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WARNING:    HARD CORE REAL ESTATE AHEAD

This is a post I probably don't really want featured.  I'm inspired to write about one of the ugly sides of our business when the relationship between lenders and real estate agents is less than "arms length".  The question is "Should buyer's agents accept buyer referrals from loan officers?"  I say NO. 

I DO NOT ACCEPT BUYER REFERRALS FROM LOAN OFFICERS.  I do refer buyers to loan officers.  If I am assisting a buyer with existing homes, they are probably going to meet their loan officer through me.  In fact, I've referred a few buyers to ActiveRain member loan officers.  One of the great things about ActiveRain is the unique way we can "get to know good loan officers and real estate practitioners.  I have met and referred business to several loan officers and several real estate agents through ActiveRain.  ActiveRain is priceless. 

My policy of not accepting buyer referrals from loan officers is based on experience.  I realize that mortgage companies and mortgage brokers spend an enormous amount of money attracting potential home buyers before the buyers have selected the home they wish to buy.  I noticed this trend, even in print, about 10 years ago when real estate brokers, primarily the large mega real estate companies began offering mortgage services directly to home buyers very vigorously. YES!  Lenders want to be the first contact in the home buying process.  I believe that they should be the third step, after the buyer has selected a real estate agent and a home to buy. 

HUD gives BAD advice to home buyers about the home buying process.

1.  Figure out how much you can afford.  HUD provides a worksheet for the consumer to compute their buying power.
2.  Know your rights.  Information about Fair Housing, RESPA, borrowers rights and predatory lending. 
3.  Shop for a loan.  Well, this is surely wrong.  Why, if the buyer already has computed their borrowing power, are they shopping for a loan BEFORE shopping for a house to buy???
4.  Learn about home buying programs.  Information about HUD programs and buying HUD owned properties.
5.  Shop for a home.  HUD suggests that this is the time to choose a real estate agent. 

I believe that HUD has the order very wrong.

I believe that there is a serious flaw in HUD's advice that prospective home buyers should "Shop for a loan" before they "Shop for a home" wherein they finally recommend choosing a real estate agent.  In fact, if I may be so bold, if more prospective and actual home buyers had selected a real estate agent before selecting a loan, loan officer, mortgage broker, mortgage bank, etc., there would have been, I believe, significantly fewer mortgage defaults, fewer sub-prime borrowers and fewer incidences of loan fraud. 

I am not making a claim that real estate agents and broker are so smart that they should be giving mortgage advice to borrowers with respect to loan types, interest rates, etc.  That would be foolish.  Too many agents don't even learn the fundamentals of qualifying buyers and rely on loan officers to do it for them.  What I am suggesting is that, if the buyers had selected and were working with a real estate agent prior to selecting a loan officer or mortgage company, they would be a lot less likely to be sold sub-prime loans when they qualify for better instruments, would be less likely to be sold loans with short term arms that escalate faster than the value of the security.  Not because the real estate agents are so smart, but because the real estate agent is often in a position to recommend ethical, experienced loan officers with a kown track record of success. 

I'm not suggesting that real estate agents all are all ethical saints and financial geniuses.  What I am suggesting is that most contract failures, based on my observations in the past 10 years, are due to financing problems.  Further, most contract failures that I've observed in the past 10 years have been with borrowers who selected the loan and loan officer, mortgage company before selecting a house or a real estate agent.  Mortgage companies, mortgage brokers, loan officers are selected from TV advertisements and more and more, from advertisements on the Internet.  The TV ads and radio ads are very clever.  But, if an experienced person really listens to what they say, we know that they are not telling the whole story about what makes a good loan. I know this.  Most people reading this post know this.  But, the average home buyer does not know when an advertisement is telling less than the whole story.  So they pick up the phone or fill out the form and it's all over with. 

If the buyer had a relationship with an experienced real estate agent, they would be referred to a loan officer or possibly two or three who would provide that buyer with more than just an interest rate.  That buyer would get

  • (1) an interest rate,
  • (2) the loan company lender fees, and
  • (3) the terms and conditions of the loan quoted. 

If they actually made a loan application, they would be provided a Good Faith Estimate that fully shows the true picture and costs of the loan.  Of the several hundred buyers who came to me with Internet lenders, only a handful had the foggiest notion of what the loan fees were going to be.  Since they have no experience, they take whatever the Internet lender sends to them as normal.  There is nothing more dangerous than a half completed Good Faith Estimate and I've seen a lot of them from Internet lenders. 

SO, WHY DON'T I TAKE BUYER REFERRALS FROM LOAN OFFICERS?  Agents with my brokerage and I have has very good relationships with several loan officers over the years.  But, it was policy that we did not accept buyer referrals from loan officers.  Loan offiers custivating our business often made buyer referrals to us.  We soon learned that taking these buyers could compromise our role as a fiduciary of the buyer.  While we were interested in assisting the buyer find a home, we often found that the buyers referred by loan officers were:

          1.  Approved for loans with interest rates far above the market for the loan type.
          2.  Approved for loans with lender fees that were twice and often three times the average for our market.
          3.  Approved for loans in sub-prime categories for buyers with excellent credit scores down  payments.
          4.  Approved for conventional ARMs when FHA or VA were not offered. 
          5.  Approved for ARMs with very high margins, but no benefit to the borrower by way of lender credits. 

THIS IS WHERE THE TROUBLE BEGINS. 
The details of the loan can't always be hidden from the agent.  When the buyer finds the home they wish to buy, the buyer will have to provide proof if financing ability when presenting a contract offer.  As a responsible real estate buyer's agent, we have to be prepared to present the buyers financial ability to perform.  Can we look at a Good Faith Estimate and see a rate that is 2% higher than market, lender fees of $2,500, 2-3 discount and "origination" fees even for a very expensive loan, what are we supposed to do??? 

