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.

I’m sitting at my desk going through a stack of papers and contracts and checks that somehow seemed to multiply exponentially when I was in California for a few days, and I just realized that I could save a lot of time if I stopped reading things and just started signing things willy-nilly.  And, given the number of not-so-discreet glares and throat-clearing “hints” from the administrative folks around here who are waiting for me to get my part of the job done so that they can do theirs, I discern that there are those in my office who think that I should just put pen to paper and get it all over with.

But here’s my problem:  I actually want to know what I’m signing.   As such, I actually have to read every word of every line of every paragraph because, to be honest, I rather assume that there is language in there somewhere with the potential of throwing me, my companies, my family, my friends, and the flowers along my front walk under the proverbial bus.  And I’d prefer to at least try to avoid it if at all possible.

And a few minutes ago, as I was about halfway through the second ridiculously complex contract that I’d been meticulously reviewing, I thought how much easier life would be if everyone got on board the transparent bandwagon.

I mean, what if this contract read:  “You promise to pay us, and we promise to do what we say we will”?   No loopholes, no hidden agendas—just a promise to do what is clearly spelled out.

Or what if Congress wrote a bill that said “This is what we want to do, plain and simple” rather than burying the intent in 1000 pages of who knows what with some hefty pork thrown in?  Certainly, it would seem to be helpful in avoiding the recent uprisings in town halls across the country—or at least give the “well-dressed protestors” a more specific topic at which to focus their derision.

But, I feel like I can’t download a song off the internet or buy a gallon of milk with my debit card without entering into a binding agreement that might ultimately result in the surrender of my first offspring.  And as you would expect, the bigger the purchase, the greater the fear of potential loss.

And that’s why I can’t help but wonder why anyone would ever work with a mortgage professional who didn’t believe in absolute mortgage transparency.  Who didn’t believe that his or her clients should know—up front—exactly what they were going to pay, and for what, and why.  Who provided this kind of information not because they HAD to, but because they WANTED to.  I mean, if you’re going to invest hundreds of thousands of dollars in a home, why wouldn’t you demand to work with someone who wanted to give you all of the information you needed—in a way that was easy to understand?    The fact is, I would.  And I hope that you would, too.

All right, I just got yet another glare from a certain staff member, so I’d better get back to it.  At the top of my stack is what appears to a 14-page reimbursement request she submitted which begins “For good and valuable consideration” and is riddled with “party of the first part” nonsense.  And I think I see something about a mental health day, a manicure and shoes in here.  Did someone just hear a bus headed my way?

It’s Friday, so that can only mean one thing… WTMNWU…  better known as the Weekly Transparent Mortgage News Wrap-Up.  Lately, the news and the blogosphere have been abuzz about transparent mortgage services. Since this is the first, of many weekly reports, I’ve included a a couple of older blog posts. From this point forward all posts included in the WTMNWU will be no more than a week old.

• What Should Mortgage Finance Look Like? (Arnold Kling)
  

  We believe their sheer complexity is the core problem and that only increased transparency will unleash the market mechanisms needed to clean them up.

  …It is striking that no one in the regulatory community seems to think in such terms. Instead, the aim of financial reform seems to be to get us back to the financial system of 2005, but with better oversight.

• Zillow Adds Mortgage Cost Comparison Feature
  

  “Truly shopping for a loan and comparing terms and costs on an apples-to-apples basis is excruciatingly difficult for the average consumer to do. This is why so many consumers find themselves in loans they don’t understand,” said Lloyd Frink, Zillow president.

  Great… if it can be done.  At the heart of Zillow is their home evaluation.  But many real estate agents have noted it to be very inaccurate. I just did a zestimate on my home and it was $200K off the correct value.  Unfortunately the value zestimate reported was $200K less than what it should be.  How do I know? I had my home officially appraised by a licensed appraiser just a few days ago.

• New Disclosure Rules Coming for Mortgage Lenders
  

  Starting on July 30, mortgage lenders have new disclosure rules to be concerned about. Mortgage lenders will have to be more transparent about the total costs of a home mortgage loan, providing consumers with more information to make better-informed decisions.

