The real estate blog.

With the real estate slowdown causing everyone to find someone to blame for the problems, mortgage brokers are taking a huge share of criticism. Now, I’m not saying some brokers deserve this. There was and is a bunch of nonsense going on out there.

However, for reputable mortgage brokers, some of this criticism has turned into much more. In Utah for instance, the vetting process for mortgage brokers is pretty intense, especially compared to other states. The licensing process in Utah was born out of high rates of mortgage fraud in the state. When politicians talk about adding to the restrictions simply because they’re facing election and real estate is a hot topic, I have a problem with it.

Consider Chris Dodd, Senate Banking Chair and aspiring Democratic Presidential Candidate, who last month proposed a “Predatory Lending” bill.

The key provisions in this legislation are:

Require lenders to assess borrowers’ ability to pay the mortgage even after a rate reset if they’re signing up for an adjustable-rate loan.

Require lenders to verify subprime borrowers’ income with documentation. Earlier this year, the Federal Reserve

Prohibit pre-payment penalties and yield spread premiums (YSP) in subprime loans. A pre-payment penalty is the fee some lenders charge if you end up paying off your mortgage early, including if you choose to refinance. It sometimes can be as high as six months’ worth of mortgage payments. A YSP is the difference between the the lowest interest rate a borrower qualifies for, and the actual rate he gets. A broker’s fee may be based on it.

Prohibit steering borrowers to more expensive loans when they qualify for lower cost ones.

Hold lenders liable for appraisals and for brokers’ actions when the broker is paid based on yield spread premiums.

I had a discussion of what I thought was right and wrong about this legislation over at the Easy Mortgages blog.

Sometimes the reforms necessary for the mortgage business seem like common sense. Consider recent policy changes by Washington Mutual -

“As part of its new broker standard, WaMu will require evidence that the broker has made certain disclosures to the borrower early in the application process, including:

· key terms of the loan requested by the broker such as loan amount, loan term, whether the interest rate and mortgage payments may change, and whether the borrower’s pricing package carries a prepayment fee, and….”

“…key terms of the loan requested by the broker such as loan amount, loan term, whether the interest rate and mortgage payments may change, and whether the borrower’s pricing package carries a prepayment fee, and

· the amount of all compensation the borrower will pay the broker for their services, including broker points, or administrative or processing fees, and whether the broker has requested a yield spread premium.”

So, not only do they have to tell you the basic terms of the loan, but they also have to disclose the fees you’ll have to pay them, and tell you if it’s actually an adjustable rate or a fixed rate loan? Now that’s just crazy talk!

Now let’s hold on just a minute and take a look at this from the broker’s perspective.

First of all, there is no “contract” with a mortgage broker like there is with a real estate agent or attorney. Broker’s clients are free to shop and leave the transaction at any time, usually without any financial penalty. Calls for mortgage brokers to act as a fiduciary in mortgage transactions must include a commitment from the client as well.

Secondly, let’s address the WaMu changes. Why wouldn’t a broker provide basic terms and fees up front? Because typically, the broker doesn’t know them. When I get a potential client on the phone, until I get their credit report, I have to take their word for the score and their debt obligations. If those deviate from what was originally stated, the loan terms and fees will be different as well. Current laws (RESPA) call for disclosure of these terms when an application is made and credit is pulled. In fact, a selected lender will send the Good Faith Estimate and Truth In Lending disclosures directly to the client, with their own estimate APR and interest rate which can sometimes conflict with the broker disclosures.

How about providing accurate disclosures when credit has been pulled? Even then it’s no sure thing. For example, I once had a client purchase a car a couple weeks before he made application with me. This purchase didn’t show up on credit and I didn’t find out about it until the lender had pulled their own credit report. The payment blew wide open the already tight debt to income ratio and we ended up having to do the loan in his wife’s name. If one were to follow the letter of the law in either Dodd’s legislation or WaMu’s policy change, these kinds of unknowns fall squarely on the shoulders of mortgage brokers.

It’s obvious that changes need to be made in the real estate industry, especially when it comes to mortgage brokers. New legislation, if necessary, must consider and hold accountable all parties involved in the transaction.