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I said Can not Should, May not Must! Buying Into Trouble 101

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Real Estate Technology with Content, coding, marketing, host.

This may get offensive. If so I do not apologize :)

I, like any other self-respecting business person, make more commission on a higher value deal that on a lesser value deal. So you would think that as a lender/broker I would want the highest loan amount I could possibly squeeze out of an applicant. If you thought that, however, you would be mistaken. (Mistaken also means wrong.)

You would further be inclined to believe that when accepting a loan submission from a broker to be funded through our lending arm that I would also prefer to have the maximum loan amount available for the applicant. This also would be an incorrect assumption - or wrong presumption.

Far more important than these is to have a pleased, viable, return client who is eager to refer their friends to Novation Mortgage. Keeping clients viable is why I spend so much time on AR ... er, I mean doing research and tweaking my publications and seminar material.

What happens becomes somewhat of a dilemna to me even though the customer is always right. (Except of course when they are wrong.) You'll need to know that we are a subprime lender although we broker A Paper deals as well and do quite a number of them. I chose to only be a subprime lender because that is the area of the lending industry wherein you find the most "trouble". I will tell you that I generally make between 2 and 3 points on every subprime deal on the broker side (origination and yield) and on the lender side we get one or two more points depending on how hot the secondary market is and how good the secondary packaging is. I don't do this business as a charity - I do it because it needs to be done and, yes, I like feeding my family. I tried poor and it's really not for me. I also disclose YSP on direct lender loans as well as on brokered loans and teach my clients how to understand and use YSP to their benefit.

You don't like that pricing? You save up your pennies and you be the lender. Those numbers are fair and required to run a reliable business. 

So, I bring a prospect into one of the regularly scheduled workshops which generally includes about a dozen or so other folks. These are 2.5 hour shops done in one of our conference rooms, for no charge, with the intention of "smartening up" prospects and turning them into intelligent borrowers. It doesn't always work out that way.

I spend no less than 15 minutes talking about debt-to income ratios and why, even though subprime allows up to 60% in some cases, it's so important in making the right decision for you. I strongly recommend that you keep your spending under 40% of your gross income. This includes your credit cards, cars, student loans, etc, and your home. THIS MAY MEAN LIVING IN A MODEST HOME. But I can promise you that if you live within your means and employ some very basic wealth management skills it won't be too long until living within your means has much better results than you may have expected.

I think all they hear is "Wealth Management Plan".

One of the hardest things to do is to convince people they really can't afford a purchase when the industry says they qualify. Yes, I know most LO's/brokers/lenders and agents are cool with that. Bigger sales price/loan amount = more commission. I'm not stoopid. The other thing to do is to convince Bobby Blue Collar that he actually does need and deserve a wealth building plan. I bet he'd jump on it if their were no such Robin Hood ripoff as Social Security.

I'm also totally against the absurd idea behind fixed commission pricing. Just thought I'd throw that in.

Let's take a look at how an acquisition transaction can create trouble for the client and everyone depending on the deal to stay liquid into the future. Here, in a flash, is what you hear from a client who has prequalified for a loan when there is no subject property in play and they are about to start shopping (I know, that's a pipe dream. If you're a Loan Officer you probably found out about the deal 3 weeks before the contract closing date): "Look honey! We can get a house worth up to $450,000!"
Here is what the truth is: At 55% DTI they can indeed (but should not) qualify for a rather nastily priced (due to risk) $450,000 loan. This is where I say, "Well, yes, that's what the industry says. What does your plan for creating and maintaining wealth say?" 

Client: "Wealth plan! Are you kidding? We don't have any wealth! We live paycheck to paycheck!"
Me: "Right. I see that. (And I see why you never will unless it's an accident.)"
Client: "We can spend that much and our equity will build faster because it's a more valuable home - like you said in the workshop."
Me: "I did say that. I also said that if you leave yourself with no disposable income, which is what a payment on a $450,000 loan would do, it could completely devastate your wealth plan and financial well-being with even the slightest bump in the road."
Client: "What about one of those Payment Option ARMs you talked about in the seminar. You know, the one with the low minimum monthly payment?"
Me: "You mean the one I recommend for people who actually have equity in their home, are investment savvy, don't need that loan just to be able to afford the home and don't live paycheck to paycheck?"
Client: "Yes, that one! How much would our payments be on that loan?"
Me: [What I really want to say, "Are you STOOPID? Do you know how many months it will be before I send the sheriff to your house to deliver foreclosure papers? I know if we COULD do that, which we CAN'T because you have NO DOWN PAYMENT, you would go out and buy a new Lexus for her and Harley for yourself with the difference between the full payment and the minimum payment!"]
Me: "Actually, Mr. Client, you would need a little down payment to create equity in the property so that we could qualify you for the better POA solution. If you want the 100% POA solution it is available but I recommend you not even think about it in your current situation. Let's get back to the plan you and I developed during the workshop and get you started moving up through the ranks by purchasing the correct home for your wealth plan. Okay?"
Client: "That's okay. I've been talking to another lender. I'll just go through them."

