What if Starbucks Was Run by a Mortgage Broker?

By
Real Estate Technology with BoomTown

Some things would be different, that’s for sure:

  1. There would be no prices on the menu.
  2. The exact same coffee drink sold out of the same location on the same day would be sold at different prices to different people.
  3. Employees would be trained and encouraged to maximize the gross profit on every cup of coffee sold by setting the price as high as possible for each customer.
  4. Employees would be incentivised to push the coffee that made them the most money, even if they knew the customer was allergic to it, enforcing a strict no refund policy.
  5. Coffees advertised as decaf would, in fact, pack more punch than a triple espesso.

How long do you think it would take the coffee giant to fall? Not long.

Now, flip it around: What do you think would happen if mortgage brokers ran their business like Starbucks? They’d have a line running out the door, too.

But alas, this isn’t the case. Instead, you have the Mortgage Cartel circling the wagons to protect their right to earn money the way they always have—taking it by farce.

Todd Carpenter of Lenderama and Loan Bark! posted an interesting piece on YSP and APR, making the argument that a borrower should focus on what they’re paying, rather than what the broker is making. Easier said than done.

I can appreciate his position that it’s nobody’s business what the broker actually makes, provided the borrower’s getting a “good deal.” However, defining a “good deal” is a highly subjective affair. It goes well beyond comparing the APR’s of 3 or 4 quotes and depends very much on who’s doing the evaluation. A borrower may have gotten the best deal of those presented, but wound up paying much more than they could have. Not just a few dollars more, mind you—but tens of thousands more.

Attempting to compare mortgage deals using percentage based methods is flawed. Brokers should put out a ‘menu’ of prices. Why?

  • Rate Shopping/Quoting is a crap shoot. The problem here is even the best quote with the lowest APR out of the five brokers you’re shopping guarantees you nothing but the best deal between five brokers—all of which are looking at you as their next meal ticket.
  • APR is directly tied to loan amount. Think about it: Where $5,000 in fees may be a significant increase between the underlying interest rate and the APR on a $150,000 loan, the same increase may seem trivial on a loan amount of $500,000. The point is, the difference in APR may appear negligible to a borrower on higher loan amounts, while the actual financial downside can be huge.
  • Annual Percentage Rate. APR may be an easy way to compare the same deal from multiple brokers during the estimate stage, but unfortunately, by the time you make it from the initial disclosure to closing, that can change dramatically—and by then, it’s usually too late. Also, consumers tend to compare the APR to the interest rate they were quoted, if the APR is not much higher than the interest rate, consumers may mistakenly take this as the sign of a resonable deal.

If you haven’t figured it out by now, The XBroker is a staunch advocate of the 100% transparent mortgage transaction. This means truthfully disclosing every bit of YSP—down to the individual program, volume, and other bonuses offered by the lender.

My message rubs most Brokers the wrong way because they see me screwing with their earning potential. To them I say, if YSP is intended to be used to pay for closing costs—which is its expressed purpose—then they why does it keep turning up in the brokers pocket?

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Rainmaker
70,293
Jeff Corbett
BoomTown - Charleston, SC

Derek and Marina...The post is meant to be thought (and comment) provoking...The comment threads always contain the better dialogue...so many opinions, all great to hear. 

Robert...watch out for The XRealtor, Fall 2007....  :-0 

Thank you everyone for taking the time to respond...compliments, questions, concerns, opinions...again, all great stuff.

Oct 24, 2006 05:12 PM #29
Rainer
13,153
Scott S. Kamiya
Honolulu, HI
CRS, GRI, SRES
This is great.....I knew there was a reason why im a realtor and not a loan officer.
Oct 24, 2006 06:32 PM #30
Rainer
53,146
Ron Withers ----Retired Mortgage Professional
Kissimmee, FL

Over the years, as a lender and a mortgage broker, I have beat the debate on the Rate/APR/YSP to death. It is no longer an issue for me. When my clients ask me about these things my response is always the same. The terms and costs that I am quoting to you are competitive and they are factual given a reasonable/acceptable tolerance from my original GFE (no bait & switch). I am not the highest nor the lowest. If you shop long enough you will probably find a better deal. What you can reply on from me is truth and service. I will tell you what you need to know and not what you want to hear. I am available/accessible (evenings & weekends). I am with you from application thru closing, present at closing and beyond. What is important to you will be important to me!

