Fiduciary Standards in Lending and on Wall Street: Can it Work?

Question for discussion: In Washington State, can Loan Officers operate within the framework of a Fiduciary duty to their clients when the lending industry is structured with incentives that may be in conflict with the new standard?

Jane Kim of the Wall Street Journal wrote an excellent article in this past weekend’s issue regarding Wall Street brokers (selling investments) being placed under Fiduciary standards in dealing with customers.

Currently, Wall Street brokers are held to what is termed “suitability standard,” which is a more lenient standard than that of a fiduciary.  In contrast, Registered Investment Advisers have operated for a long time under the more stringent “fiduciary” standard—a legal standard that compelled them to act in the best interests of customers.  The proposed higher standard forces disclosure of potential conflicts of interest (i.e., if they make more money off of an investment offered vs. others) and promotes recommendations of investments that may be less costly to the consumer and more tax-efficient.

While Wall Street struggles with reform as part of its regulatory overhaul, the mortgage industry has also implemented reform by introducing a similar “fiduciary standard” for mortgage brokers and loan officers.  Prior to this reform in the mortgage industry, those who originated loans had no obligation to work in the best interest of their customers.

“In most states, mortgage loan originators still have no fiduciary obligation to work on behalf of their client’s best interests. The state of California mandated fiduciary duties for only mortgage brokers even during the height of the real estate bubble and Washington State added fiduciary duties for mortgage brokers and loan originators in 2008 but this still leaves consumer loan company loan officers (LO’s) and bank loan officers with more of a salesperson’s status.  I’m sure there are some LOs who work at a bank, credit union, or consumer loan company (they like to say “mortgage banker” or “correspondent lender”
because it sounds better) who do regularly look after their clients’ best interests but this is just mere subjectivism.”

Jillayne Schlicke,  Founder of the National Assn. of Mortgage Fiduciaries

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Much of today’s economic problems are directly associated with lending-gone-wild.   Countless cases of fraud both locally and throughout the country have been exposed resulting in massive losses for lenders and consumers, even those caught innocently in its wake.

One of the questions unanswered: How can the mortgage community effectively work the way a fiduciary standard is intended when the current lending structure is one in which incentives provided to the loan originators seem to undermine their ability to work in the best interest of their client?

For example, if you have two perfectly credit worthy borrowers, gainfully employed and with similar financial resources that are purchasing a home, it is common that you can have one borrower obtain a loan interest rate at about 1/4 to 1/2 percent less than that of the other borrower.  Sometimes the spread may be larger.  Why?  It may have to do with incentives commonly called yield spread premiums or rebates from the lender paid directly to the mortgage broker/loan officer for originating the loan at a specific interest rate.  This is retail lending. There was nothing wrong with this system when it operated under the prior “salesperson” framework where a Fiduciary duty was absent.  Today, the Washington State licensed loan originators, working under a Fiduciary standard with the incentives at hand, may have an inherent conflict that didn’t exist before.  I find this terribly ironic.

A loan sold to the consumer at 5.0% interest rate may provide a payout/rebate to the loan originator of only .125% (1/8th of one percent) of the loan amount but a loan sold to the consumer at 5.25% may bump that paid incentive to the loan originator up to .5% (1/2 of one percent) of the loan amount (note:  the rebates are earned fees over and above the commonly standard 1% fee charged).   If the interest rate is sold at 5.5%, the incentive provided for the loan originator may be even greater.  The checks and balances to this scenario is that consumers shop and therefore a loan officer must compete in fees and rate or they will have little chance of making the loan.  In addition, there is no way of knowing what rate will be offered to the consumer at loan application including any rebate back to the loan originator until the loan program and rate is locked.  Rates can and do change daily and even several times within the day.

“During the bubble run up and predatory lending days, loan originators would routinely lowball their Good Faith Estimates or simply not disclose this rebate existed. At closing the consumer would see the higher fees but have no time to object.” – Jillayne Schlicke

What is the solution?

It could be that a loan originator could guarantee their rate and fees (subject to restrictions and conditions) on the new Good Faith Estimate or GFE (coming this January 2010) that has been recently overhauled by HUD to provide a clearer understanding of the fees and loan program that is being offered.   There has been push-back resistance of this new Good Faith Estimate by the lending industry, and some of it for arguably good reason.   According to Jillayne Schlicke, the National Association of Mortgage Brokers (NAMB) has lost this round to influence a change in the newly proposed GFE.