  As with everything else in real estate, another disclosure will always help… NOT. I just put an offer in on a rental property. It’s been a few years since I put an offer on a property, and sure enough there were about 5 more disclosures I had to sign. I think real estate and mortgage contracts are growing by 2-3 pages every year.

• Transparent Brokerage Fees Are An Elephant Slayer (Yes, this is over a month old, but since this is the first WTMNWU, we thought we would add it)
  

  Transparency in mortgage brokerage is a concept that is well underway. Mortgage brokers have always been required to disclose both borrower-paid and lender-paid compensation, on the good-faith-estimate and HUD-1 settlement statement, but rarely used disclosure as a selling feature to customers.

• New Facebook Fan Page for The Transparent Mortgage NetworkWe have started a fan page for the transparent mortgage movement. Instead of waiting for Washington to reform our system in a few years (if ever), let’s inform the consumer that there are transparent services out there NOW. It’s not revolutionary, it’s actually quite simple.
  Please join the fan page and help support our movement, everyone will benefit!

Over the weekend I read another article about the steps the government is taking to reform mortgage services. I just shook my head thinking about all the tax dollars that are being spent on committees and research. You know how fast government works, right? Halfway through the article, it states that they are still years away from any type of reform. In my opinion, not only is the government again messing with the free economy, but they are taking power and the voice away from the consumer. When I say voice, I mean that most consumers think the government will make everything better and they should not demand transparent mortgage services NOW.

So I say, let’s derail this slow moving, tax funded, train!

…along with all of the reforms, really — could possibly cost consumers more for their mortgage, perhaps adding as much as a half a percentage point to their mortgage rates, said Cameron Findlay, chief economist for LendingTree.com. In addition, lenders who can’t afford to make the procedural changes might be forced out of business, which could effectively decrease competition, he added…

But, Findlay said, any extra costs would be worth it to restore faith in the system and protection for consumers. Also, it’s a drop in the bucket compared with what it’s costing to clean up the havoc created in the mortgage market and the entire economy when mortgage money was easy to get.
Source: MarketWatch

I say we can, and are, doing it now, for free and still maintaining the free economy.

Below are three points from the article that can be address now

1. Requiring transparency. Consumers would receive a simple, integrated federal mortgage disclosure that is “reasonable, clearly written and concise,” and be adequately presented with the risks and benefits of a mortgage product.
   
   First of all, we have this now, it’s called the good faith estimate. It sounds like they want to add more documents to it, that probably won’t be read by the consumer because they will be given in the already large folder-o-docs that you get with any mortgage. You can make it as simple to read as possible, but when accompanied by dozens of other documents it just become another “skim over” item.Doesn’t better, more trustworthy, business win… Instead of waiting for the government to give the people the “thumbs up” and say it is now safe to borrow and trust mortgage brokers again, the consumer should be educated and shown that there are transparent mortgage services out there. Consumer demand outweighs government intervention any day!
2. Promoting simplicity. Borrowers would first be offered “plain vanilla” mortgages with terms that are straightforward. They can obtain more complex mortgages, but those vanilla loans will be presented as a first choice.
   
   I think what they are talking about here is when a consumer cannot afford a mortgage of any type, so the mortgage broker gets creative, skips the 30 year fixed products and goes right to the adjustable mortgages. Again, it comes down to transparency of mortgage broker, and many Realtors, that often separate themselves from the mortgage side of things, need to stand up and protect their clients too. Real estate transparency is an umbrella, covering all aspects of the transaction.
   
   
3. Demanding fairness. Mortgage brokers would be required to determine whether the mortgage they’re selling to a borrower is affordable, and prepayment penalties would be banned or restricted. Hidden fees that compensate a broker for selling a higher cost loan would be banned.
   
   This is where it starts to play with our free economy. Is that gas you’re buying affordable? Is that dentist bill affordable? is your paycheck big enough… This is a slippery slope when the government starts making vendors question whether the product they sell is affordable. Maybe the government should just jump in like health care and create a government mortgage loan service and compete with the big mortgage companies? That would solve everything!

If you think that we can change the mortgage industry before the government can, please become a fan of the Transparent Mortgage Network on Facebook. Let’s build a voice and create a better mortgage system.

I love summertime.  It’s not just the whole birds-chirping and flowers blooming thing—it’s also when home sales are traditionally churning merrily.

