The mortgage business is largely a relationship business between advisor and client. Not unlike doctors, investment counselors and lawyers, successful mortgage loan officers earn their living by helping folks obtain a mortgage loan, whether it is a refinance or a purchase. The duties of a loan officer are diverse. We help borrowers establish financial objectives, we educate them on the myriad of mortgage loan products available, we make recommendations that are compatible with a borrower's objectives, and sometimes we need to go to bat for a borrower during the approval process.
I like to believe that most loan officers, especially the ones who have been in business a long time, are honest and competent. The mortgage business is very competitive. Inept and dishonest loan officers usually don't last a long time. And it steams me when I hear of a story of dishonesty and exploitation. I've got to share this story.
A woman calls me up to inquire about refinancing her mortgage. I ask her a few basic questions and I learn that she had refinanced five months ago to a monthly adjustable rate through a loan officer she knows from her church. The rate is a lot higher today than it was back in September when she took out the loan. She is a widow on a fixed income and wants to refinance to a fixed rate.
She says she's calling me because she doesn't have a good feeling about her experience with her church-going loan officer.
My first reaction was to question the wisdom of taking out a monthly adjustable back in September. In early 2002, I began recommending some of these monthly adjustable programs to certain suitable borrowers. Although predicting interest rates is a difficult task, it's a lot easier to predict short term rates with some degree of accuracy than long term rates because short term rates are largely controlled by the Federal Reserve. Long term rates are guided by market forces.
In early 2002, it was evident that short term rates were going to continue to fall -- which they did until the middle of 2004. These monthly ARMs were a great deal for a long time.
Towards the end of 2004, I began recommending against taking out a short term ARM. Short term rates were clearly on the rise, and Fed Chairman Alan Greenspan made no secret of his intention to continue to raise these rates.
So I'm on the phone with this woman and am wondering why some loan officer would advise that she take a monthly ARM last September, when short term rates were almost as high as long term fixed rates and poised to move higher. I ask her a few more questions and can tell that she doesn't completely understand her mortgage program. So I invite her to come and see me and bring with her all the paperwork.
She comes in to my office and I peruse through her refinance papers -- the promissory note, settlement sheet, and so forth. What I see is shocking.
It turns out that this loan officer placed her in a monthly ARM with a margin of 3.80 percent. This is the amount that's added to the loan's index to determine the interest rate. The higher the margin, the higher the interest rate. 3.80 percent is unusually high by industry standards.
I then look at the settlement statement. She borrowed a total of $200,000, and the fee paid to the loan officer from the lender was $8,500 -- quite high for a $200,000 loan. Such a high fee usually means the broker pays the borrower's closing costs, creating a "zero cost refi," a product that has been wildly popular and one that I highly endorse.
Not in this case. There was no "broker closing cost credit" on the settlement statement. I then look at the itemized closing costs. They look typical and customary. But I did notice one thing -- a $2,750 origination fee paid to the broker and charged to the borrower.
I see that this God fearing, church going loan officer:
- Puts a widowed church associate in a short term adjustable rate at a time when any professional in the mortgage business knows that short term rates are on the rise;
- Gives her the highest margin on the ARM in order to receive a $8,500 fee from the lender;
- Keeps the entire $8,500 fee and provides no closing cost credit;
- And to twist the knife that's already been stabbed, charges an additional $2,750 origination fee.
Our church-going loan officer made $11,250 on his unsuspecting target. Our widow doesn't know a lot about mortgages. Why shouldn't she trust a fellow church member? Surely she'll be treated fairly.
Yeah, right.
As I catch my breath after these discoveries, I notice one more thing. The loan carries a three year prepayment penalty. If she pays the loan off within three years, she will be subject to a penalty equal to six month's interest, or $7,200.
Not only did our loan officer angel gouge with a capital "G", he sentenced this women to a three year commitment on a lousy mortgage! Unbelievable.
I gave her the best advice I could. Contact the loan officer's boss and demand a copy of the broker's executed fee agreement, which is required by law in most states. If she didn't agree to pay the origination fee in writing, she is due a refund.
I also told her to demand a copy of the prepayment penalty disclosure. If it wasn't disclosed, she may be able to go to the lender and request a waiver.
If you read this column often, you will recall that I recommend that consumers ask trusted advisors such as neighbors, friends and family members who they might recommend as a good loan officer. If one person has a good experience with a particular lender, the chances are good that he is honest and competent.
I get steamed when I hear of stories like this one. Most loan officers are honest and competent. But there are a lot who are not. It is this minority that gives out industry a black eye. And I can think of no better example than a widow getting gouged by a fellow church member. Let's hope this guy isn't in business for long.