Many in the lending industry have elected to avoid the disclosure of yield spread premiums (shown on a Settlement Statement) by working at a company that is licensed as a consumer loan company or by working at a bank.  In other cases, the loan officer may work under a correspondent lending company or other similarly structured business model.  Under these business models the loan is originated and closed in the name of the lending firm where the loan officer works and shortly after closing (almost simultaneously) the loan is sold to an investor such as Wells Fargo or Chase Bank.  This business structure avoids disclosure of any rebates or yield spread premiums and, if the loan was brokered and not closed in the name of the correspondent or consumer loan company name, the awkward situation when a consumer may ask (while signing their closing papers) what the separate figure or YSP disclosure is on their Settlement Statement.

Working within a framework of a “Fiduciary Standard” is not an easy task because of so many competing interests, potential conflicts of interest and regulatory standards that may or may not be practical in all situations.   Jane Kim, in the article she writes in this weekend’s edition of the Wall Street Journal summed up the problem facing Wall Street brokers well:

“Trying to define what constitutes a fiduciary duty is like trying to define the duty to not commit fraud—any application of it depends on the client’s particular facts and circumstances.”

New Era?

On January 1st of 2010 (the date that HUD begins requiring use of the newly updated Good Faith Estimate document), it could be new era when a loan officer says to their client, “I charge “x” amount to make your loan and when I lock your rate if there is a rebate or yield spread premium excess beyond what I charge in aggregate, you will receive the benefit of that money in the form of a credit or partial credit to reduce your closing costs.  We won’t know that that amount is until your loan is locked.   I don’t control what those rates and rebates offered will be.  The ability for you to float your lock and play the market may also work in your favor and also work against you if rates rise.  Together we will communicate to make sure we obtain the very best terms for you.”  That would foster long-term business relationships like no other.

To conclude, I don’t think there has to be over-concern in the lending community with regards to the new Good Faith Estimate and properly disclosing earned fees.  From my perspective, a lot of the uproar and concern by the mortgage broker community is energy misplaced.  Consumers have no qualms about paying for services provided they know what to expect and can appropriately budget for their expenses if they are informed in a transparent way.  Since late 2003, when our escrow office opened, there have been only a select few cases where clients have chosen not to close a loan because of confusion over fees or under disclosed matters that have come to light after receiving their Settlement Statement.  I would argue that in those few cases, had the consumer been communicated with properly and all earned fees were explained in a manner that made sense, the loans would have closed and everyone would have been happy, including the escrow and title firms that are paid only if a loan closes.  There is nothing more frustrating for title firms and escrow companies closing transactions than to have a client across the table walk away because of rates, fees or “unknowns” that take the consumer by surprise.

(thanks goes to Jillayne Schlicke for collaborating with me and editing this post)


About S-Crow

“S-Crow” (Tim Kane) is co-owner (with spouse Lynlee, LPO-Designated escrow Officer) of Legacy Escrow Service, Inc., an authentic independent escrow firm closing residential purchase/sale and refinance transactions.

42 comments:

  1. 1
    Eric says:

    I’ve been in the mortgage business for 6 years. I’ve been reading Seattle Bubble for 2+ years. I started out not knowing a soul here in WA. I never realized how cut-throat the business was until I got into it. The first few years when times were great, were actually very difficult for me. I looked at my job as if I was a financial planner, and not the lowest price on the street. I’ve seen where that has gotten many people; stuck in an 80/20 IO and underwater.
    This past year has been the best year for me & my clients. I have an intial meeting for about 1.5hrs, show them the rate sheet, tell them what I offer and explain the market to them. I’ve also told them about Seattle Bubble, so that they can get a different viewpoint. I want them to be part of the decision and educating them is the best way. It has also brought me a lot of referrals.
    Am I the only one doing this? I highly doubt it. This business is way to competitive to handle it just over the phone. So, YES, I feel like I do have a fiduciary responsibilty to my clients. I expect to work for them again, I expect referrals. And most importantly I expect them to trust me to make the right decisions with them.
    By the way here is the rate sheet for FHA
    30 45 60 days
    4.625 2.000 2.125 2.375
    4.750 1.125 1.250 1.500
    4.875 0.500 0.625 0.875
    5.000 -0.250 -0.250 0.000
    5.125 -0.500 -0.250 -0.125
    In order to get business it is up to me to decide what I wan to make. In order to cut out competition I’d offer take a .75 hit. So I’d sell a 4.75% for .375% plus closing costs

  2. 2
    Kary L. Krismer says:

    Well first, let me say I’ve been very critical of the state legislature for throwing around the fiduciary term here, there and everywhere. It’s lazy. Specify what entities can do and what they can’t do. Don’t leave it to the courts to determine.

    Second, under almost any standard if you were dealing with two loans, one at 5 and one at 5.25 the broker should piece the cheaper loan, all other things being equal. But things are not equal. There could be differences in other terms (e.g. prepayment penalties). There could be differences in the way the loan is processed before closing. Ideally the consumer should perhaps know of these differences and be given a choice, but at some point they might be given so many choices that they wonder why they ever went to a loan broker in the first place.

