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More Mortgage Industry Punditry ... and a loaded question

It was about eighteen months ago that a friend of a friend called to ask if I would glance at a settlement sheet. Chris, a busy woman executive, was scheduled to close a refinance loan the next day and sensed that something wasn't quite right after learning the amount of her new (proposed) monthly payment.

Chris, I later learned, had responded to a letter sent to her house by an industrious mortgage broker. Her intentions were to lower her interest rate while pulling out a little cash. It sounded reasonable enough considering Chris' lending profile. She is highly educated and a successful executive for an international spice company. I'd been to her waterfront home once, or twice, for parties and knew that it had to be worth more than a million dollars. A loan amount of $450,000 certainly seemed non-problematic to me. Also, Chris struck me as the type of person who would maintain an impeccable credit rating. As it turned out, I was right!

At first blush, the HUD-1 appeared heavily laden with fees. There were a couple of points showing along with a generous display of junk fees. Most disturbingly, the broker was walking away with a yield spread premium (YSP) that totaled $19,000. I asked Chris for permission to discuss her loan with the loan originator.

Initially, the woman was congenial and talkative. She became defensive only after I questioned the YSP. I suggested to Chris that she post phone closing until someone could explain why she was paying a premium spread. The next day, I heard from the loan originator's manager who accused me of trying to steal the deal. It was, of course, a ridiculous and unfounded accusation. I am nothing more than an unlicensed industry observer these days.

But, make no mistake, I've been around this business long enough to know when someone is being screwed.

A long story short, Chris settled about two weeks later with a different mortgage broker. The fees and charges came to $4,000 or so. The interest rate was much lower than that proposed by the original broker. There was no YSP charged.

Do I believe that mortgage professionals are deserving of their fees?

I do, but there are limitations to reason.

Repeated studies have concluded that women with above average incomes and credit scores are likely to pay more for mortgage money than men with less favorable lending profiles. Women of color are most likely to suffer lending abuses and least likely to realize financial security through the traditional path of homeownership.

The YSP is almost always a factor when predatory lending practices are at play.

I reluctantly accept the need for the YSP in residential transactions. It is of considerable value to homeowners when employed by honest, well-intended loan professionals. We know, regrettably, that this is not always the case and that the YSP is all too often used to victimize trusting consumers.

I'd like to make this post a bit more interesting by asking a hypothetical question!

Let's assume that I was still a title company owner and didn't know Chris personally.

Let's also assume that the loan was referred to my title company by the original mortgage broker that attempted to charge a $19,000 YSP.

As a licensed title professional: Did I have an obligation to the consumer to question the obviously exorbitant fees being charged?

Would it have been inappropriate for me to question the fees?

What's your professional opinion?

Note:

The original post read: Do I believe that real estate professionals are deserving of their fee?

I decided to make the question more specific by revising "real estate professionals" to read "mortgage professionals" because the generic nature of the phrase was questioned by a number of readers.

Posted by Ed Rybczynski on 12/15/2007 06:04 PM

Comments (24)

predatory lending, yield spread premium

24 Comments on More Mortgage Industry Punditry ... and a loaded question

DEC

2007

Hi Ed, by the number of responses I would say nobody want to answer your hypothetical question! First, good for you telling Chris to move on...that YSP was out of sight! Busy people are usually very trusting of the professionals they hire.....to a fault I am afraid.

Your hypothetical is a different matter. Most closers....which is what you will have here in Michigan will not question the fees from a lender. Even fees being over the top! Many times the lender actually goes to the closing. I have seen a few of these where I was not representing the buyer....I was on the sellers side. I look at the HUD-1's very closely but the closers do not question the numbers unless they don't fit with what was supplied by the lender docs. Sad but true. Nice post Ed.

Why is the question below in your post??

"Do I believe that real estate professionals are deserving of their fees?"

Seems to me that there was no "real estate professional" involved in this refinance. This was a finance industry professional. She was a refinance, not a purchase money and I don't see where she was referred to the lender by a real estate professional.

The second question would be "what are the standards or rules by which title company owners operate???

I know that if I were a title company owner and that file was sent to me for closing, I wouldn't close it. I'd send it back.

Why didn't this consumer get a good referral for a lender?? Did she hear a commercial on the radio??? Or, on the Internet???

Scenarios like this always leave me with more questions than answers. Such as, "How did she get involved with these highbinders in the first place?"

As a real estate professional, no client of mine will ever be subjected to a highbinder lender, unless it's a brother in law.

The poke at real estate professionals fee also had me wondering what was going on..... As far as pointing out a gouging of nearly 15k in fees I cannot image any consumer standing accepting such a deal.

Gary

I purposely omitted that Chris was somewhat argumentative when I recommended a delayed closing. She has a hectic schedule and wanted the settlement to be done and out of the way.

Real estate agents and loan originators have to understand that title companies have a fiduciary obligation to consumers. Once a deal is referred, the consumer becomes a mutual client and the title company has no legal duty to the real estate agent or loan officer. It's a tough concept to comprehend.

