A couple of weeks ago we posted a blog titled, “Future of Lending – Who Will Fill the Gap?”    In yesterday’s (February 14th) Washington Post, an article by Dina ElBoghddy and Renae Marile titled “Refinancing unavailable for many borrowers”, is a much better discussion of the problem borrowers and lenders are starting to face because of the mounting numbers of people who have suffered credit problems or home valuation problems because of the current recession and problems in the mortgage industry and consequently can’t qualify to refinance.  Refinancing unavailable for many borrowers

The challenge and/or opportunity for lenders in the coming months and years with refinancing this large group of people who cannot qualify for a refinance transaction under the current lender guidelines or because home values have declined significantly, will be an interesting situation to watch.

Over the past few years, as lenders have become very strict with underwriting guidelines and stopped lending to borrowers in situations resulting from a bad economic environment, (self employed, less than 620 credit score, BK or foreclosure in the last four years, for example).will this growing group of people ever be able to qualify for home loans again?    If the economy struggles on for another couple of years, as may well be the case, the number of people who can’t qualify for loans under the current underwriting guidelines will grow to be a very large number.   Will they all be destined to be renters for the rest of their adult lives, which is not such a bad thing, but certainly not the American dream.   Or, will lenders be able to bring back portfolio lending and start to address the merits of each loan individually?

Will underwriting standards change to address particular situations that were not the borrowers fault?   How big will the pool of people be that can’t get loans under the current guidelines?

If the number of people gets really large will the government feel obligated to get involved and force lenders to make loans to people in this large pool?

Are we on a path that will start to replicate itself as a multitude of previous home owners want to be homeowners again?   What about that person who had perfect credit until their company went out of business and they lost their job?   Can we turn back the clock and consider only their credit history prior to the job loss that wasn’t their fault?

The longer people continue to fill that bucket of unqualified borrowers, the more need there may be for creative lending in the future.   Isn’t creative lending what got us into this mess in the first place?   Does history truly repeat itself in the mortgage business?

There seems to be the thought, in some circles, that the new Good Faith Estimate required on all residential lending transactions as of January 1st, has somehow infused the mortgage industry with instant integrity across the board.

Nothing could be further from the truth.

There seems to be little argument that mortgage professionals could use a bolstering of their reputation and integrity, but the new GFE is not to vehicle to accomplish the task.   As the days of December clicked by and implementation of the new GFE came closer and closer, my inbox was regularly filled with lender invitations to attend training sessions on using the new form.

These invitations contained descriptions like, “we will teach you how to keep charging YSP”, and “the new rule does not mean we can’t keep charging YSP.” Some went even further by stating, “you can still charge YSP and we will show you how to get around the new rules.”

Just as the new GFE was mistakenly concocted by those without a thorough understanding of the lending process and sensitivity to the needs of the borrower, it seemed those charged with championing the implemetation of the misdirected form were also void of borrower understanding, and what’s more, didn’t seem to care about their integrity in the arena of public opinion.   The central place where borrowering customers are found and retained.

This attitude of mortgage professionals, centered around “saving our precious YSP and the ability to control the borrower”, just reinforced the untrustworthy label conveniently stamped on the industry professionals by the bureacrats and main stream media as the lending environment has deteriorated over the past couple of years.

This has been a huge lost opportunity for loan officers and originators everywhere. What should have been a huge opportunity to bring integrity and transparency to the lending process has simply been squandered.

For decades, Realtors have been totally transparent with their fees.    Sellers understand that there is a cost associated with having someone market, show and sell your property.   Borrowers would understand if mortgage professionals transparently disclosed their fees up front as well.   No one expects others to work on their behalf for free.   Hiding broker or loan officer compensation in line 2, page 2 of the new GFE is no improvement in disclosure and certainly no feather in the cap of transparency in lending.

With the recent Real Estate Settlement Procedures Act (RESPA) changes to the good faith estimate (GFE) effective January 1, 2010, it’s seems time for mortgage loan officers to let go of the Yield Spread Premium (YSP) dependence. For decades, real estate agents have been making their living charging a flat fee that is always disclosed up front when the real estate contract is signed by the seller. There is no mystery surrounding the fee, and the Realtor has no opportunity to manipulate or hide anything from the seller. Some loan officers have depended far too long on their ability to direct borrowers into interest rate commitments that may not have been in the optimal interest of the borrower, but certainly may have lined the pockets of the loan officer.   This is not to say that all loan officers have been lining their pockets, but the time seems to have come where full, upfront disclosure and transparency of the loan transaction details is overdue.

Loan officers can easily charge a flat fee, a fixed percentage of the loan amount, or a fee on some sliding scale based on the strength of the borrower, disclose this fee structure up front, and then allow the borrower to see the best rates the loan officer has to offer, and allow the borrower to make their own choice.   In addition, with the YSP now required to be given back to the borrower as a credit toward closing costs, if the borrower sees all interest rate alternatives side by side with the available YSP and payment information, they can make an informed and balanced choice that works best for their particular situation.   If the borrower wants a little higher interest rate that throws back a higher YSP credit to cover closing costs, let that be their decision and not left in the hands of the loan officer.   In this way, the loan officer is assured of getting paid a fair and reasonable fee for the loan, and can help the borrower make judgments that are focused away from how much the loan officer will make on the deal.

It’s seems time to release the death grip on YSP and transition to a flat fee or percentage of the loan amount fee for the loan officer that is disclosed on the front end of the transaction, not only for the benefit of the borrower, but for the reputation and credibility of the loan professional.