  3. 3

    IMO, It Won’t Work

    Its still putting the bonus wolves in charge of the chicken coop security…see in part:

    “…It’s also the latest in a string of studies showing that despite tough talk by politicians, little has been done by regulators to rein in the bonus culture that many believe contributed to the near-collapse of the financial sector.

    The report includes eight pages of legislative proposals to address executive pay, but concludes that officials have “not moved forward into law or regulation any measure that would actually deflate the executive pay bubble that has expanded so hugely over the last three decades.”

    “We see these little flurries of activities in Congress, where it looked like it was going to happen,” Anderson said. “Then they would just peter out.”

    The report found that while executives continued to rake in tens of millions of dollars in compensation, 160,000 employees were laid off at the top 20 financial industry firms that received bailouts….”

    The rest of the URL:

    http://www.reuters.com/article/ousiv/idUSTRE5810O320090902

    Let me be philisophical and offer a way it may work:

    All our elected officials must have campaign contribution limits of like $5 per source per year….LOL….BTW, the Democrats promised us that when the Republicans were in control, I’m still waiting….

  4. 4
    Jillayne says:

    Hi Eric,

    How are you licensed?

    Loan originator working under a mortgage broker, Loan originator working for under a consumer loan company license, or loan officer working at a bank or credit union?

  5. 5
    Jillayne says:

    “Trying to define what constitutes a fiduciary duty is like trying to define the duty to not commit fraud—any application of it depends on the client’s particular facts and circumstances.”

    My first reaction was that this is flat out lazy journalism on the part of Jane Kim. But then again I don’t suspect she had the time needed to really understand the issue. There are plenty of published books, peer reviewed journal article and case law on the books to get a firm grasp of how to understand fiduciary duties and Wall Street stock salesmen.

  6. 6
    S-Crow says:

    Thanks for the comment Eric. I never knew how complicated and how little I knew about real estate in general until I opened up a escrow firm with my wife.

    Seattle Bubble is consumer centered and that’s why it attracts agents, LO’s, consumers and industry insiders.

  7. 7
    S-Crow says:

    Kary,

    In a sense I agree with you that too many choices can be counterproductive. On the other hand, I think if borrowers are given the ability to choose, the power of that relationship will blossom—and you can advise as to what pitfalls they can run into by certain choices that they can make.

  8. 8
    Kary L. Krismer says:

    RE: S-Crow @ 7 – Yes, but connecting that up with Jillayne’s comment #5 (which I disagree with), what happens if you discuss 3-5 specific choices with your borrower, and then after the fact some attorney comes in and makes the argument that another important choice wasn’t given, and that you breached your fiduciary duties to them?

    Fiduciary duties are decided on a case by case basis, and the reported cases can be conflicting, turning on the smallest change of fact (or none at all).

    There’s actually a recent reported Court of Appeals decision that references in almost an off-hand way that real estate agents have common law duties in addition to their statutory duties. I remember Ardell and I arguing over that issue in the past (whether there still were common law duties). When you open it up to common law duties, an argument of some sort could be made that there was a violation of those duties in just about every transaction. Of course, those arguments might have little or no merit, but the point is what I said before, it leaves it to the courts to sort out.

    If there were things the mortgage brokers were doing that the legislature didn’t like, they should just say so and make those specific things actionable.

  9. 9
    jon says:

    There may have been insufficient disclosure of incentives by brokers to their clients, but that was not the cause of the over-lending in the bubble. As a client, I could care less what incentives are being paid broker. I only care about what I am paying. Adding more paperwork to the closing is not going to help a situation where the real problem is people don’t even understand what a teaser rate is.

    The real problem was carelessness on the part of the lenders. That carelessness was made possible by the then implicit federal guarantee of the loans, and the fact that non-guaranteed lenders had to lend aggressively if they wanted to compete with the federally subsidized lenders.

  10. 10
    Scotsman says:

    RE: Eric @ 1

    Eric- I wish you the best of luck! Twenty years ago during my brief stint as a mortgage broker I felt the same way- I saw myself operating as more of a financial planner that a sales rep. My big push was to try and talk folks into 15 verses 30 year loans knowing that very few would have the discipline to take on the extra 15-20% a month, yet the interest savings and impact of their future finances would be huge. Unfortunately, the scummy firm I worked for just wanted the extra points and fees so they let me go, even though I was always one of the top 3 producers out of a dozen plus reps. I saw my dismissal as further proof of their stupidity and short-term mentality. About a year later the firm failed and shut down. For an innocent like me it was quite an eye opening experience, and left a real impression. It’s good to hear there are some who want to do it right.