DEPENDS ON THE BUYER'S RELATIONSHIP WITH THE LOAN OFFICER
If the loan officer is the buyer's father, uncle, brother, mom or someone in the family, you probably keep your mouth shut.  Blood is thicker than water.  However, if the loan company is an Internet lender, you are probably going to advise the buyer that:

"I believe that the loan that your lender has you in is a lot more expensive than you need.  If you wish, I'll Real Estatehave a loan officer that I've worked with for years run your information and we'll get another view on loans for your price range." 

Or, "Good Grief, this is highway robbery.  This loan is going to cost you about $12,000 more at closing than you need to pay.  Let's take a drive over to Mr. GoodLender and let him see what he can do to save you some money."  

Or, "Geez.  You're a government employee with great credit scores and 20% down.  Why are you in a sub-prime loan?  I don't know this lender but I know you can do a lot better.  Let me shop this loan and I'll see what other lenders can do for you." 

How can you take aggressive action to advise a buyer you represent in a fiduciary capacity as their buyer's agent, if the lender referred the buyer to you??  You can't.

That's why I don't accept buyer referrals from loan officers. 

Find A Home For Sale in Maryland and Northern Virginia.

Courtesy:  Homefinders.com

 

116 Comments on WHY I DON'T TAKE BUYER REFERRALS FROM LENDERS - A CONTRARY VIEW

Lenn

I'm jumping up and down and applauding loudly.  You understand!  You truly understand!   

08/03/2007 06:07 PM by Ed Rybczynski (Rybczynski Consulting)

Ed.  Of course, I do, Ed.  Of course, I do.  I had a hard time with this article because there were two matters involved.  One is the matter of buyer referrals from lenders and the other is which should come first, the agent or the lender.  HUD is not help.

I figured, this one isn't going to go anywhere anyway, too hard core for the average reader.  Who knows, maybe folks will find it interesting.  Most agents wouldn't turn down lender referrals.  I do. 

08/03/2007 06:20 PM by Lenn Harley, Homefinders.com, MD & VA Real Estate

Lenn,

I think you are among a very few, who don't take money from brokers, I think your are amazingly smart for this because, these brokers will assume they can do their own thing with referrals of yours, and in reality, these brokers are extensions of you and the way they conduct business, has a direct reflect on you....

Tom Weiss

08/03/2007 06:24 PM by Thomas Weiss (Thomas R. Weiss)

Lenn

You've philosophically and intellectually touched on the core of fiduciary responsibility.  Your practical application of "policy" was firmly grounded in experience.   We rarely hear the word "policy" used in this industry any longer.  This is a perfect post.  Anyone who finds it excessively hard core needs to rethink their career choice.  

08/03/2007 06:28 PM by Ed Rybczynski (Rybczynski Consulting)

Lenn, Very good article. I actually had not looked at it this way but it makes complete sense. Lenn I can't tell you how many closings I have been to with my sellers where the buyer shows up with no REALTOR(R) or MB in sight. The buyer is on their own. They start signing, get to the payment and it's hundreds of dollars more than they were expecting. Needless to say they are in shock. So I ask the million dollar question "Well what did the GFE state" I then get the blank stare and the inevitable answer "What's a GFE?" THEY HAVE NEVER SEEN ONE!!!!! Don't even know what I'm talking about. Probably didn't realize they were paying 3 points for the loan either.  Of course we can't reach their agent or the MB. And usually the same thing happens....they sign the docs and get the keys to their new house they can't afford. But what can I do? I'm NOT their agent and my sellers are ready to close.

08/03/2007 06:28 PM by Bryant Tutas-Tutas Towne Realty, Inc

Thomas.  I like "arms length" relationships between the service providers in real estate transactions.  One of these days I'll write about my time with a mega broker who had an in-house lender, in-house insurance, etc. 

08/03/2007 06:41 PM by Lenn Harley, Homefinders.com, MD & VA Real Estate

Lenn

Excellent article. Every deal I had a major problem with over the last few years was due to the buyer's choice of lender. Seemed like everyone had a "friend in the business" and came to me "pre-approved". Turned out these "friends" were really no friend just out to make a buck.

Sandra

08/03/2007 06:45 PM by Guilford Connecticut Real Estate Agent, Sandra Cummings (William Raveis Real Estate)

Bryant.  One question I would have is, where did the buyer hook up with that MB??  Forget the agent.  The bar for real estate licensee is so low, nothing surprises me there. 

Ed.  Policy and Procedures are important in risk reduction.  I'm the most risk averse real estate broker around.  If an agent violated one of the brokerage policy, they were given one warning and then, if I saw that they eren't following "safe brokerage procedures", I sent their license back. 

 

08/03/2007 06:46 PM by Lenn Harley, Homefinders.com, MD & VA Real Estate

Lenn,  I am glad I read the whole post before I said anything.  I think you really brought up some good points.  especially about "fiduciary capacity" .

You clearly state your point on accepting buyers... but what about listings?  I recently turned over a lead to someone on Active Rain for a listing.  To be honest I really don't see any problems with this.  I would like to know your views.

08/03/2007 06:47 PM by My Favorite Mortgage.net - Matthew J Blum

Uggh....... a touchy subject. I got a lot of referrals this year from a realtor in another state that is working with a national lender that was working with physicians moving to the hospitals in our area. They were already locked in and all we had to do was find them the house or condo. In looking over the GFE's they were appropriate. They are able to wave all the school loans ( and dr's have many ) so they could get them in a house or condo now on a residents salary. Most of our local lender had to count the school debt.

