April 7th, 2015 4:30 PM by Gregg Mower
As we know the Mortgage Industry has gone through significant changes over the last several years. The Mortgage Melt-Down of 2006-2011 caused the Government to implement sweeping changes to the industry from Loan Officer Licensing to limitation of compensation made, and everything in between. But has all of this new regulation actually changed the industry for the better and made the consumer feel safer or has it just created a quagmire for the industry to have to deal with at the consumer’s expense.
We all know what happened during the recession and some say the mortgage industry actually caused the depression, oops recession. That is not a debate I want to entertain in this blog today. I would prefer to analyze the Mortgage Business post regulation change and determine if the regulation and new bureaucracy has actually helped the industry or has it done the exact opposite. If you have not been following the industry over the last 10 years or so, you would not know the changes that have occurred. In response to the recession the government has created a whole new agency to protect the consumer called the Consumer Finance Protection Bureau (CFPB). This multi-trillion dollar agency has been tasked with policing the mortgage industry as well as the stock trading industry. The government also built the National Mortgage Licensing System or (NMLS) that oversees the licensing of loan officers. All this was created to protect you the consumer; so do feel protected? It has been 4 years since the regulations have started to be implemented and in that time most consumers have no idea these agencies exist, nor do they know what their missions are to help the public.
In the Mortgage Industry we certainly know about these regulation changes as we have to follow them every day with every new transaction we receive. Let’s start with Loan Officer licensing. I actually like this as an accountability for loan originators. Prior to the recession anyone could be a loan officer with no regulations at all. This caused wide spread abuses as the offenders would simply move from company to company causing havoc wherever they went. I truly believe that Loan Officers should be held to a higher standard and made accountable for their actions. With Loan Officer licensing not only are Loan Officers held to a higher standard they now can be held accountable for actions that result in financial damage to a customer or a company. In addition Loan Officers must go through mandatory 8 hours of continuing education every year and pay a $300 fee to keep their license. Licensing has proven to keep only the serious Loan Officer in the business and the “fly-by night” Loan Officers we saw prior to the recession out.
The Dodd-Frank Act was the act or set of laws that went into effect as a result of the mortgage melt-down. Out of this Act came the creation of the Consumer Finance Protection Bureau (CFPB) designed to police the mortgage industry and set rules and regulations the industry must abide by. If the rules they created were not or are not followed, the offending company will be fined heavily, possibly to the point where they become bankrupt. The fines and penalties are so tight and stringent that the industry has gone to a complete hysteria over being found guilty of violations whether intentional or unintentional. The result has been the tightening of underwriting criteria with potential borrowers having to verify every little aspect of their financial picture down to the deposits they make into their bank accounts. This “Over-kill” in documentation has cost many potential good borrowers the ability to enter the housing market. For example; if you happen to be self-employed or are paid on commission your tax returns are analyzed and based on your “net” income after all your expenses. This may sound like the rules have been made to protect the IRS to get maximum taxes, and may very well be, but this negatively affects the qualification of most self-employed and commission based people.
Another rule that was made by the CFPB is that Mortgage Broker’s and Loan Officer’s compensation limited to 3% of the loan amount. That may not sound bad, and it truly is not, however, a Mortgage Banker or Direct Lender who funds loans on its own lines of credit is exempt from that rule. This means that a “Direct Lender” or a Mortgage Banker can make more money on a loan than a Mortgage Broker can. Furthermore, a Direct Lender does not have to disclose all the fees made on the transaction like a Mortgage Broker does. This has caused confusion for consumers when they try to compare interest rates and fees. Yes, the very law designed to give the consumer more ability to shop for a mortgage has caused more confusion about the interest rates and fees being charged. I talk with consumers every day, and they bring me other lender’s fees sheets to compare with what we can do. What I see is that the consumers are confused by Lender credits, rebates, and Loan Origination fees, and what it all means to them. I am finding more and more that the direct lenders are burying fees and charging higher rates, than we do as a Broker. Coming from a direct lender myself, I do understand that they may have a higher overhead than we do as a small independent broker, but that still should not give them reason to confuse and charge more.