  11. 11
    David Losh says:

    Was my comment this morning not on topic, or just contrary to the Real Estate Industry in general?

  12. 12
    Sniglet says:

    Frankly, I don’t see much point in passing yet more regulations to “protect” consumers.

    The real-estate bubble wasn’t caused by slick brokers or loan officers decieving their customers. For the most part, consumers were enthusiastic participants in getting mortgages they couldn’t really afford. It didn’t matter to most people what the interest rate, or fees were, because they knew they were getting a loan they really shouldn’t have to begin with. Heck, many deals that were financed even included kick-backs for buyers! Who is going to really care about the fees paid to the broker if you are getting a lot of unearned money put in your pocket?

    Even if the new rule proposals had been in place years ago, I strongly suspect that nothing much would have changed.

    What I find particularly interesting is that new loans are seeing higher default rates than hitherto seen, and this is with all the hind-sight of what happens when credit is too loose. The irony is that it is the government which is pushing the GSEs (Fanny, Freddie, FHA) into offering looser terms than ever, as they pull out all the stops to prevent a bigger downturn.

  13. 13
    David Losh says:

    RE: Sniglet @ 12

    In the 1990s there was the junk fee lawsuit where lenders paid millions of dollars back to borrowers. It was a small victory.

    Today, in my opinion, the mortgage industry defrauded millions of people and no one has said anything.

    The recourse a lender has is foreclosure. The value of the asset should cover any short in a sale. That’s the security that investors have. It’s all about the value of the asset.

    No one should pay on a $500K Note when the property is only worth $350K. Using sales data of what some other dumb sucker over paid for a property is hype and hysteria. Banks, lenders, and investors are professionals. They lend money professionally.

    No reasonable person would make the connection that banks, lenders, and investors would engage in such large scale misrepresentation of an asset’s value. The consumer may not realize what a property value is, but the bank, lender, and investor most certainly, and deliberately did know the true value and made the misrepresentations.

    Harping on a borrower’s ability to pay doesn’t change the fact that the borrower was swindled. If they are swindled for a 1/4 per cent of the Note or a 1% fee is irrelevant.

    No one should be taking out a mortgage of refi at this time. The consumer has to stop the insanity.

    The high price of the appraised value far exceed the value today, tomorrow, next year, and five years from now. Your only hope is to pay off the mistake you have already made.

    Don’t give these thieves another dime of your money. Just take your lumps, and pay.

    If you want to buy take over another person’s Note in a blind escrow account. Pay it off. Only when principle balances are in line with value will the market stabalize.

  14. 14
    S-Crow says:

    I think the significant point of the post is to convey that while a Fiduciary relationship with customers is possible, there are so many industry centric interests that are in direct conflict. And it is not just in the real estate business. Last night my wife told me about a huge fine ($2.3 Billion)the pharma. co. Pfizer paid out because of misuse of public trust via false advertising and cozy relationships with the medical community.

    “The Justice Department also said the pharmaceutical giant provided kickbacks to health-care providers to encourage them to prescribe other drugs, including Lipitor, Viagra and Zoloft.”

    I do think though that with one eye you can give all the trust you can to the people that are helping you in a real estate sale or refinance, while with the other eye, you have to have it on your wallet at all times.

  15. 15
    David Losh says:

    RE: S-Crow @ 14

    This government action is like policing crack dealers when the suppliers live in another neighborhood.

    The mortgage industry willfully inflated values over a period of years to generate Notes that were sold for a discount on that inflated value.

    The consumer may not have understood how much the prices and values of property were inflated. We might be able to say Real Estate agents and Loan Originators might not have known, but the banks, lenders, and investors most assuredly knew.

    The mortgage industry traded in values far beyond any reasonable expectation of return. If it were stocks and you over stated the value it would be fraud. Just because it took years to build sales data to support your inflated values should show a conspiracy.

    Fraud, and conspiracy to commit fraud brought down a global economy. Looking at who shaved a per cent age point or two is frivolous.

  16. 16
    thinkchip says:

    The extent to which the federal government and federal reserve’s role in this mess is ignored is amazing.

    Lenders were like a business that found an incredible deal from it’s wholesale supplier. Imagine how many folks would take hot tubs if the government were subsidizing the price 80%. Spa retailers would begin aggressively seeking folks to buy them at the artificially low prices (with corresponding artificially high profit margins). They might even push hot tubs on folks that didn’t really need them or couldn’t afford them otherwise. If there were a fixed (or slowly growing) supply of gazebos now being chased by all of these new hot tub owners, of course the price would go up. Would you really blame the Spa retailers for the bubble in gazebo prices or the government for it’s easy hot tub policy?