Any opionion ?

08/03/2007 06:47 PM by Missy Caulk Ann Arbor Realtor Ann Arbor Real Estate (Keller Williams Ann Arbor)

Sandra.  Me too.  One of the worst we had was the brother of the buyer.  But, they had to keep peace in the family.  The average buyer has not a clue about how to select a mortgage company, read a GFE or understand what they are doing.

 

08/03/2007 06:49 PM by Lenn Harley, Homefinders.com, MD & VA Real Estate

Very interesting and unique commentary

08/03/2007 06:50 PM by Cape Coral Real Estate Agent Scott Slocum (239) 340-1384 (Florida Future Realty Inc.)

Hi Lenn,

Smart analysis, however, (there is always a however) I have noticed I say more often than not "it depends" and in this case, I think that applies.  If I have a good relationship with a lender, and we have traveled down a couple of roads together, I will of course accept a referral, and vice versa.  I would explain to my "new buyer referred client" if said lender was charging him excess fees,  we would now need to have a pow wow to clear the air.  Like any transaction, "it depends" and I always make sure I see a TIL within 3 days.

  Fiduciary is a very strong word, however, (again with the however) I think you can represent your client  to the fullest of your ability, still sleep at night, have a working relationship with lenders, and receive some "relationship commissions"  I feel it is a two way street, and it sure is nice to receive a referral from a lender, instead of them always looking to you for those same referrals.......which begs the question....how do they feel about receiving referrals from REALTORS, isn't it almost the same conflict of interest? 

Dick Beals

08/03/2007 07:06 PM by Wilmington Real Estate 4U

Lenn, I typed a really good comment and lost my internet connection as I hit "submit".  I'll make it shorter this time.  I have run into the same problem with lender referrals for buyers.  I was almost to the point of saying no more...I think your post just convinced me that my thoughts were right.  Maybe if the lender was not involved in the transaction....I don't know.

I thought this was a great post and I hope it gets featured. I think it could bring out some really good, positive conversation.

08/03/2007 07:11 PM by Stephanie Edwards-Musa, Realtor ® The Woodlands, TX Real Estate (Prudential Gary Greene, Realtors ®)

Matthew.  I'm a Buyer's Broker.  The only homes I list are my buyer's contingencies.  I don't even charge them.  I just list them to make them go away.  Not interested in any listing referrals from anyone.

Dick.  If, in my perfect world, the buyers would start their home search adventure with a buyer's agent, they wouldn't be coming from a lender.  As for agents referring to lenders, it is agents who have the fiduciary relationship with the buyer, at least in MD we do.  I believe I read recently that in CA or somewhere, mortgage brokers have fiduciary too.  Wonder how that's working out??  Of course, there are always exceptions.  But, as a matter of policy, I don't accept buyer referrals from lenders.  They try.  Thinking that they can get buyer referrals from me if they refer a buyer to me.  Won't work.  It's a slippery slope. 

Missy.  That is probably one of the exceptions that could be made.  I'm familiar with the "physicians" programs with BOA and a couple of other lenders.  If I were approached by one of those "programs", I would know up front that their guidelines for these buyers were fair to the buyers.  Hopefully, that lender isn't looking for any type of "referral fees" from the real estate brokers.  Bottom line is, as a fiduciary, if the bank did anything that would be harmful to my buyer, the buyer would know it.

Stephanie.  Thanks.  I hope it gets featured too.  Of course, I always to.  The reason I wrote it was because of posts today about buyer and lender incest, um, I mean referrals. 

 

 

08/03/2007 07:35 PM by Lenn Harley, Homefinders.com, MD & VA Real Estate

Lenn,

I have to disagree with you on this.  If you or any real estate agent won't tell a client that their fees and rates are too high then who will stop these types of lenders from sticking it to clients?  If the real estate agent won't protect the client from unscroupulous lenders then who will? Could these lenders also be inflating income to get the client into a house they can't afford?

If you and all other agents would take these types of referrals and educate the client then we have another step in the chain of buyer protection.  I would love to tell clients this information but they have already gone to another lender so I won't have a chance to do what I do. So the pressure is put onto you and your industry.

You won't take referrals from lenders, why not take them and educate the client? I know that the referrals will stop from that lender, then it is up to the next agent to do the same, and then the next, and so on.  Because until the lending industry figures out how to patrol itself we NEED YOUR HELP, we need the real estate professionals to help us out, but more importantly to help the consumer out with another level of protection.

By adopting this policy aren't you just leaving these clients to the lions?  Isn't it just burying your head in the sand and letting some other less professional agent (a commission chaser) let the client get a good screwing? I just read another blog where in CA a mortgage broker told a client to use an agent to find the house then come back to him/her and they would write up the contract and refund the buyer the real estate commission. 

The agents responding were outraged (righfully so) there were calls to get that lender blackballed, tell all their real estate friends about what the lender did, to do everything in their power to run that lender out of the business (which I agree). Now where is the uproar over what these lenders are doing to the clients?  Is it only important to the real estate industry when someone steals a Realtors(R) commission?  Where's the outrage that a client is paying $12,000 more than they should in upfront fees and a higher interest rate so some lender can line their pockets?

If these lenders somehow stole your commission on a deal would you do something about it?  Would you do something other than creating a "policy" to not work with lenders that do that to you in the future?  Why not give the consumer the same level of care and concern?