I seldom lose a pre-qual to a competitor. In 30+ years I have lost 1 loan at the closing table. In the last 2 years I have had only 2 loans denied and they where due to property issues.

Be honest, forthright, competent, and provide good old-fashioned service and life and business will march on!

Oct 24, 2006 11:21 PM #31
Rainer
17,425
Dennis Serra
Meridian Business Group - Schaumburg, IL

I believe the capitalist system is self correcting.  Although “Greed” can be evil it does have its place.  It breeds “Competition”.  And competition has more to do with what consumers get charged than any other factor.  More regulations and rules just serves the crooked as it gives them more places to hide.

 

I would be curious to hear what XBroker deems as reasonable compensation for a LO or broker.

Oct 25, 2006 06:03 AM #32
Rainmaker
70,293
Jeff Corbett
BoomTown - Charleston, SC

Dennis:

http://thexbroker.com/blog/fixed-fees-for-a-broken-business.php
Oct 25, 2006 06:26 AM #33
Rainmaker
70,293
Jeff Corbett
BoomTown - Charleston, SC

Here too...An AR post, almost the same as the prev. link...

http://activerain.com/blogsview/16414/Brokers-and-Bankers-Must
Oct 25, 2006 06:36 AM #34
Rainer
48,480
Lisa Dunn
Edina Realty - Minneapolis, MN
www.TwinCitySeller.com

Thanks for the open discussion and letting me be a fly on the wall!  You could blog about this for sometime with your comments if you could "dumb it down" for the rest of us. I don't believe I have a full appreciation of all the issues you've bantered about. I'd love to learn more!

Oct 25, 2006 07:32 AM #35
Rainmaker
70,293
Jeff Corbett
BoomTown - Charleston, SC

There is no such thing as a stupid question!!  Fire away Lisa...

Some people had to consult a dictionary (see prior comment), so dont feel bad at all ;) 

Oct 25, 2006 10:19 AM #36
Rainer
31,280
Jessica Hughes
Ambiance Staging - Boulder, CO
Wow, this has been an enlightening read, although, truth be told, the curve was much too steep for me.  I agree with Lisa here though, if you could dumb it down for us laymen, I'd sure appreciate it!

Jeff, I have a question for you.  Do you know anything about lending practices in the UK and how they compare to lending here in the States?  From my experience (living there for 5 years and owning 2 homes) I didn't feel as though their institution was as corrupt as it is here.  For one thing, I know that the qualification process is much stricter and foreclosure rates are much lower.  Does anyone have any thoughts on this???

Oct 25, 2006 12:11 PM #37
Rainmaker
70,293
Jeff Corbett
BoomTown - Charleston, SC

Ill offer the relative little I know...

 The US Mortgage Backed Security market 'securitized' mortgages about 10 years ago, causing a HUGE influx of secondary market buyers and sellers into a market that was traditionally very similar to the UK...conventional and conservative. 

This 'evolution' of the marketplace and the advent of technology within has increased the velocity of capital, thus increasing the American Lenders ability to, well, lend.  The result you get is 'easy money' in the USA, when compared to the UK.    

You hit the nail on the head...stricter qualification guidelines = less default = less foreclosures.

Here are some Wiki-fied definitions of the two markets....

Oct 26, 2006 04:39 AM #38
Rainer
31,280
Jessica Hughes
Ambiance Staging - Boulder, CO

Thanks Jeff!  Notice how Wiki calls the UK lending market innovative a number of times? Maybe something to research a bit more......... I personally think that we should emulate the UK market more.  They've proven that de-regulation doesn't have to mean chaos (unless you're talking about the British rail system that is ;) )

And I would say that I prefer the estate agent structure much better as well, but I might get tarred and feathered...... so I won't.