    Banks and lenders received their product (money) at artificially low rates from the fed. Government fraud (standard operation), NOT the free market is what caused the mal-investment. Buyers, investors, lenders all acted as expected considering the distortions inflicted on the market by the fed.

  17. 17
    S-Crow says:

    RE: thinkchip @ 16 – I see your point about the Fed.

    Do you sense that Fiduciary duties to clients would make a difference or is it clearly that the Fed created the problem? After all, there were theoretical stop-gaps in place. How about ratings agencies for mortgage securities? I’m also thinking that on 95% of every purchase and sale agreement written during the bubble run up there were agents names on the forms that may have had Fiduciary duties to their clients (buyers). How about the ” impartial” role of appraisers? In escrow, our role is pretty much neutral. We can’t give advice, just the facts and our office closes transactions per closing instructions by the parties and the lender. If I had a Fiduciary duty as a licensed loan officer in Washington today, I’d get to give the specific advice that in escrow is not a function/role (except that in escrow if the staff identifies a potential legal problem associated with a transaction we advise our clients to consult professionals (Attorneys, etc..).

  18. 18

    RE: Sniglet @ 12 – thanks, Sniglet. I’m still having people contact me with poor credit or lack of income (or job) wanting a mortgage. They don’t care if or how they will pay for this huge long term debt.

  19. 19

    Fiduciary duties will only work if it applies to all residential mortgage originators. Also, the new GFE is a joke IMO… how can any mortgage lender guarantee a rate on an estimate when it is not locked and when we are going through approx. 0-5 rate changes per day (on average, we have a new rate sheet every 4 hours in the last two months). You cannot guarantee into the future things you know nothing about (such as market reactons). I’m doing a 6 part series reviewing the GFE…and I truly hope I’m wrong.

  20. 20
    David Losh says:

    RE: thinkchip @ 16

    Please.

    Acted as expected? No.

    This is getting to be much more frustrating as the days go on. The cost of money is always low. The price people pay for money is always high. That’s business.

    In the stock market, if you meticulously generate hype that over inflates the value of the stock while knowing the stock had far less value, then sold the stock, it’s considered fraud.

    The Notes the mortgage industry created on a daily basis and continues to create knowing full well that the value of the security is far less than the face value of the Note should also be fraud. In my opinion it is fraud.

    These Notes were sold as being backed by an asset close to the face value of the Note. The industry knew that was far from the truth and sold the Notes anyway.

    A foreign investor, or national investor, buying the Notes, or bank stock, or other financial instruments, would have very limited knowledge of the how the value was arrived at. Today they know it was completely fabricated.

    This is much different than the free market at work.

    People need to be protected from these swindlers by shutting down banks, opening up books, reevaluating assets, redirecting payments, lowering payments, and stabilizing the housing market. Principle balances now need to be reduced and other compensation needs to be paid out.

    It’s a global crisis.

  21. 21
    S-Crow says:

    RE: Rhonda Porter @ 19 – I’d probably offer that Fiduciary duties in lending is acheivable but it is incredibly difficult. The problem is that the industry from the top down has to be on the same page. Realistic? Probably not. The other problem is one of education and answering the question: do loan officers truly understand what it is to operate under a Fiduciary standard? Jillayne probably can see how that answer is going by discussions on the topic in her classes.

  22. 22
    S-Crow says:

    RE: Sniglet @ 12 – Sniglet, Rhonda has a very good idea of what the lending culture is. She also understands having AE’s (Account Exec’s) from lenders pushing products that were incredibly profitable during the bubble run up.

    I been IN broker offices during presentations from AE’s to loan officers. So, while I agree that individual LO’s are clearly not responsible for the bubble (not the focus of this post), in aggregate, that industry, along with other industry failures led to our crisis. The irony for me is so many in the real estate business upset about the situation still try to remove their industry from any scrutiny. It makes me upset when I see escrow people involved in fraud.

    I recall getting mail at my house from a broker/owner telling me to ignore the press, ignore the blog discussions (such as your warnings) because no one knew better than that of those who sell homes. I attended the foreclosure sale of their home this past July. Was that broker/owner directly responsible for the bubble? No. To me it shows the psychological mindset that Dr. Shiller discusses in his book and also touched on while giving his presentation at Seattle Pacific University. Herd mentality going both directions is almost unstoppable.

    The question is: can the lending community here in Washington operate under a Fiduciary duty when competing interests in that business make it fundamentally difficult?

  23. 23

    RE: S-Crow @ 22 – the mortgage business became very dirty during the subprime market. You’re right, Tim…we’d have AEs from all the big banks and lenders call on us. The attractive personable AEs ask if we have files we cannot put together and can they review them. Before you know it, deals that you thought were impossible or should not be approved were returned to you written up with the AE’s coversheet with instructions on how to submit incomes, assets, etc.