When I refer a client to a real estate professional I know that what I have given the client is the best overall loan structure for their situation and the agents I work with know that I have because they have all been through some very detailed training on what we do with clients.  I feel that when professionals are on the same page the client benefits.  We treat agents just like we do with our Financial Planners, CPA's, Estate Planning Attorneys, Insurance Pros, (our Wealth Management Team), etc, we feel that Realtors(R) are just as important to our team of ADVISORS as any other professional.

Next, I strongly feel that a perspective buyer should meet with a true mortgage professional FIRST to do a comprehensive mortgage planning session so they fully understand and know what they can afford, what their comfort zone is, what type of financing structure they should have, how much to put down, where their dollars are most efficiently allocated, establishing the base of an overall financial plan or that the loan they get fits into their current financial plan and getting them the best loan for THEIR needs not just what tradition tells them. 

This also helps to keep them from looking at too much house, when they start by looking at $400,000 houses yet can only afford $300,000 houses then no matter how good of a job you do, I do, everybody does they are going to be disappointed with the entire experience because the $300k house is NOT the $400k house.

I don't think we are that far apart on our views I just think you are much more important to the entire homebuying process than you may think.  Contrary to popular belief this is not just a HOME buying process it is what is likely the client's biggest and most important financial decision they will have made in their lifetime.  Whether we want to admit it or not the public views owning a home as a long term financial investment- a 2006 FNMA survey of First Time Home Buyers asked them what is the MOST important factor in buying a house- the #1 answer 84% said "for the long term investment" a Harris poll done for Countrywide asked the current homeowners what the most important aspect of owning a home was and 91% said "for the long term investment".  Doesn't that account for something in how both our industries should be doing our jobs?  Don't our clients deserve as much?

I realize that puts a lot of responsibility onto both our industries and isn't it time we worked together to meet their expectations, no wait to EXCEED their expectations?

08/03/2007 07:35 PM by Kurt Jackson, CMA, CMPS (kcmortgageplanning.com)

Lenn, no referrals are paid to the lender. I don't think you can ever do that, violates RESPA.

08/03/2007 07:45 PM by Missy Caulk Ann Arbor Realtor Ann Arbor Real Estate (Keller Williams Ann Arbor)

Lenn - I agree HUD has it backwards, however, there are a few lenders I would take a referral from. I have worked with them before and know they are working to get their and my client the best deal.

I do have a problem with lender agreements and in house lending. My biggest pet peeve is Realtors who also are the LO. I hate recieving a purchase agreement with the Buyers agent also acting as the LO. That is a whole other post!

08/03/2007 08:01 PM by Indianapolis Real Estate | Paula Henry (ReMax Excel)

Kurt.  Thanks for the thoughtful post. 

Sorry, you folks in the financial industry are going to have to clean up your own house.  Most financial professionals consider real estate practitioners little more than walking keypads. 

We in the real estate industry are constantly working to keep our house clean.  It's difficult when the entry standards are lower than for a government file clerk. 

The level of sophistication of the average home buyer is very low when considering the amount of money they are spending not to mention the debt that they are incurring.   This is precisely why the service providers for home buyers and sellers need to be arms length.  This is precisely why the fiduciary relationship is solely between the buyer and their agent.  Recommending service providers to help a client achieve their goals at a fair price from a reliable lender is one thing.  Accepting referrals and not being  indebted to that lender is as impossible as practicing dual agency in real estate sales.  The human mind is a funny thing.  The statute may say you can do it.  But, that doesn't mean it can be done.  You can't weigh the benefits of dual agency to each side and have them come out even if all the facts are known to all parties.  Nor can a real estate agent who accept referrals truly represent that buyer/borrower in a fiduciary capacity. 

I've watched up close the incestuous relationships between lenders, brokers, agents, other vendors and the closer they get, the worse it gets for the consumer.

 

08/03/2007 08:25 PM by Lenn Harley, Homefinders.com, MD & VA Real Estate

Missy.  USAA, and other lenders make buyer referrals and accept "referral" fees regularly.  The lender referrs the buyer, the agent sells the buyer, the agent/broker pays a referral fee to the lender.  Goes on every day.  That doesn't mean that the Doctors program works this way.  I believe that program is on the up and up.

Paula.  You are right.  That is a whole other post.  We have the same problem with attorneys who want to sell real estate too. 

08/03/2007 08:32 PM by Lenn Harley, Homefinders.com, MD & VA Real Estate

Lenn.....  great post as usual. I don't have time to read the comments this time. sorry....  I agree with your point, but disagree with the results. If my clients went to a realtor first, about 35% of my business might have dropped last year and this year. I have different ways of attracting business and yes, the internet is one way and it works for me. 

I do understand that many realtors have relationships with usually good people that can be trusted, that are professional, and will have a great closing ratio.

Overall, HUD's order could be questioned. Especially the worksheet. Consumers can't even shop correctly because they believe so many lenders and the lies. How could you expect them to use a worksheet and get it correct. And the programs?   lol  So, I agree here.

In regards to accepting referrals?  I can understand that some lenders spend money on this to give realtors referrals. In my opinion, they are just trying to buy the realtors business. But what about us loan officers that just network and get a few that fall into our laps?  I pick a trusted realtor in that area and refer them.

In any case, another thought provoking post by Lenn Harley. Nice job....

jeff belonger

08/03/2007 08:49 PM by Jeff Belonger -- The FHA Expert.com -- FHA Loans -- FHA mortgages -- Mortgages (Infinity Home Mortgage Company, Inc)

Jeff.  Thanks for commenting.  I appreciate the thoughts. 

My opinions about agents accepting lender referrals is based on experience. 

I'll write a post one of these days about some of the transactions that brought me to where I am.

