So I caught a little flak over my explanation of the LTree and it's business model.
LINK

No biggee.
If I get this right, I am the "Flak-er", and they would be the "Flak-ees".

The Flak-ees reactions ranged from the standard issue knee jerk "Duh", to eye opening wild disbelief.


Let's do this in two parts:

Part One - the answer to the Dee-Dee-Dee side, (Carlos Mencia reference)...

Some of the Flak-ees maintained that the Tree was and is doing what it needs to do to stay in business. In order for the Tree to continue offering the great services it does to us poor consumers, they need to sell the leads. "Wadda you think? They should just give 'em away?"

Uh, no...
I have no problem in their selling the fruits they have grown.
I do have a problem with their trying to deceive both the buyers of the leads and the customers.

Advertising has been called the business of half truths.
Some might argue that there's far less than half of a truth in any advertising.
But I'll say, if the banks were competing you indeed would win.
That is the truth. But the truth is, the banks can't really compete.
For many reasons, the playing field is stacked against honest competition.

With the Tree sending leads to their own mortgage company first, they get a jump on the competition. If they really wanted you to know they had a mortgage company wouldn't they have called it something like Lending Tree Mortgage?

Home Loan Center doesn't sound like L.T. at all does it?

Then there is matter of human nature.
I'm a good guy, but I know there are plenty of less than honorable people out there.
As I have said before, they can lie thru their teeth about rates and fees all the way to the signing table. There's nothing illegal about it. It's called Bait and Switch and I see it everyday.
And guess what? If they know they have to beat 3 other liars to get your business, guess what they are going to do?

The best liar wins.

I have a great solution.
Make them tell the truth!
How?

The "Mueller Act"!

Force the lenders (you figure out how) to quote you a rate, a term, a prepay, the total non-recurring closing costs, all fees, everything, and then set that quote in stone.
No changes - period!

Then, if the loan you get isn't what they quoted - they have to pay the difference plus let's say $10,000 in damages.

Furthermore, take the quoting away from individuals (loan officers who work for commission) and put it in the hands of the corporation. Not that corporations don't lie - they'll be more apt at looking at the bottom line.
In short, fully guarantee the quote.
Sounds like a sound and reasonable idea - right?


Now let's step back and see what happens.

From the Lender side:
The lenders will now be caught between trying to compete but not underestimate the rates and fees. They know there are 1,000 ways a loan can change from application to funding.
Many of which are completely unseen this early in the process.
As a lender, you can take a calculated risk and hope nothing increases the rates and fees, that you can close before your lock expires, that the supporting documentation comes back as stated.
But that's a risk. Guess wrong and it costs you money.

So the business is going to price these with a certain amount of cushion.
How much? - Nobody could tell for sure, but a cushion for sure.
Cushion means... not the lowest rate possible, yet low enough to win the deal.

Let's go over to the consumer side:
I'll take two different borrowers, one who has it all together and a super clean deal with no surprises anywhere. We'll call him Mr. Clean.

The other one has everything imaginable come up - not necessarily by his own fault. Both have identical income, credit, and debts. He's Mr. Calamity.

Mr. Clean is doing a refi on his condo. He locks for 15 days (cheaper rates), the appraisal is done and comes back perfect, the prelim as clean and clear as well. His HOA does what they need to do and keeps the records they are supposed to.
Working with any reputable lender, he would get the absolute best rates and fees.

Mr. Calamity, doing the same refi, the same amount, locks for 15 days as well.
But then the poop starts hitting the fan.
His appraisal comes back with issues - there are questionable comps, they need more pictures, or a zillion other things. The Prelim comes from title and shows tax liens. It also shows his ex-wife who happens to be on safari with the new husband. Ooops. We need a quit claim deed signed. His condo turns out to be unwarrantable, the parking is under the building as opposed to outside the footprint, the loan he applied for also says it needs to be 75% owner occupied complex wide. Oh, and there is pending litigation from someone who tripped on a sidewalk last month and is suing the HOA.

Each and every item listed added to the rate, points and fees of Mr. Calamity's loan.
That's just a couple of items that might go wrong.

So under the newly enacted "Mueller Act" the lender that quoted both these guys would get the same loan. Not having a crystal ball, the lender would have quoted the same to both. Got it?

But here's where market forces screw it all up.
Mr. Clean - had he gone the traditional route, would have gotten better rates and fees.
Why? Because the lender had to build the risk of unknown factors into the original quote - the cushion. Mr Clean paid more for his refi then he had to.

Mr. Calamity however made out like a bandit.
Not intentionally, but the lender would have to honor the quote.
(eat the difference)
His real rate and fees would be incredibly higher.
Missing his lock might have cost him a 1/4 point.
Tax liens, pending litigation, HOA cert. all would bump him out of an A paper loan.

The lenders, learning from their mistakes on Mr Calamity would adapt and build in a bigger and bigger cushion. Unfortunately imposing this cushion on the next Mr Clean.

So in the end, the "Mueller Act" would fail in what it was enacted to do.
Mike Mueller would be impeached,
the Act would be repealed,
and the lessons learned would be taught to high school history students across the US for years to come.

Ok, how's this idea instead?
We educate the consumer to make insightful decisions, by working with trusted professionals, who understand the consumers objectives and goals.
I like that better.

Next time we'll look at the "They don't really do that do they?" side in Part Two