    I’ve always felt, not by law–it’s just me, that consumers should hear their options which included:

    1) you can use this (suck) program if you buy now
    2) you can do x, y and z and use another program (such as FHA) and buy later once you’re in a better position.
    3) you don’t have to do anything.

    BTW David, nice shaking your finger at the mortgage industry as a whole over and over again…I’ve had plenty of real estate agents (I won’t put down the entire industry) tell me that it’s not my job to decide IF someone should buy a home–that if they qualify for a mortgage, its my job to provide it.

    Consumers need to take responsibilty and make eductated decisions with their finances (beyond mortgages).
    This includes making good choices on who you select to work with as your mortgage originator.

  24. 24
    S-Crow says:

    RE: Rhonda Porter @ 23 -Rhonda mentioned: ” I’ve had plenty of real estate agents (I won’t put down the entire industry) tell me that it’s not my job to decide IF someone should buy a home–that if they qualify for a mortgage, its my job to provide it”

    We’ll now that Fiduciary duties are part of the equation for LO’s there shouldn’t be any difficulty telling agents that the tide has turned. You can tell a buyer if they should or shouldn’t buy a home and that has to be a very satisfying position of advocacy. I think for a lot of LO’s they should be saying “it’s about darn time I can discuss home ownership with my C L I E NT without having an agent hold that weak argument over my head (that ‘s it’s not my job to tell someone if they can or can’t buy a particular house). It is now a mandate.”

  25. 25
    david losh says:

    RE: Rhonda Porter @ 23

    There are laws on the books to protect the consumer. The consumer has no way of knowing or understanding the Real Estate business. By the comments here it’s obvious that people in the Real Estate business have a limited understanding of what happened.

    Wall Street was taken to task, slightly, and the mortgage industry, which was too big to fail, got bailed out.

    The fact loans are being made today or refinancing is going on should be challenged.

    If I create a loan for my portfolio, if it is my risk, that’s my choice. Loans were sold. Loans are being sold. Value is obviously out of whack.

    I’m in Cour de Laine Idaho and condos are selling or trying to sell for $300K. Houses $500K, cracker boxes $120K. It’s Idaho, Cour de Laine. When the Notes are bundled and sold do you really think there is any chance that these loans will perform?

    The focus should be on values. Values need to be brought down. This is far beyond some blog site, or your post. The mortgage industry needs to be halted, opened up to scrutiny, and over hauled.

    Sorry.

  26. 26
    david losh says:

    RE: S-Crow @ 24

    Holy cow, I’m now getting your point.

    The Loan Officer has no client. The Loan Officer works for the lender. The Loan Officer has a Fiduciary responsibility to the stock holders.

    If the loan fails the lender has the recourse of foreclosure. The borrower’s losses are the rights to the property. The lender can fire the Loan Officer, that’s a policing term, I have no idea where Originator came from, and that’s the extent of the liability.

    Are you saying we can now sue the Loan Originator? For what? What’s the exposure? The rate difference? The loan fees? We already have that.

    This is more feel good about doing nothing but cover up.

  27. 27

    RE: Rhonda Porter @ 23
    I’m not going to put down the whole mortgage industry or the whole real estate industry, but I think there were a lot of people in both industries who saw only dollar signs, and stopped seeing clients as people. There was too much money to be made to take responsibility. And even now, real estate agents are blaming lenders, lenders are blaming agents, and very few in any industry are saying ” We have some culpability in this mess. We misled people, we tricked people, we lied to people, we didn’t provide enough information.”
    Sniglet’s right in that consumers could have been better educated in the first place before diving in headfirst, but there really was an onslaught of pressure to buy, no matter how high the cost.

  28. 28
    Kary L. Krismer says:

    By S-Crow @ 24:

    <We'll now that Fiduciary duties are part of the equation for LO's there shouldn't be any difficulty telling agents that the tide has turned. You can tell a buyer if they should or shouldn't buy a home and that has to be a very satisfying position of advocacy. I think for a lot of LO's they should be saying "it's about darn time I can discuss home ownership with my C L I E NT without having an agent hold that weak argument over my head (that 's it's not my job to tell someone if they can or can't buy a particular house). It is now a mandate."

    I suspect it will become dissatisfying when you find so few people listen to your advice.

    Fiduciaries don’t decide what people do (in most cases). The decision is still the client’s. And once some people get an idea in their head it’s impossible to get it out.