08/03/2007 09:06 PM by Lenn Harley, Homefinders.com, MD & VA Real Estate

Looking forward to that post.  thanks

08/03/2007 09:10 PM by Jeff Belonger -- The FHA Expert.com -- FHA Loans -- FHA mortgages -- Mortgages (Infinity Home Mortgage Company, Inc)

Lenn:  I had to come back so I could read it all and absorb. Okay, two transactions ago the lender the buyer "picked" was high in interest for having 20% down and the closing costs were way outrageous. I told my buyers that I would see what others could do and get back to them. I got back to them with three estimates on both interest,programs and lenders fees (actually an estimated GFE) and they all came in lower. I instructed my client's to ask the LO to match it....and she did....and their interest amazingly came down .75% and closing costs came down 3k. They need us before them....or at the very least...if they already have one when they meet us.....get the scoop and as you stated, "we'll get another view on loans for your price range." 

P.S. Came back. In the above scenario...I didn't talk them out of the lender they chose...just did a little homework for them because they asked and they felt the lady was nice but was just trying to "make money" off of them. In the end it turned out well.

08/03/2007 10:24 PM by Celeste "SALLY" Cheeseman (RA), e-PRO HAWAII Real Estate & HAWAII Relocation (Century 21 Liberty Homes -Mililani, Hawaii)

The only thing I want from the lenders I use is that they treat my clients fairly and are honest with them..I've never been a fan of doing anything that even slightly smacks of conflict of interest..

08/04/2007 12:17 AM by Manhattan Beach CA/ e-PRO..... Kaye Thomas... (Real Estate West)

I agree with some parts of this but as a buyers agent, I want people qualified for their loan before I spend time driving them around.  I want to know they are serious before waisting my time playing taxi cab.  If they come to me with an approval, I still ask that they also get a second approval from someone I know just in case things go awry.  If they have been referred to me by a loan officer I would assume that I know that person and trust that they can handle it.  But No to finding a house then shopping for a loan.  Not in my book.

08/04/2007 02:42 AM by Darrel Quebedeaux (Evergreen Realty & Associates Inc.)

Lenn - As usual, thought-provoking and on the mark. In 20 years, I have taken one referral from a loan officer (back when I didn't know better). When you know better, you do better. I work with some really great loan officers and have very high expectations of what they will do for my clients, unfettered by any additional financial relationship with that lender.

08/04/2007 06:05 AM by Dave Rosenmarkle (Highland Realty)

:::APPLAUSE:::

I believe I am one of the fortunate agents that has found a fabulous mortgage lender that I not only refer buyer clients to, but she also refers clients to me without my once feeling that her clients have gotten a raw deal on the mortgage end.  She stands head and shoulders above everyone else I have met, and I know that when I see the GFE that it will be the best possible scenario for the buyers.   She is the ONLY mortgage representative that I will accept buyer clients from.  Otherwise I feel strongly as you do, that to accept a client from a mortgage lender referral could compromise your fiduciary responsibility to that client unless you are willing to be honest with the buyer client above all else.

08/04/2007 06:11 AM by Kris Wales-Macomb County MI Real estate (RE/MAX Advantage 1, Inc.)

Lenn - I'm SO with you on this one,, with a couple of exceptions! 

I found myself in a situation not all that long ago with a buyer who'd been referred to me by a lender I didn't know.  We all love referrals, so I thought this was pretty nice.  And then when I looked at their approval letter, I couldn't believe the program he had put them in - way over the market interest rate, loads of junk fees in the Good Faith Estimate.  I had a little conversation with them along the lines of your suggestions above, and they ended up with one of the trusted lenders I like to work with.  Those buyers were headed toward major rip-off with the lender they somehow started with.

I do accept buyer referrals from the lenders I work with.  I know their ethics and how they work, and I never ever have to worry about interest rates, junk fees, or anything slimy with them.  And they know the same about me.  These are lenders I do my own financing with - trust them completely.

Ann

08/04/2007 06:28 AM by Portsmouth NH Real Estate ~ Ann Cummings (RE/MAX Coast to Coast - Portsmouth New Hampshire)

Hey Lenn, you just featured so back on the top !! ( of the board ) Congratualtions, this is important information.

08/04/2007 06:34 AM by Missy Caulk Ann Arbor Realtor Ann Arbor Real Estate (Keller Williams Ann Arbor)

Lenn

A tough topic and as usual you hit all the points head on. I think you gave this a lot of thought and presented it very,very well.

08/04/2007 06:42 AM by Allison Stewart REALTOR ®St. Cloud Florida (Florida Pines Realty, Inc)

Yesterday, when I read this was coming I KNEW it would be good.  I just found it this morning.  Sugar coated, as usual, and a perfect compliment to my Cheerios!  LOL

08/04/2007 06:50 AM by Chris Elizabeth Griffith ~ Bonita Springs Fl Real Estate (Keller Williams Elite Realty, Bonita Springs, FL)

Lenn I couldn't agree more with your well written and as always informative post.  Accepting referrals clouds the water.  I also got a call from the physicians program.  The realtor that called and had the referrals wanted a referral.  Maybe I am wrong but I declined as it seemed to be a way around the RESPA that made me a bit nervous.  Maybe it is a different program.  I try to just stay away from any referrals or implied referrals unless it is from an agent.

08/04/2007 06:58 AM by Miriam Bernstein,Westchester County Real Estate (RE/MAX Prime Properties)

I would rather not...don't want to be held accountable for the mistakes that might come up. The problem is if you give the referral will they actually be able to follow through on their end.

08/04/2007 07:04 AM by Neal Bloom-Realtor ® Assoc.-CRS-Weston FL (RE/MAX Premier Associates)

Lenn.