Oct 26, 2006 07:07 AM #39
Rainmaker
70,293
Jeff Corbett
BoomTown - Charleston, SC

Yes, yes...unfortunately it would be a task equivalent to pushing water back up-stream. 

Hopefully we can administer some checks and balances within this market to curb the chaos :)

Oct 26, 2006 07:12 AM #40
Rainmaker
275,577
Ken Cook
Content, coding, marketing, host. - Marietta, GA
Content Marketer/Creator

Jessica - the institution is not corrupt - some members of the institution are corrupt and have low ethics. I still don't know what Jeff does because I haven't taken the time to investigate although he has requested a phone conversation next week and we shall speak.

As a lender I am proud of what I do - I am proud of my employees. We are very focused on being not only compliant but being the type of lender to whom clients return time after time - and we are. We have nearly 40% repeat clients and a large percentage of the remainder are referrals. I think I have an idea what Jeff does but price fixing and exposing the "dirt" isn't going to change either the industry or what the general public client can expect from the industry.

Here's a "real world" example. Let's take the same exact loan amount $185,000 let's say. Then let's say that both clients are looking at a fixed 30 term and this is to purchase a new home.

Client (A) has credit scores averaging 750, has a DTI of 30%, has been at the same job for 10 years, never had a late payment, default or judgment.

Client (B) has credit scores averaging 590, has a DTI of 52%, has been on the same job for 6 months but in the same industry (line of work) for 2 years and has had 3 credit card late payments of 30 days each in the last 2 years, has a judgment on a collection and defaulted on a loan resulting in a charge off 5 years ago.

Both clients want a no down payment loan so they can do the smart thing and keep their cash in their pocket.

Client (A) may get an interest rate of 6% and pay 1% origination with 1% YSP.

Client (B) may get an interest rate of 7.35% and pay 1% origination with 2% YSP.

Doesn't look fair at first glance, does it?

Now we're at risk assesment. I, me, Ken Cook, has an employee who is going to decide whether or not to write the check (because it is ME who writes the check, not the applicant) to purchase this property on behalf of the client and allow them to repay me on a monthly basis (or the investor to whom I sell the loan).

Furthermore my underwriters are most likely going to get everything they need from Client (A) because they care about their business and have excellent records but they are going to have to "pull teeth" to get the required documentation from Client (B) who's sloppy and carefree lifestyle caused them to have bad credit in the first place.

Same loan amount. Same loan solution. Lot's more RISK and EFFORT for Client (B).

Let me be 100% honest with you: "Fair" lending acts are intended more to "level the playing field" for borrowers than they are to rid the industry of predatory lenders. Although there are some lenders who I would classify as predatory and they are the "big guns" you see advertising "no closing costs", "fixed cost loans", etc. The example I cited above is a very real example. It's an example where risk and amount of time required dictate pricing. In fact, the "big guns and dot coms" you see advertising on TV won't even lend to some of the people other lenders will. In the end, many lenders don't want to do loans under a floor level in states with FLA's at all because the risk outweighs the return.

The problem is not regulation. The problem is ACCURATE education to the client. I do a minimum of 2 completely free 3 hour workshops every month which teach applicants about loan pricing, secondary market function, pre-payment penalties, adjustable rates, indexes, margins, cap rates, floor rates, etc. In that seminar I tell clients how to read a GFE and TIL and see the YSP. I also tell them that FIXED COST LOANS are the best way to take one in the keister if they don't know about rate pricing.

Making loans cheaper is not the way to fix people's stupidity which causes them to have bad credit and bad business practices raising their level of risk to the lender/investor. The way to fix it is to educate the borrower to cherish good credit, use good business practices and money management skills and STOP OUTSPENDING THEIR BUDGET.

