Industry pros and government agencies need your help

To a large degree, the tricks of the mortgage trade continue because they give lenders and loan reps ripe opportunities to profit at the expense of their borrowers. Although various housing, banking, and consumer regulations govern lenders and loan reps, these regulations seldom protect effectively. With many regulations, form trumps substance, bureaucratic rules trump common sense, and good intentions trump concrete results.

Even worse, U.S. Senate hearings in March 2007 revealed a "chronology of regulatory neglect," said Christopher Dodd, chairman of the Senate Banking Committee. The Wall Street Journal and New York Times have followed up these hearings with many articles such as "Regulators Are Pressed to Take a Tougher Stand on Mortgages" and "Regulators Scrutinized in Mortgage Meltdown."

More specifically, this Senate investigation found (just as I warned against in the 2003 edition of Mortgage Secrets):

  • Millions of borrowers are led into bad loans.
  • Bonus compensation for loan reps who persuade borrowers to take higher-cost loans.
  • Hidden (undisclosed) prepayment penalties that prevent or deter borrowers from refinancing high-cost loans.
  • Overuse of "exotic" mortgages with increasing payments.
  • Excessive fees and costs.
  • Unsuspecting borrowers are pushed into mortgages they cannot afford.
  • Lenders conspiring to originate "liars loans" (a term of widespread usage in the mortgage industry that refers to mortgages supported by fraudulent statements of borrower debts, income, assets, property value, or some combination thereof).

To sum up testimony heard at these hearings, Senator Richard Shelby queried Sandra Thompson (director of supervision for the FDIC), "So, we're just touching the tip of the iceberg. Is that a fair statement?" "That would be a fair statement," responded Ms. Thompson.

Industry Initiatives to the Rescue?

In a 2002 issue of Mortgage Banking,1 John Robbins wrote:

As mortgage bankers, we know that integrity, trust, and honesty are simply the rules of conduct by which we should all live. . . [government

1 Mortgage Banking, "Integrity," April, 2002, pp. 17-18.

and industry] are currently targeting many unethical practices such as flipping [repeated] refinances that result in fees for lenders without any benefit to borrowers . .. inflating a home's appraised value, packing loans with unnecessary credit insurance, and charging extended prepayment penalties that trap homeowners in high interest rate loans. . . .

It is commendable that some mortgage banking and brokerage firms are initiating voluntary consumer disclosures on their own. These disclosures detail the loan fees a borrower can expect to pay and how much other settlement costs should total. Some companies also disclose in advance of settlement if closing fees will exceed the initial good faith estimate. Mortgage applicants possess the power to demand similar information from lenders who are not now offering these extra disclosures.

As multiple 2007 congressional hearings show, neither lenders nor mortgage applicants have conquered this challenge. All industry observers agree that mortgage lenders, and yes, borrowers, too, have failed to meet their responsibilities.

Upfront Mortgage Broker (UMB)

To spearhead full upfront disclosure of costs, fees, commissions, bonuses, yield-spread premiums, and other types of lender charges and loan rep compensation, Jack Guttentag ( has created the Upfront Mortgage Broker's Commitment (see Figure 9.1). UMBs believe that full disclosure will force reform.

Essentially, UMBs want mortgage lenders to behave more like professionals who work for their clients' best interests while charging a fully known, agreed-upon fee. With true client representation and fixed compensation, the loan reps can design and search for the optimal solution to a borrower's funding needs and wants. When incentives to gouge the borrower are removed, loan reps will walk the straight and narrow. Loan customers will receive better service. Everyone will live happily ever after.


  1. The broker will be the customer's representative or agent, and will endeavor to act in the best interests of the customer.
  2. The broker will establish a price for services up front, in writing, based on information provided by the customer.
  3. The price may be a fixed dollar amount, a percent of the loan, an hourly charge for the broker's time, or a combination of these.
  4. The price or prices will cover all the services provided by the broker. This includes loan processing, for which customers always pay a broker or lender.
  5. On third party services, such as an appraisal, ordered by the broker but paid for by the customer, the broker will provide the invoice from the third party service provider at the customer's request. Alternatively, the broker may have the payment made directly by the customer to the third party service provider.
  6. Any payments the broker receives from third parties involved in the transaction will be credited to the customer, unless such payments are included in the broker's fee.
  7. If the broker's fee is 1 point, for example, and the broker collects 1 point from the lender as a "yield spread premium," the broker either charges the customer 1 point and credits the customer with the yield spread premium, or charges the customer nothing and retains the yield spread premium.
  8. The broker will use his best efforts to determine the loan type, features, and lender services that best meet the customer's needs, and to find the best wholesale price for that loan.
  9. The wholesale prices from which the broker's selection is made will be disclosed at the customer's request.
  10. When directed by the customer, the broker will lock the terms (rate, points, and other major features) of the loan, and will provide a copy of the written confirmation of the rate lock as soon as it has been received from the lender.
  11. If a customer elects to float the rate/points, the broker will provide the customer the best wholesale float price available to that customer on the day the loan is finally locked.
  12. The broker will maintain a web site on which its commitment to its customers is prominently displayed, along with any other information the broker wishes to convey.

Figure 9.1 Commitment of an Upfront Mortgage Broker (UMB) (Courtesy of Jack Guttentag)

Borrower Savvy Still Needed

The UMB commitment can't work by itself. Considerthis analogy: Lawyers owe strong fiduciary duties to their clients, yet anyone who has watched closely knows that lawyers often abuse their clients' interests to line their own pockets.2 Mere fee disclosure in a fiduciary relationship doesn't vanquish chicanery, duplicity, and incompetence. Lawyers can triumph over their clients and the social good because most people lack knowledge about the law, the rules of procedure, and that oxymoron, legal ethics.3

Likewise, you will pay too much for too little unless you gain the knowledge to assert yourself forthrightly and intelligently. Only when consumers ask the pertinent questions—and demand factual, well-reasoned answers—will they achieve their best loan at the lowest costs and pricing available.

Until then, match the ideal of John Galt. Become part of the competent minority who refuses to humble yourself with, "Well, we will do whatever you think is best." With Mortgage Secrets as your guide, insist on the service and disclosures that will distinguish you from the sheepish borrower who prefers a pleasant, run-of-the-mill loan rep—someone who won't confuse their decisions with multiple choices. No doubt, most loan reps are not willing or able to meet this challenge.

This same situation holds true for real estate agents. During most of the twentieth century, realty agents disparaged knowledgeable buyers. And many still do. Increasingly, though, buyer knowledge (partly due to a plentiful selection of books on homebuying and real estate investing) has forced an upgrade in agent competency, although it is still far below the standards agents should meet.

Nevertheless, as more homebuyers and investors expect honest competency, real estate firms are slowly edging out the fast talkers whose only goal is to make a sale. This same trend influences mortgage lending. To foment a revolution, we just need to enlist more foot soldiers. Won't you

2 See, for example, the books, Double Billing, A Nation Under Lawyers, A Feast for Lawyers, Divorced from Justice, and Injustice for All, to name just a few exposes on this topic.

3 Can you name one other occupation whose ethics books include a chapter entitled, "Promoting Falsity," along with instructions on how to do so?

join up? At the end of the day, consumers determine the ethics, competence, and professionalism of the people who serve them.

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