It’s sad to say, but you have good reason not to take referrals from mortgage brokers. Unfortunately, many loan officers are poorly trained or just unethical. And do not find yourself being an ethical loan officer who works for a mortgage company being ran by an unethical manager - you will get fired for not being aggressive enough. I make sure my good faith estimates are complete only to loose my prospect to loan officers who do not send the borrower complete good faith estimates. This makes it look like a am charging extra fees (title insurance, county tax, etc) when I am only being honest. Thank you for the great article.

Terry 

08/04/2007 07:13 AM by Better Day Financial (under construction)


Lenn:  I had to come back so I could read it all and absorb. Okay, two transactions ago the lender the buyer "picked" was high in interest for having 20% down and the closing costs were way outrageous. I told my buyers that I would see what others could do and get back to them. I got back to them with three estimates on both interest,programs and lenders fees (actually an estimated GFE) and they all came in lower. I instructed my client's to ask the LO to match it....and she did....and their interest amazingly came down .75% and closing costs came down 3k. They need us before them....or at the very least...if they already have one when they meet us.....get the scoop and as you stated, "we'll get another view on loans for your price range."  P.S. Came back. In the above scenario...I didn't talk them out of the lender they chose...just did a little homework for them because they asked and they felt the lady was nice but was just trying to "make money" off of them. In the end it turned out well.

Sally.  You're right.  I should have addresses that.  Mortgage rates and terms ARE negotiable.  But, the buyer needs to know what they are negotiating.  I've found few who are.  That's why, when the circumstances are right, I shop loans for MY buyers.  The only thing I want from the lenders I use is that they treat my clients fairly and are honest with them..I've never been a fan of doing anything that even slightly smacks of conflict of interest..

I agree with some parts of this but as a buyers agent, I want people qualified for their loan before I spend time driving them around.  I want to know they are serious before waisting my time playing taxi cab.  If they come to me with an approval, I still ask that they also get a second approval from someone I know just in case things go awry.  If they have been referred to me by a loan officer I would assume that I know that person and trust that they can handle it.  But No to finding a house then shopping for a loan.  Not in my book.

Darrel.  Perhaps our market is different.  It is extremely rare for a buyer who has contacted me to be less than qualified.  I'm capable of qualifying a price range for a buyer.   As far as credit?  Shucks.  I just ask them.  Folks aren't going to lie about their credit.  They just don't.  They may not know about what constitutes good credit, but a few questions in the telephone interview will uncover any potential problems.  I don't consider it a waste of my time to take a buyer on a tour.  At the end of the day, they are mine.  In my market, if you insist that buyers be pre-qualified by a lender with a credit review, you won't be taking many buyers on tours.  They'll be out with someone else.  The basic home tour is our first step in bonding that buyer to an agent at the end of which, we get a signed Buyer's Agent Agreement.  What could be better. 
Many agents and brokers practice a policy of "exclusion" with home buyers.  We practice a policy of "inclusion".  Let's get to know each other.  You don't want to "spend time driving folks around".  My policy is "My time is your time".  One approval isn't even enough for you.  Shucks.  I don't need a loan officer to tell me that a buyer is qualified.  I don't really need anything from a loan officer until my buyer has selected the home they wish to buy.  That's when I need a lender's letter.  Not to take a tour.

Lenn - As usual, thought-provoking and on the mark. In 20 years, I have taken one referral from a loan officer (back when I didn't know better). When you know better, you do better. I work with some really great loan officers and have very high expectations of what they will do for my clients, unfettered by any additional financial relationship with that lender.
Dave.  Thanks.  "unfettered by any additional financial relationship with that lender" is a wonderful description of why I don't take lender referrals.

08/04/2007 by Dave Rosenmarkle Delete Report as Spam

:::APPLAUSE:::
I believe I am one of the fortunate agents that has found a fabulous mortgage lender that I not only refer buyer clients to, but she also refers clients to me without my once feeling that her clients have gotten a raw deal on the mortgage end.  She stands head and shoulders above everyone else I have met, and I know that when I see the GFE that it will be the best possible scenario for the buyers.   She is the ONLY mortgage representative that I will accept buyer clients from.  Otherwise I feel strongly as you do, that to accept a client from a mortgage lender referral could compromise your fiduciary responsibility to that client unless you are willing to be honest with the buyer client above all else.
Kris.  Thanks.  Life is so much easier when there are no chilly-wiggles in the gut. 

Lenn - I'm SO with you on this one,, with a couple of exceptions! 
I found myself in a situation not all that long ago with a buyer who'd been referred to me by a lender I didn't know.  We all love referrals, so I thought this was pretty nice.  And then when I looked at their approval letter, I couldn't believe the program he had put them in - way over the market interest rate, loads of junk fees in the Good Faith Estimate.  I had a little conversation with them along the lines of your suggestions above, and they ended up with one of the trusted lenders I like to work with.  Those buyers were headed toward major rip-off with the lender they somehow started with.

I do accept buyer referrals from the lenders I work with.  I know their ethics and how they work, and I never ever have to worry about interest rates, junk fees, or anything slimy with them.  And they know the same about me.  These are lenders I do my own financing with - trust them completely.
Ann.  As with almost everything in life, there are going to be situational differences.  I simply tell lenders up front that I'm not interested in referrals.  They still want my referrals and if they continue to perform, they'll get it. 