Ten years ago I wouldn't have questioned the fees exceeding $30,000 that were being charged to Chris. I would have been more interested in protecting my relationship with the mortgage broker. Today, I would hold up the closing if placed in that particular situation.

I learned my lesson the hard way and I hope that others learn from my mistakes.

Lenn

You would think that I would have learned by now to be exceeding guarded with phraseology when you're known to be in the house. I was referring to real estate professionals in the generic sense which would include finance industry professionals. Or so I thought.

Chris received a solicitation in the mail and assumed it to be safe to deal with a duly licensed mortgage broker. I believe that it's an assumption that every consumer has a right to make.

Predatory lending has reared its ugly head in every sector of our society. Successful (trusting) executives are as likely to make bad choices as anyone else. BTW: Chris is an accomplished chemist and quality control expert who took for granted that her loan officer wouldn't take advantage of her.

I have seen two mortgage brokers do this and they were not MY referrals - I repeatedly asked my clients to get a second opinion!!! As a real estate professional, I have personally stepped in for my own clients..

Dan

It wasn't a poke. I include title agents and lenders along with real estate agents under the umbrella of real estate professional. I don't find it to be a stretch since real estate is the broader topic addressed by the disparate disciplines.

The fees in this case exceeded $30,000. The mortgage broker apparently preyed upon someone who was busy and lacked practical knowledge as to lending practices. Chris could afford the new payment and would have hesitantly closed had I not intervened. I doubt if she would had ever questioned the transaction at a later date.

I've seen more than one settlement sheet with similarly abusive charges.

Courtney

Thank you for your insight. We need to learn that second opinions aren't threatening to us personally or professionally, they're a good thing for consumers.

Ed, I had a similiar situation happen to me once. A past client was refinancing the next morning. He called and said will you look at this something doesn't seem right. I was in bed.

I got up, he faxed it to me.

I told him the fees were really out of line and NOT to close tomorrow. The lender was mad. Oh well, he trusted me and I sent him a lender and he saved 9,000.

I don't know about the title companies, but according to a comment you made, it would be your job to bring it to the attention of the buyer.

Missy

Title companies have an obligation to the consumer regardless of the source of the referral. I hate to be so blunt, but in a strict legal sense, title companies really owe nothing to the real estates agents or loan officers that keep their doors open. The obligation of loyalty flows directly to the consumer. It's a difficult line for title companies to walk at times.

I've learned so much by blogging over the past year. Many of my Title-opoly readers are regulators and elected officials. I often exchange emails with them and have even met some of them in person. It's important to report suspected cases of predatory lending to state regulatory officials. Regulators can't take action if they're not aware of infractions.

Actually, your friend did the right thing. She got your opinion and you did the right thing by telling her she was being gouged.

With all of the noise and news about the housing industry and especially the mortgage side, you'd think any sentient person would get several opinions. Of course, looking at just one pricing sheet, they wouldn't have the foggiest idea that what they saw was out of line. The mortgage brokers rely on that. Fact is, you would not likely get the loan to close. Mortgage companies and brokers who scam the public have arrangements for "friendly" closers. They can even use notaries who have no opinions about anything.

I had a buyer in February who insisted on using an Internet lender and they referred him to a Closing Notary. All in all, after getting the GFE, HUD-1, ranting and raving for 2 days, I managed to save him almost $7,000 just by getting rid of junk fees and incorrect billing. But, I had a fiduciary to my buyer through my BA Agreement. I'm not sure a title company is in that position and I know a closing notary isn't.

We in the industry assume that the consumer knows more than they usually do. In fact, the consumer is likely to accept what they hear because they don't want to say the words, "I don't know". I'm sure the lender that spoke with your friend had a good line and aura of knowledge and authority.

She's lucky she had someone to consult.

But, back to your original question. I couldn't answer, whether or not I could tell the customer that she was being bilked. I don't know what is permitted under the rules that govern title companies.

This is one of the reasons mortgage brokers are getting licensed. How that is going to work, I don't know. It might be like putting lipstick on a pig.

It's a lot more complicated than one would think.

Lenn

As I was just saying to Missy, I've learned so much thanks to blogging. I now have invaluable contact with a number of state regulators and public officials. It's so very important, I'm told, to report predatory lending to state regulatory officials. Regulators can only investigate the cases of which they're aware.

Sigh....I think I see the same pattern reappearing over and over again. Most real estate professionals just don't "get" how the public could be duped unless they were "careless." This is NOT the case. Not everyone is a Realtor or a loan officer! Professionals are very, very busy people and they have precious little time to work out the details of a loan instrument that they have little understanding of in the first place while working 90 hours a week at their CHOSEN profession! This is why the seek PROFESSIONAL help. But when they feel obliged to become experts in order ensure that they won't be fleeced - they cease to understand why they must pay for professional help - and I well understand why!

DEC

2007

Ed,

Everyone is entitled to make a living but those figures sound pretty high...I'm not one to decide what is right. Maybe I need to change my profession:)

"Regulators can only investigate the cases of which they're aware."