Loan Officer Compensation limitation is another rule that came from the Dodd-Frank Act. The laws state that a Loan Officer cannot make more than 3% of the loan amount per transaction. It further goes on to state that the Loan Officer’s compensation cannot be tied to the interest rate in any way. This is to protect a consumer against a Loan Officer Charging a higher than market interest rates and getting paid to provide higher rates. Sounds good for the consumer, right? Well here is the rub, and you may have caught on to it already, the 3% Loan Officer Compensation is the same limit that a Mortgage Brokerage can make on a loan. We know that a Direct Lender or Mortgage Banker does not have to disclose all the fees they make on the transaction, so if a Loan Officer makes a 2% commission where is the rest of the money? Here is the secret sauce that your lender does not want you or the regulators to know. First to define a Direct Lender; A Direct Lender will use a line of credit, like a credit card, to fund their loans and that is what makes them a “Direct Lender”. They still have to sell the loans or securitize loans to pay the line of credit off. They will sell the loans to a servicing lender or a bank who will then collect the payments from the borrower’s every month, this type of transaction is called a correspondent transaction. If the Direct Lender is securitizing their loans with Federal National Mortgage Association or Fannie Mae or the Federal Home Loan Mortgage Corporation or Freddie Mac they will create a security with several loans that are yielding a certain amount and receive cash to pay off their line of credit. Either way a Direct Lender receives a market rate from either the correspondent lender or from Fannie Mae or Freddie Mac everyday sometimes multiple time a day. Once that market rate is determined by the above markets the lender then has to add a profit margin to the base rate to pay for operations based on the volume of business they have the rate the Direct Lender creates is called their base operations rate or "Wholesale Rate".
That sounds confusing, and it truly is, but is done by professionals that work for the direct lender every day. Anyway, once a lender has determined their “base operating rate” or “Wholesale Rate” they then can add basis points to that for paying for a branch of the company, and it’s Loan Officers. Remember, we said that a Loan Officer may makes 2% or 200 basis points of the loan amount and is limited to 3%. So let’s add up the true fees and then you can see how the money is distributed, and how the rules designed to help the consumer truly hurt the consumer unless they find the loophole (A Mortgage Broker). Follow the money, at the Direct Lender they start with a “wholesale rate” then they add a branch fee of 100-200 basis points or 1-2%, then they add 200 basis points or 2% for the Loan Officer, in addition the Direct Lender can add Fees like a Processing fee, underwriting fee, documentation fee, and those fees can be 50-150 basis points depending on loan size. So if we do our simple addition you can see that the total fees added to the Wholesale Rate can be upwards of 500-600 basis points or 5-6%. Here is the loophole that most folks are not finding, and that is a Mortgage Broker can only make 3% total over the Wholesale rate, thus a Mortgage Broker, like MAE Capital Mortgage Inc. can be upwards of 1-3% better than a direct lender. Why are most folks not finding this? Simple, most Loan Officers follow the money. You see if they work for a Mortgage Broker making 2.5-3% total they cannot afford to pay the Loan Officers that magical 2%, it has to be something less. So the majority of the Loan Officers have chosen to work for the Direct Lender so they can make more money. With the majority of Loan Officers Following the money, how will the uninformed consumer know the difference? Answer: they don’t, unless they read through this article and can understand the math or get lucky and find us. In addition the Loan Officer working for the Direct Lender is not required to have a California Real Estate License and the NMLS License, they only need to have the NMLS license.
Unfortunately, I could go through most of the rules and regulations that have been implemented over the last several years and show how the intent was to protect the consumer and has ended up hurting them. By the creation of the new laws, they have created uneven playing fields confusing not only to the industry but especially to the consumer. The new laws and regulations are so many, and so stringent, that Loan Officers and Companies alike have to spend a majority of their work day keeping up on the changes and how they will affect them. The mortgage industry has traditionally been an area of innovation and creativity, it has turned into an industry of regulation, paranoia, and stagnation at the expense of the consumer. So in the Post Apocalyptic Mortgage industry we have seen more changes that have hampered the industry with the intent to help the consumer when the consumer would really prefer to have their mortgage transaction go smoothly with less documentation and more opportunity. As usual any comments are welcome.