Hey Lenn, you just featured so back on the top !! ( of the board ) Congratualtions, this is important information.
Ann.  Yee Haa! ! !
A tough topic and as usual you hit all the points head on. I think you gave this a lot of thought and presented it very,very well.
Allison.  Thanks.  It is a tough topic.  I believe that when agents accept referrals from lenders, the agent's objectivity and representation of their buyer/client is compromised.  If not in fact, then possibly in the eyes of the buyer.  Ouch.  Things better be smooth or we'll all be suspect.  Ha! !   Like we're not already.

Yesterday, when I read this was coming I KNEW it would be good.  I just found it this morning.  Sugar coated, as usual, and a perfect compliment to my Cheerios!  LOL
Chris.  Thanks.  Sugar coated.  Moi.  Never. 

Lenn I couldn't agree more with your well written and as always informative post.  Accepting referrals clouds the water.  I also got a call from the physicians program.  The realtor that called and had the referrals wanted a referral.  Maybe I am wrong but I declined as it seemed to be a way around the RESPA that made me a bit nervous.  Maybe it is a different program.  I try to just stay away from any referrals or implied referrals unless it is from an agent.
Miriam.  "Clouds the water".  There's another good description  Thanks.

I would rather not...don't want to be held accountable for the mistakes that might come up. The problem is if you give the referral will they actually be able to follow through on their end.
Neal.  "held accountable" is another reason to not take lender referrals. 

Terry.  Thanks for commenting.  Your comment is the perfect example of why I believe that a home buyer needs to start their home buying adventure with an experienced agent.  I've seen the GFEs that you describe and I then ask my buyer, what are the lender fees????  What's the purpose of these 3 points with an 8% interest.  What are these points buying, potato salad??  I asked a loan officer that one day and he hung up on me.  Wonder why?  How can I realistically provide good services to my buyers if I accept such loan approvals as good for the buyer.  For one thing, when the mortgage company is committing highway robbery, my buyer is going to lose a LOT of buying power. 

 

 

08/04/2007 07:47 AM by Lenn Harley, Homefinders.com, MD & VA Real Estate

Most of the time the realtors that i'm dealing with are asking for preapproval letters, which will require me to ask for w2's, paystubs, financial statements and to pull credit. they want these before they submit an offer.

what happens when you've spent time with the buyer who doesn't qualify? have you pulled credit?

I would hope and encourage any realtor who sees a GFE from me with outrageous fees to send that client somewhere else. i'll drive them there myself. 

if you thought the program was inappropriate i would hope you would call first for an explanation.

everyone should have a plan for success and you have yours and it must work well or you would probably modify it. so that's great. i am aware and concerned that many loan officers do not acquire the knowledge that they should and that others only care about how much money they can make. i wish they would just leave the marketplace.

your system should help. 

08/04/2007 07:50 AM by

The post above asks:  "what happens when you've spent time with the buyer who doesn't qualify? have you pulled credit?"

I don't have to "pull credit".  I talk to folks.  I'm not rushing to write a contract.  I may speak with someone on the phone for an hour getting to know them before making an appointment to preview properties.  I will know their employment situation, their home ownership history, family structure and home needs, possibly what their third cousin twice removed earns, etc.  When you know someone, you can simply ask them about their credit.

You say: "How's your credit?".  They answer and you proceed accordingly.  I always ask. I don't care if they are looking at a $2,000,000 price range.  Back in the Internet boom about 1999, I had a lot of buyers who were cash poor but had a LOT of start-up company stock that they couldn't sell.  They thought their stock and income was sufficient to buy a $2,000,000 house.   Not always.  Goodness, I can do a P&L in my head.  A programmer who came from a job making $40K and suddenly is making $140,000 and a lot of restricted stock, had better have some cash.  AND, they had better have good credit.  So, I ask.  "How's your credit?"  If the answer is "We're working on it", I'm going to get a credit report pulled.  But, I may take them on a tour anyway because (1) I love to tour luxury homes, (2) he has friends and co-workers who may have wonderful credit and some cash. 

I practice "inclusion".  The worse thing that can happen is that I've toured some great homes and you never know who is going to call next week.

 

 

08/04/2007 08:03 AM by Lenn Harley, Homefinders.com, MD & VA Real Estate

Very well done. Thank you for the detailed info.

 

 

 

 

 

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08/04/2007 08:28 AM by Al Maxwell - Real Estate Agent - (Coldwell Banker)

Lenn,

If you do get a chance to write about the mega broker, who had the in house lender, I would really like to hear about it, sounds really good....

Tom Weiss

08/04/2007 08:45 AM by Thomas Weiss (Thomas R. Weiss)

I have never received a referral from a broker, but I have referred 90% of my clients to different mortgage brokers/lenders I have found a few brokers become too confident in my business and tend to pad the bill a bit so I quit referring to them and move on, I also have recommended my clients shop when I feel they can do better.

I am going to the HUD website now to read their guidelines interesting.

Again another thought provoking post.

08/04/2007 08:54 AM by Rebecca Savitski NC Real Estate Listings (NC List for Less Realty Incorporated)

Lenn, while I never examined it  in the way that you have so clearly presented , there seemed to be something..."not quite right" about a mortgage company referral.  While it could be above board, perfectly OK, and something that works for the buyer, it's too tied into the loan (as you state) to effectively provide the fiduciary required on our part- some of the responsibilities have been predetermined by another, minimizing what we can effectively do.  "Owing" the lender is not part of a fair equation.

08/04/2007 09:29 AM by Options Realty

Great post Lenn.  I agree with you and especially about buyers getting their agent before they start shopping for a loan!!