I believe that they could do a LOT more. I have a friend with FDIC and he has described to me the regular examinations that he does of banks in his area.

The FDIC has developed simple auditing systems to reveal anomolies with loan defaults, payment records, lending patterns, etc., designed to uncover patterns of predatory lending.

HUD has the same ability but they focus their efforts on only in certain economic areas and rely too much on the non-profits and testers because they want to funnel money to their cronies. That's another story.

But, the AGs of all stats could easily identify patterns of high interest loans, YSP, etc. They just don't because no one has given them the kick in the butt that they need to do their job. It is their job to monitor lenders. They just don't do it.

Once an examination of a bank or lender's books shows an above average rate of interest charged on an above average percentage of loans, they know what's going on. The information is there.

What are they doing??? Stats regulators don't need complaints to investigate. They have the power, just not the will.

Oh, they also have subpoena power.

Ruthmarie - I think you've captured the paradox that is the future of real estate. Fee structures are likely to move downwardly if consumers feel like they're forced to compensate for inadequacy among licensed professionals. I use the word "inadequacy" in the broadest possible context to include not only those who are poorly trained, but those who would cheat, lie, and steal as well.

Neal

A decade ago, I would have agreed with you about the right of everyone to earn a living, but now I feel a need to add a caveat or two.

Your license comes with a legal duty to question matters that appear out of line. Thirty thousand dollars worth of lender fees for a four hundred and fifty thousand dollar loan are a cause for real concern.

I'll go as far as to speculate that a title company that would have closed Chris' loan in its original form would have had criminal culpability. There would have been liability from the perspective of class action litigation as well.

In the past, it wasn't uncommon for real estate professionals of every ilk, to turn their heads and blindly accept that everything was ok. That day is gone. It has been replaced with an age of staunch consumer advocacy.

I tell every audience: If you are uncomfortable acting as judge and jury of your peers, find another career.

I hate to sound so serious, but I am.

Lenn

Admittedly, complacency runs rampant among regulatory departments in most states. We're thankfully seeing signs that regulators are becoming proactive when it comes to consumer abuse. Erin Toll and her concerned staff in the state of Colorado are a perfect example. It was a member of Erin's staff that this past week asked me to remind everyone to report wrongdoing to state officials.

Did it make sense to report suspected abuse in the past? Probably not because regulators had a reputation for doing little or nothing.

I believe that we're witnessing a paradigm shift that favors the interests of consumers in real estate transactions. I also believe that we're entering an era of unparalleled govenmental intrusion in housing markets.

Ed,

Where have all the title professionals gone???

Underwriting counsel would suggest that the title agent has no business in counseling the borrower...agents shouldn't even explain mortgage docs, according to title insurance underwriters.

IMHO, that transaction going through would depend on the title insurance closer...If the mtg broker settled at a title closer who he knew would look the other way and allow his ridiculous YSP...A mortgage broker who has settled with our company previously would know they couldn't sneak that one by us...we question anything unusual by anyone involved in the closing process!

Thanks, Fran

Fran

It's an interesting dilemma that you raise. I've met many title professionals who feel that they're under no obligation to question anything. There's also a dangerous tendency to rely solely on the garden variety disclosures provided by title underwriters and lenders.

I suggest that title agents prepare disclosures for everything. I certainly would have one signed whenever a YSP is charged.

People need to understand that title agents have more legal liability than any other player in a transaction. The feds hold you to the same professional standards as a doctor or a lawyer. There's no making excuses when something goes wrong.

Ed,

As an aside, when RESPA was introduced in the mid 1970's, someone was astute enough to number each line on the Hud-1...that presumably would make it easy to track and analyze data on a national or regional basis by computer...over 30 years later and with high speed computer capabilities, someone has dropped the ball...where is all that info??? RESPRO!!! I'm telling you, there's too much clout there...and it's not consumer friendly!!! Thanks, Fran

It is our personal and professional responsibility to step in against this very behavior by those 'alleged' professionals in the business who capitalize on the very consumers that we are entrusted in serving.

Your personal experience alone should serve as a testament to others who imagine prosecution would never happen to them.

Thank you for blogging as much as you do. You share some powerful words and lessons.

DEC

2007

Ed - I cross reference everything I possibly can in the transaction. I'll check the property appraiser site and Zillow to see what the property is worth. I'll then compare it to the appraisal and immediately know if something is fishy. In dealing with the lenders you begin to know off hand what kind of rates and fees they charge. Of course I don't get the credit report so I can't tell if what they are getting is good for them. However, I do look at the fees being charged and again, I'm not one to say what you can charge but I do know what is preposterous.

Like you stated, they send it to a title company that is looking only to please the broker and/or lender because they want their business, so they look the other way. I'm sure even their fees were enormous.

Curious, did she close with the same title company?

Dawn

Chris absolutely did not close with the original title company that was selected by the original mortgage broker. I wouldn't have allowed it. The title company is always involved in predatory lending abuse of this type. Always!

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