that I'm making my money some where. That's not a mystery. With your argument, Bed Bath and Beyond should sell me those towels at the wholesale price, then charge me their 100% - 300% markup as points. Am I getting you right here?
R.B. "Bob" Mitchell
ValueList Real Estate Services, Inc.
Great comment Bob. Input like yours is what I value most from this community. I used to be heavily involved over here in the rain, alas my 'home blog' and related products Im developing hinders my ability to actively participate over here as much as i would like....
To answer your question(s):
The fact that Bankers don't have to disclose YSP and Brokers do is a tight lesson in hypocrisy, and often unfairly paints the Broker in a negative light.
There was a study done by two Harvard professors where consumers were presented with the exact same mortgage, the first using Broker disclosure req's and the second, a Bankers. Over 75% of the time, the consumer incorrectly identified the Bankers offer as superior.
YSP isn't a rip off if it is offered and explained as it's black letter law definition states- YSP is an option that is to be presented to the borrower as a means to finance some or all of their closing costs.
Where YSP can be 'damaging' to the consumer is that they may not need it, and unknowingly accept a higher interest rate than they qualified for. Stretch this difference over a few years and the 'damages' add up.
Retail outfits, car dealerships, etc are not governed by the same set of laws as the mortgage industry, so comparisons to such aren't prudent....
Lets compare another industry more closely related to the mortgage space, the 'stock market':
Wouldn't you like to know (even if it is just to know) if the mutual fund your broker is heavily investing you in is paying him substantial kickbacks to do so? It's easy to see where the potential conflict of interest comes into play. Maybe the fund performs and it doesn't matter, but maybe it tanks and now it smells like bad fish.
At the end of the day, Brokers and Bankers should play 'cards up'. Asking for forgiveness instead of permission doesn't work when the Feds come-a-knockin with the rule book in hand...Especially when they're on a witch hunt...
Jeff: I actually don't mind disclosing what I'm making on the back side of the mortgage, but I do mind that the banks don't have to, ESPECIALLY if they are brokering the mortgage as I am. That said, I really don't see the difference between a retail mortgage broker and any other retail business. If I'm offering 6.25% w/zero points and $1400.00 in closing costs and the bank down the street is offering 6.125% w/zero points and $1,400.00 in closing costs, then the consumer knows what they are buying. It shouldn't matter what I'm making or what the bank is making. They beat me fair and square.
The breakdown in the stock market analogy is that the product is not fixed. If I sell a 30 Year Fixed rate loan at x % w/ zero points and x dollars in closing costs...like I said above, they know what they are getting. If the stock broker sells a mutual fund that may perform at one level and it may not, you would probably like to know what their incentives were used to entice him to sell me that particular fund. If they sell me a bond that is going to yield x percentage and his competition down the street is trying to sell me a bond that yields Y percentage, which is lower than what the first broker is offering me, why would I care what he makes? He beat his competition.
Don't get me wrong, I'm all in favor of transparency. I don't mind disclosing HOW I get paid, I still don't think that it's anybody's business what I get paid. The market will take care of that. If I charge too much, then the market will notice....and the mortgage market is a VERY competitive market. That said, you can't legislate stupidity. Are there people out there who are stupid and will get taken advantage of, yep! You can't fix that.
R.B. "Bob" Mitchell
ValueList
Bob,
What i'm saying is that the consumer should be able to see exactly what they qualify for, unmanipulated wholesale pricing, and let the broker, banker, bank, etc compete for their business via efficiency and service.
My analogy was to point out that if I were buying a financial product, I want to know if my 'fiduciary' was in anyway influenced by conflicting values. Maybe annuities would have been a better choice, and we all know the scam they are...In any case the mutual fund example has been exposed as unethical.
Unfortunately they don't teach this stuff in schools, so I know many doctors, lawyers, and other people alot smarter than me, who are 'stupid' when it comes to mortgage/personal finance and real estate...Alot of focus is given to minorities, the elderly, and other 'high discrimination' groups in the media, however, I've seen HUD-1's with $35k in mortgage professional compensation...'the privileged' get bilked just as hard.
Check this out: http://thexbroker.com/blog/?p=224
Im not just spouting off without intending to do something about it ;)
Hey Jeff: I often show my wholesale rate sheets to clients, usually in connection to some other lender offering an unrealistic rate. So, I'm not opposed to being transparent. My gripe is reading about these poor abused borrowers who were lied to and mislead by mortgage lenders and how it's not their fault that they are going into foreclosure when they were disclosed to multiple times in the loan process. Information is way too abundant for borrowers not to know what they are getting into and the borrower needs to take some responsibility here.
If they were lied to or mislead, that's a different story. The disclosures should tell that story.
I'll check out your blog.
Bob
Wow, now I dont' know if I had a good deal and got screwed on my loan, or just got screwed... that's a pretty scary picture you painted... but, appreciate the info... very interesting..