That's not my fault and it's not my fault if your credit risk is too high for par pricing. If you (any borrower) presents a higher risk or causes more effort to be required to process and underwrite your loan it's going to be you who pays for that work and risk. Or you can keep renting a trailer.

Oct 26, 2006 07:38 AM #41
Rainer
16,405
Allan Pape
Austin, TX
A very interesting comparison (Starbucks vs. mortgage office).  Thank you for the perspective...something to think about.
Oct 26, 2006 07:43 AM #42
Rainmaker
70,293
Jeff Corbett
BoomTown - Charleston, SC

Ken...What a comment!  Your articulate explanation of credit risk pricing factors and circumstances is worthy of it's own post, and something I would like to refer to (if I may) in the future.  But please wait to pass judgment on exactly what I am proposing until we can speak ;)   It's much more than price fixing and rolling dirt.  To label me as another potential 'Discount', fly by night idealistic radical, is short sighted but understandable, considering it is difficult to discern what my actual 'play' is.   For someone who preaches transparency, I'm not doing a good job of practicing it, granted, but for well founded reasons that we shall discuss.

I have gotten the point that many individuals who read my posts think I am slinging mud indiscriminately at the whole mortgage industry and everyone in it is a crook, so let me clear that up.

The majority of individuals who practice mortgage origination have NO business doing so, for at least one of many reasons...i.e. relative inexperience, shallow knowledge base, high greed factor, focusing on the transaction and not the situation, I could go on.  When you allow unqualified individuals to practice as financial experts in an unregulated, veiled, complicated and lucrative trillion dollar industry, it really is only a matter of time before the institution consumes or corrects itself.

Ken, you are in the minority of mortgage originators (general term for anyone who sells a mortgage to the public) as (i'm quite certain) most members of this community are.  It is people and businesses like you and yours that maintain some sort of ethical assemblance in this institution.  Alas, for every Ken, there are 100 mortgage dirt mongers...it is the disturbing truth.  There are not a few bad apples spoiling the bunch, the whole orchard is infested...businessmen like yourself are a genetic anomaly, impervious to the predatory practices that are so commonplace; they often get shuffled into a generalized bucket of back page news.   Very few people understand the repercussions 'white collar' misdealings.   But if a mortgage broker broke into a client’s house and stole $1000, the 'blue collar' crime would make front page news.  Getting tangential....*focus*

I love the mortgage (and real estate) industry...they are my passion, my living, my fiber. I am here to protect through education coupled with a solution.  Brutal honesty with the right amount of ‘flair’ can ruffle feathers and wake people up, which is my intent, just not towards people like you Ken :) 

Oct 26, 2006 08:38 AM #43
Rainmaker
70,293
Jeff Corbett
BoomTown - Charleston, SC

The comment thread of this post has caused me to begin writing it's antithesis: 

'What if a Mortgage Brokerage Was Run by Starbucks?' 

Oct 26, 2006 08:41 AM #44
Rainer
31,280
Jessica Hughes
Ambiance Staging - Boulder, CO

When I say that the institution is corrupt, surely you didn't think I meant that every mortgage lender is unethical did you?

Not all priests are pedophiles either, but if you have an institution that turns a blind eye to such behaviour, IMO things need to change...........

Based on a conservative estimate predatory lending costs Americans over $9 billion a year. I did just post a blog about unethical lending

Oct 26, 2006 11:54 AM #45
Rainmaker
275,577
Ken Cook
Content, coding, marketing, host. - Marietta, GA
Content Marketer/Creator

Jessica - you finally inspired a full blog: http://activerain.com/blogsview/17139/Starbucks-has-nothing-to

The leaves are beautiful, the mountains look like candy and it's raining like Noah's flood. So I had time to write. 

Oct 27, 2006 02:24 AM #46
Rainer
15,796
Lance & Elaine Wells
Connect Realty Boise Eagle Idaho - Eagle, ID

This blog sure created a fun read of the tread.

Nov 18, 2006 02:42 AM #47
Anonymous
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Jul 07, 2011 12:16 AM #48
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