08/04/2007 09:38 AM by Brad Andersohn ~ Community Builder (ActiveRain)

Lenn....I totally disagree.  I refer about 13-20 deals a year to my realtor referral partner.  I have worked with over 100 realtors in my career and love a bunch of them.  But there is only one realtor that I would actually refer my own family to.  My realtor partner is a top 10 agent in Illinois and our businesses are built on integrity and service.  For her not to accept my referrals would show a complete disinterest in serving the best interests of my client base.  The majority of the referrals that I provide to her end up referring their friends and families to her after closing.  We have such an after care program.

 I feel that so many realtors are just transactional and not relational.  In other words, they're relational until they get that check at closing.  Then they're gone.  This isn't an attack on you or your industry, but I'm saying that I want a partner who trusts me and of whom I can trust back.  I know that we may not be the norm, but a relationship goes both ways.  She refers deals to me and I to her.  The client's best interests are served.  If the client wants to go with other realtors that's fine, but ultimately it's my reputation on the line.  Therefore I can only refer my clients to the best.  This may sound arrogant, but we have worked hard for 10+ years together and our clients derive the benefit of that.  For my realtor partner to listen to this advice would hurt her clients as well as mine.  Bottom line is all the wrong people would get hurt in to abide by an idea that I think is poor.

In the inverse...let me ask....If she were not to take the referral that I send, to whom do I send them?  Or do I just let them get a lot of fluff from the internet which can basically print all sorts of falsehoods?  People who work by referral only work with partners who invest in their own.

08/04/2007 09:49 AM by Larry Bettag - Cherry Creek Mortgage

I havenot had vey many client referals from loan officers, but those that I have had were less than successful.  You may be on to something.

08/04/2007 10:09 AM by New Jersey Real Estate James Boyer Morris, Essex & Union County NJ Realtor (RE/MAX Properties Unlimited, Real Estate)

Interesting take Lenn.  As usual with your posts, I have to bookmark them so I can fully digest them at a later time.  I tend to agree with you in what I browsed so far though.  I'll be back...

08/04/2007 10:15 AM by Jason Sardi, Pennsylvania Mortgage Broker (First Choice Equity Group Inc.)

Lenn, a brilliant blog!!!  I will say, however, that I have two favorite lenders in my hometown.  The reason that they are favorites is that they treat my client right, they consistantly outperform other local lenders, and they have the same high standards that I do.  I don't often accept referrals for them.  It occurs probably 4-5 times a year, and they probably do 30 loans for me per year.  I don't believe that they would choose these borrowers to mistreat. 

08/04/2007 10:17 AM by Chris Tesch College Station, Texas Real Estate (RE/MAX Bryan College Station)

Good perspective here. I always insist on reviewing the Good Faith Estimate whether it was obtained prior to hiring me or not. Some seasoned buyers don't think it's necessary, but I always ask. I will take buyer referrals from a lender, but if the loan they're trying to sell isn't ideal, I still recommend my buyers 'shop' a few more lenders and we sit down together and compare. 

 

I endeavor to protect and educate. 

08/04/2007 10:44 AM by Portland Oregon Real Estate Broker * Jennifer Bukaty * (RE/MAX equity group, inc.)

Len, you make some great points.  Lots of information to digest.  Hopefully after being put under the microscope the lending industry comes away with more true professionals with a back bone to hold themselves to a higher standard.  I really like the justification some use of, "they have already got that type of loan so I don't have a choice if I want that business."  Why would you be willing to sink someone financially to make a few bucks?

08/04/2007 11:01 AM by Brian Brumpton, Boise Idaho Real Estate Professional. (Keller Williams Realty of Boise)

As a buyer's agent, I'm somewhat in agreement with Lenn. All too often, Buyers are led astray by mortgage brokers who overcharge the buyers with 1.5% to 3% origination points! They typically meet these brokers through advertisements prior to locating a buyer's agent. However, a good buyer's agent will point out how the buyer is being taken advantage of -- but many times to no avail. The buyer has already been hooked by the mortgage broker.

Regarding referrals, taking a referral from a reputable lender would not violate our fiduciary duties to our client; in fact, it would do just the opposite. Since we know the lender in advance, then we will be confident that the lender will do a great job for our client.

08/04/2007 11:09 AM by Stephen Graham (Associate Broker) Buyer's Agent (Realty Professionals, Inc. - Atlanta, GA Georgia)

What?  You want me to disagree?  I get it, Lenn (after you pounded it into my head last fall).  

This is one of those enduring posts that should be in Realtor Magazine.

08/04/2007 11:25 AM by America's #1 Mortgage Broker

Whoops!  Not so fast broker lady, I just thought of something.  In California, loan originators are instructed by the state to operate in a fiduciary capacity and have been for nine years (you won't believe it but I just learned that about 6 weeks ago, which demonstrates how much it is ignored).

How would we deal with that?  I'm guessing a BBA, signed with a real estate brokerage, would trump the LO's fiduciary.  We're splitting hairs here but I'm interested in your opinion.  Who's ULTIMATELY responsible for the buyer's financial well being? 

08/04/2007 11:31 AM by America's #1 Mortgage Broker

I am a mortgage broker and my wife is a Realtor.  While in many cases I agree with you in our case we both work to the highest and best advantage of the client.  This does not mean we do not make money on each and every transaction however we are mindful of the fact that clients usually do find out that they have been taken advantage of and we go out of our way to err on the side of caution.  Also we both know that referrals are not only the best referral source -- they are also the cheapest!  I am constantly amazed by how many mortgage brokers are so transaction based rather than relationship based.  Over time almost every loan I write leads to a second loan from a referral within a year.  That is easy lead and inexpensiver lead generation.

Alex

08/04/2007 11:32 AM by Alex & Cadey Charfen (Distressed Property Institute, LLC)