  29. 29
    thinkchip says:

    “The mortgage industry willfully inflated values over a period of years to generate Notes that were sold for a discount on that inflated value.” -D Losh

    The real estate and mortgage industry didn’t inflate anything. Lenders and the investment banks they sold the notes to acted as any business that found itself with an extremely good deal on it’s raw materials would, they lowered prices, standards and went and found new customers. [Full disclosure: perhaps I should say ‘we’ as I was an LO and an AE for years]

    “there were a lot of people in both industries who saw only dollar signs” -I Sacharoff

    Mr. Sacharoff, et al.: The profit motive that drove RE agents and LO’s is surely not to blame 1% as much as the federal reserve and national government. The people at the top of the lenders and investment banks had learned from previous government action that there was almost no loss that would not be transfered to the taxpayers/suckers/pigeons. It is government action (more accurately central bankers action with government jerk’s complicity) that is bringing down the health and wealth of the world once again, not the free market.

    Please, also consider the idea of moral hazard. “Moral hazard is the prospect that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk” -Wikipedia. This clearly applicable, elementary idea is brushed away as ignorable by the Keynesian economists that shape our monetary policy under either party.

    “As markets have grown to recognize how quick the Federal Reserve is to bail out institutions (and executives) in trouble, they naturally respond. In the 1990s, people talked about the “Greenspan Put” a term which derisively suggests that it is always safe to invest in risky assets, because the Federal Reserve is ready to bail out investors…” http://baselinescenario.com/2009/09/13/economic-donkeys/

    Folks like myself and a few friends that had real concerns about the depth that lending standards had sunk to kept busy writing decent loans or (most often unsuccessfully) counseling those we worked with to not get so extended. It was not the front line actors but government edict that set the stage for the disgusting redistribution of wealth from the lower/middle class to the corporatist/government/banker elite going on now (as orchestrated by central banks with fiat currency so many times throughout history).

  30. 30
    thinkchip says:

    Decent summation in the NYT that further argues against additional politicization:
    http://www.nytimes.com/2009/09/13/business/economy/13econ.html

  31. 31
    David Losh says:

    RE: thinkchip @ 30RE: thinkchip @ 29

    Yeah, well the thing is that we do live in a capitalistic country and companies are in business to make profits.

    The government has set up checks and balances to protect the public from product defects. financial products are no different, in my opinion, than Ford selling the Pinto after they knew it would blow up on rear end impact. It was a financial decision that to recall the Pinto would cost more than settling lawsuits associated with the deaths.

    Banks are regulated for a reason. Health care is regulated for a reason. We live in a capitalistic country and companies are in business to make profits. When those profits are at the expense of the greater good our duty is to protect the Public Welfare.

    You weren’t making good responsible loans. You were burdening people with unsecured debt.

  32. 32
    thinkchip says:

    David:

    I am certainly not arguing that in a capitalistic society people don’t go in to business to make profits.

    What if the “regulation” itself has resulted in the financial horrors we see today? Should we really advocate for more? Or blame the other actors? The improved property secured the debt of any loan I wrote. None of us acted on the macro level that the federal reserve and DC did to inflate this and other bubbles. My original point was that you cannot ignore this when discussing our present situation, though they’d like you to.

    My point is that government has not set up checks to protect anyone. That is the story they tell, but like any abusive relationship we need to look at the actual actions and results of the abuser’s actions, not listen to the promises. Did you read the NYT piece?

    No business succeeds by bankrupting or injuring their customers but sometimes an actor in the market can distort things so badly that great injury results. Governments do succeed by hurting the customers. As was said in the 60’s “war is the health of the state”. This current crisis is already resulting in greater “market share” for the gov. How surprising!

    Until we realize that the biggest player in the deal is a voracious monster, that says he’s there for our protection, we’ll continue to have booms, busts and a crumbling empire like has happened repeatedly through history.

  33. 33
    Kary L. Krismer says:

    By thinkchip @ 32:

    No business succeeds by bankrupting or injuring their customers but sometimes an actor in the market can distort things so badly that great injury results.

    I would disagree. Look at car sales and car lending. They succeed mainly by suckering people into buying more car than they can afford. They make money off the percentages. The same for a lot of credit card companies, although perhaps right not that model isn’t working too well.

  34. 34
    Jillayne says:

    Way back in comment #19 Rhonda says, “Fiduciary duties will only work if it applies to all residential mortgage originators.”

    Well we have to start somewhere and the LO who works under a broker is the best place to start because they are acting as an agent for the consumer, and are in a position to “find” the best mortgage for that particular client.
    Next will be the LOs who work under a consumer loan company and last will be the LOs who work for a bank.

    It can and will work during the transition, which will take time.

  35. 35
    Jillayne says:

    Thinkchip, “My point is that government has not set up checks to protect anyone”

    I would argue that state government has resources only to go after the most egregious cases of consumer protection in the mortgage industry and the industry itself must step up and begin to self regulate ethical conduct. This would include the industry helping its members understand what it means to be a fiduciary, creating a dialogue, guidelines, case studies, an informed consent process for which their members can use to learn and help each other.