Okay, so I might sound a little too Mary Poppins-ish there.  Blame my wife and her penchant for Julie Andrews musicals.  But the fact is, historical data shows that home sales traditionally began to heat up in early spring, and deals are still being made in June and July.   And this year, despite a relatively weak economy in many areas, looks to follow that trend, with applications for home purchases continuing to climb according to the Mortgage Bankers Association.

What is changing, however, is the type of loans that folks are choosing.  In fact, if you’re looking to buy a home, odds are that you’re considering a government-insured FHA and VA loan.  In fact, Bloomberg reports that more than one-third of prospective homebuyers are selecting government insured mortgages—the highest number since the early 1990’s.

Why would you, as a prospective homebuyer, choose a government-insured loan over a conventional one?  Well, there are a number of reasons.  First, these government programs usually have lower down payment requirements than their conventional counterpart.  If your home’s purchase price is $250,000, FHA guidelines require you to have a down payment of $8,750.00 (3.5%) while a conventional loan would require a down payment of $12,500.00 (5%).    Credit and debt-to-income standards are also generally more lenient with government insured loans than conventional loan programs.

Now, there are some downsides to government-insured loans, like you are required to carry private mortgage insurance (PMI) along with paying an upfront fee of 1.75% (this is normally financed into the loan amount), and currently the rates on FHA loans are running .125%  higher than conventional loans.  You’ll want to make sure that you talk to your loan officer about all of the pros and cons of several types of loan programs before making your decision.

Keep in mind as well that loan type will have an impact on how much your loan will cost you.  That’s why it’s extraordinarily important that you work with a loan officer you can trust—one committed to absolute transparency in mortgage lending.   Make sure that you know, from the first time you discuss your mortgage loan, exactly the type of fees that he or she will charge and how much those fees are going to be.  And ask—point-blank– for full disclosure of the yield spread premium on the loan you’re considering.  Transparency is crucial to getting the best deal for you, and should quickly be added to your list of favorite things.    Like raindrops on roses and whiskers on kittens.

Raindrops on—where on earth did that come from?  Oh wait.

Honey?!  How many times do I need to ask you not to put that DVD in when I’m working….?

I really hate posting about mortgage violations. There are hundreds of thousands of mortgage brokers making an honest living not only providing home buyers with good mortgages, but also teaching them the in’s and out’s of the mortgage process. With that being said, I don’t want this post to sound like I’m saying “Here you go, I told you so”, but I want to bring to your attention some of the violations that you see and how we at RateWindow are trying to fix them.

I found that the 5 most common mortgage violations at RISMedia was indicative of why we definitely need the real estate community to jump on the “Transparency Movement” bandwagon.  Transparent mortgage regulation is coming whether we like it or not. I believe the powerful real estate community demanding transparent mortgages would be much more effective than regulation. Below is a great example of a violation. I bring this violation up because it is so typical. Simply, it is a bait and switch.

Bad “good-faith” estimates. Good faith estimates are supposed to be documentation of mortgages and costs for buyers to compare and contrast one mortgage offer to another. However, some brokers write low-ball good faith estimates as a “bait and switch” by showing homeowners they’ll offer lower costs and mortgage terms, then later inserting higher interest rates, higher closing costs or mortgages that some homeowners can’t afford. CMAC sees 21 percent of this violation in its mortgage reviews.

Who needs to drive the transparent mortgage bandwagon?

The real estate agent directs a significant amount of the purchase mortgage business in this country which creates a tremendous opportunity to get in front of what is sure to become a highly regulated industry. Washington obviously feels a need to make sure we don’t have a similar meltdown in the future and they have the momentum to push that agenda forward. Equally powerful in my mind as Washington’s laws is for the real estate community to demand their mortgage professionals be totally transparent. Once the consumers hear the transparent voice of their real estate agents the consumers will then demand it. Once the consumers demand it, the mortgage professional better deliver or figure out another profession to try.

Again, don’t get mortgage violations, mixed up with all brokers are bad. That is hardly the case, and when you see the type of transparency that the consumer wants and needs, it should make sense. We are not trying to change the world. We just want the consumer to get an honest, trustworthy mortgage broker. It’s a start, tell me what you think.