Okay - so that's an almost imaginary event but it's very similar to more than one encounter. I think it is important to all of us, prospective clients included, to realize that the problem is not that these loan solutions are available but that MAY doesn't mean MUST and CAN doesn't mean SHOULD.

The mortgage industry is constantly slammed because of the increased number of foreclosures due mostly to high priced non-prime mortgages. And, the industry to a great deal is guilty: Guilty of providing what the public demands but is generally too unreliable financially to handle. Out of over 2200 loans I've seen 5 foreclosures. Is that because I'm something so great? Something above others? NO! It's because I educate my clients and never stretch the limits of reality. The two first payment defaults we had were totally explainable although not acceptible. One man literally lost his job within days of the closing - though he had the reserves he chose not to pay his new house payment (risk), and the other man owned several rental properties that almost all suddenly developed costly repair needs or vacancies. Again, he had the reserves he just chose to put them to work somewhere other than paying us back.

If you are a BUYER (homeowner or investor) I will teach you how to shop for and acquire the best mortgage for you and how to develope and maintain a wealth building plan (yes, you need one) for NO COST TO YOU and NO OBLIGATION to do business with me.

If you are a REAL ESTATE AGENT  I will teach you how to talk to your clients for NO COST TO YOU and NO OBLIGATION to do business with me.

If you are a MORTGAGE BROKER or LOAN OFFICER I will teach you how to talk to your clients for NO COST TO YOU and NO OBLIGATION to do business with me.

We're currently in the final stages of creating a powerful online education tool for just this purpose. I hold regular webinar/teleconferences at quite an expense to me. You can email me through AR at anytime and you have my office number 678-946-0100 (where you WILL have to leave a message because I get at least 100 phone calls a day - so you'll have to wait for a return call also).

I want everyone to respect my industry because it earns respect. I want every buyer to enjoy their home and manage their risk and exposure so they can add to society through personal gain. I want every real estate and mortgage professional to know that integrity is the foundation of honor and the lack of it is no foundation at all. 

Set a bookmark for http://www.reiuniversity.net - we're still working on it but it's worth bookmarking now: 

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I started writing on Active Rain in 2006 when I was representing the mortgage industry. I am no longer in that industry and many of the older posts contain outdated information. Please do not contact me for LENDING or MORTGAGE questions but rather contact a licensed mortgage professional from your area. I have always been in marketing and branding and that is still what I do. Thanks for reading!

Comments (5)

Marc Blasi
Palm Beach Gardens, FL

Ken-

I've been in similar situations and I wanted to scream!

You mentioned the up to 60% rule - 60% is BAD but when people realize that that is based on pre-tax $ they SHOULD have the sense to say NO. 

Too many don't.  I feel sorry for the people who have gotten shafted.  But, I have zero simpathy for the folks that you try to educate (as above) that insist on screwing up anyway.

Nov 01, 2006 04:00 AM
Jeff Corbett
BoomTown - Charleston, SC

Ken...Been reading you posts and I can read between your lines, what is meant for 'me'....

Im going to change your perception on a few things ;) 

Nov 01, 2006 05:33 AM
Dennis Serra
Meridian Business Group - Schaumburg, IL
Ken, I would like to hear more, but your link is not working.
Nov 01, 2006 07:09 AM
Bryant Tutas
Tutas Towne Realty, Inc and Garden Views Realty, LLC - Winter Garden, FL
Selling Florida one home at a time
Ken, Good stuff. You are giving honest advice. It's a shame the consumer does not pay attention. You be because you can definitely does not mean you should. The consumer is their own worst enemy.  
Nov 01, 2006 07:47 AM
Ken Cook
Content, coding, marketing, host. - Marietta, GA
Content Marketer/Creator

Dennis - not sure which link isn't working. The REI University? Seems to be working fine.

Now JEFF why in the world do you think I would single you out? Seriously, I look forward to our conversation. Had a little time this morning - should have some time tomorrow afternoon .... 2:30 PM is open currently.

You still got my direct number? 

Nov 01, 2006 08:55 AM