    More and more often today, I hear mortgage LOs say they are telling homebuyers that they don’t qualify, they need to save money, establish a solid credit history, etc., instead of buy, buy, buy.

  36. 36
    David Losh says:

    RE: David Losh @ 31

    The simple and easy way to build an economy is by constructing housing units, and go to war. The government requested that we all pull together after 9/11 to strengthen our economy. The mortgage and banking industry took this to mean make profits at the expense of the global economy.

    In 2005 the government should have stopped the banking industry, they did not. We are now in the midst of the government leaving business alone.

    The government in 2005 had the duty to report the extreme danger of selling securities backed by over inflated property values. By 2006 the damage was so sever that a collapse was eminent. The only thing we could do was sell off our properties and dump our stocks.

    In 2007 it was way to late to warn any one or fix anything. Dumping continued, profits were made, and now it’s on to the next thing. Remember, cash is king, let’s see what we can get for cheap from the dumb suckers who continue to believe business will take care of all of us.

  37. 37

    RE: thinkchip @ 29
    You’re not going to get me to defend the Federal Reserve, but, like I said, nobody’s taking responsibility.
    I maintain that up until the crash, there was a conspiracy amongst loan originators, real estate agents, lenders, appraisers, etc to perpetuate the bubble, come hell or high water. It wasn’t legally fraud in most cases, but came close to treading the line on a large scale. If you were counseling prudence at the time, then good for you, but a lot of your ( and my) compatriots weren’t.
    Absolutely, the financial / industrial complex has a lot of influence, and the government enabled/encouraged all this to happen. That won’t get an argument from me. What will? Blaming someone else like you’re doing. You’re a lender, but lenders aren’t to blame. Blame the government! Why not? It’s not us.

  38. 38
    David Losh says:

    RE: Jillayne @ 35RE: Jillayne @ 34

    If a loan officer or loan originator did anything other than get me a loan I’d sue them. They have no right to talk to me about anything. The job they chose to do is lend on profitable properties, that is get properties as cheap as possible.

    Why any loan person would be looking at W-2s or credit is beyond me. They lend on property value. The recourse the investor has is foreclosure. All the unsecured credit antics landers are using today are best left to Money Tree Pay Day Loans.

    Lenders either want to do business or they should get into another line of work.

  39. 39
    Jillayne says:

    Hi David,

    Not anymore. With changes to the federal Truth in Lending Act, with some high cost mortgages (lower triggers than for a HOEPA loan) the lending institution must make sure that the homeowner can repay the loan.

    This means verifying employment, earning ability, credit, funds to close, and so forth. Making a loan just on the basis of collateral only is prohibited, depending on how the loan is classified.

    In the world you’re describing, homebuyers would be required to have 35 to 40% downpayment.

  40. 40
    Kary L. Krismer says:

    Jillayne or Rhonda, what do either of you know about the duties the banks/loan servicers owe to the entities that might have guaranteed the loans? I think that would make a very interesting topic, because I suspect the reason many REOs are so poorly marketed it someone else is on the hook. As I mentioned recently here, either Freddie or Fannie houses are actually being fixed up prior to sale in Snohomish county. Not only are there now piles of trash lying around, but there’s new carpet and linoleum. Quite the contrast to “bank owned” properties.

  41. 41
    David Losh says:

    RE: Jillayne @ 39

    Think about this for two minutes. you are describing exactly why investors are in such trouble today. I’m saying investors because banks make money on servicing.

    Loan Originators should be looking at appraised value and potential rental income. W2s? credit? come on those are things way past. Borrowers ability to pay? Come on.

    In my opinion every investor in this country and around the world should have mortgage companies in court until there is nothing left.

    We are not going to pay. No one is going to pay. You would have to be brain dead to pay a mortgage.

    All of the loans created this year and last will be under water within two years. How is that going to possibly work out for the lenders, banks, or investors?

    The problem is the value. If some one wants to, or is stupid enough to, pay a mortgage that’s all gravy at this point. Until value comes down to match the over supply of housing units there is nothing to lend on.

    Let’s even go so far as to make believe that some on gave a lender 20% down for the privledge of getting a loan then the value goes down 20% in two years and that equity is gone who do we sue? We sue the lender, the investor sues the lender, we all sue the Loan Originator.

    There is criminal law to address over inflating value. People go to jail in stock cases why not mortgages?

  42. 42
    Jillayne says:

    Kary,

    Help me out a little with an example. Do you mean the duties a bank/lender owes FHA or VA?

    Fannie/Freddie don’t offer any insurance or guarantee but I think you know that.

    Which REOs are being fixed up: bank owned or Fannie/Freddie?

    Thanks.

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