Note: The following was written by Larry Rubinoff, branch manager of a Clearwater Beach, Florida office of Amstar Mortgage.

When you apply for a loan, who takes your application? What role does that person play? Who does the person represent–you or the lender? What’s the difference between a mortgage broker, a loan officer, a loan originator, and a lender? For many consumers, the answers to these questions are a complete mystery.

First, let’s examine the title and the role that each of the various people play in providing mortgage loans:

• Lender: The lender is the person or institution that ultimately provides the money used to purchase the property. In the past, this was typically a bank, credit union, or savings and loan (S&L) that loaned out money that was deposited by its customers. Now, the term “lender” can also be applied to investors who purchase securities backed by mortgages.
• Mortgage broker: A mortgage broker is a person who acts as a middleman between the lender and the borrower. The mortgage broker typically has a selection of mortgages from a variety of lenders to offer to clients. The primary job of the mortgage broker is to match the borrower to a lender whose guidelines fit the borrower’s situation. The broker takes your loan application, gathers essential documents (such as tax returns and paycheck stubs), structures the loan, and then presents it to a lender. If the borrower accepts the terms of the loan as offered by the lender, the borrower is then dealing through the mortgage broker with the lender. The mortgage broker is paid on commission that can come either from the borrower, the lender or both, but the broker is expected to help borrowers secure mortgage loans that best meet their needs and are affordable. Mortgage brokers are also called loan officers, although loan officers are not always brokers.
• Loan officer: A loan officer takes your loan application, gathers essential documents (such as tax returns and paycheck stubs), structures the loan, and then presents it to the lender that they work for. A loan officer is “usually” an employee of a bank, savings and loan, or other lending institution. The loan officer is also paid a commission that can come from either the borrower, their employer/lender, or both, the same as the mortgage broker.
• Loan originator: Anyone who takes your application and advises you on your mortgage loan is a loan originator, even if the institution for which the person works allows them to “broker” the loan to another lender and even if the person is a licensed mortgage broker. The term “loan originator” is a more generic term for mortgage broker and loan officer.

Note: Mortgage brokers, loan officers, loan originators, and all salespeople, for that matter, who achieve long-term success are dedicated to serving the needs of their clients. The people who cause problems are the ones who typically enter the industry for short-term gain.

Although loan originators may, in some circumstances, (this can vary by state) have a fiduciary responsibility to the lenders who supply the products (mortgages) they sell, to be successful, they need to provide their clients (the borrowers) with affordable mortgages that best meet their needs and qualifications. When they achieve this goal, everyone wins–the lender, the borrower, and the loan originator.

Borrowers often become confused, because well-intentioned “experts” provide them with the wrong advice. These “experts” often offer misleading suggestions such as the following:

• “Go to the loan officer not to the broker”
• “The broker can serve you better then the loan officer”
• “Go to your bank not the mortgage broker”

The fact is that titles matter very little. A mortgage broker who has access to a diversity of mortgage loans may be able to give you a much better deal than your local bank is offering. A highly qualified loan officer may be more knowledgeable than a particular broker. As a consumer, you need to pick the individual whom you trust and with whom you feel most comfortable. Ask friends, family members, and colleagues for recommendations. Interview at least three loan originators and check their references. Don’t worry so much about the person’s title.

Too often in our society we rely on a person’s title alone to indicate competence. This is not a useful approach with all professionals whose services you seek.

You also have the right to seek legal advice during the entire process and be represented by an attorney (whose competence you have verified, as well). You need not only take the word of the lender, loan officer, loan originator or mortgage broker. Caveat emptor! (Buyer beware!)

I was discussing the mortgage meltdown with a colleague the other day, when we encountered an interesting question: Who do mortgage originators (brokers and loan officers) represent? Do they represent themselves, the lenders whose products they sell, or the borrowers?

As a REALTOR, my relationship with you–my customers–is clearly delineated. I have a fiduciary responsibility to you–either as a the buyer or the seller I represent. (The term “fiduciary” simply means that I must represent my client’s best interests.) In a case of dual representation, Realtors are expected to treat both parties fairly and equitably.

A professional’s responsibility varies according to the profession and the specific role the person plays. A stock broker, for example, is supposed to sell investments to clients that are in the clients’ best interests. Someone who sells cars, however, is responsible for acting on behalf of the dealership, not the person who’s buying the car. Condemning a car salesperson for trying to sell the buyer additional optional features the buyer didn’t really need would be insane.

In real estate transactions, fiduciary responsibility is not always so clearly defined, and I believe this is at the root of many problems in the industry. For example, is an appraiser (paid by the buyer) responsible to the buyer or to the bank who uses the appraisal to deny or approve a loan? In the best of all possible worlds, the appraiser’s job is to provide an accurate appraisal of a home’s value, but in the real world, this doesn’t always happen. At the direction of a homeowner, loan officer, or real estate agent, the appraiser may inflate the appraisal, fooling the lender into approving a loan it would otherwise deny.

The fiduciary responsibility of mortgage brokers and loan officers is even fuzzier. Like a car dealer, a loan officer is merely selling a product supplied by the lender. Like an investment broker, however, the loan officer has some responsibility not to saddle the borrower with an overly risky loan. As you can see, the role that the broker or loan officer plays between the lender and borrower is clouded in ambiguity.

I believe that this ambiguity led to many of the problems leading up to the mortgage meltdown. In some cases, loan officers were overly ambitious in representing the borrower’s interests, which resulted in mortgage fraud. In other cases, loan officers who were overly eager to sell the lenders’ products pushed risky loan products (subprime mortgages) on unwary borrowers. Ironically, by acting solely on the behalf of either the borrower or the lender, these loan officers served neither party. Both lenders and borrowers got stuck with bad loans.

Some states have passed legislation that gives mortgage brokers and loan officers fiduciary responsibility to borrowers, but that addresses only one half of the equation. Brokers and loan officers also have to protect the interests of lenders.

I don’t intend to make mortgage brokers and loan officers the scapegoats in the mortgage meltdown. There’s plenty of blame to go around. Real estate agents, appraisers, title companies, Wall Street, the Federal Reserve, legislators, politicians, and homeowners all share the blame. Unfortunately, mortgage brokers and loan officers play the role of gatekeepers and are saddled with an inordinate amount of responsibility. They must serve two masters in a way that is in the best interest of both parties.

Perhaps mortgage brokers and loan officers need to stop thinking about their vendors and their clients and think in more abstract terms. Instead of selling products from lenders or representing borrowers as clients, maybe they need to be committed to making good loans. In many ways, the relationship needs to be governed by the same rules that apply to dual representation in the real estate industry — if it’s not a good deal for everyone involved, then it’s not a good deal. As an added incentive, perhaps brokers and loan officers should have their compensation tied to the success of the loan rather than receiving a commission on each sale.

To learn more about my office’s approach to representing you–either as a buyer or seller–call our office at (586) 751-0000. As a full-service real estate company, we’re here to help you succeed!

My recent commentary, “A Mortgage Meltdown Quiz,” inspired a great deal of feedback both positive and negative. Most of the negative feedback came from mortgage brokers who were understandably upset by the fact that I was placing much of the blame about the current mortgage meltdown squarely on their shoulders. Most of the positive feedback came from homeowners who were about to lose their homes because they followed the advice of misdirected mortgage originators and purchased risky products promoted by mortgage lenders.

I do stand corrected on two points. First, not all mortgage brokers are to blame. Every industry has its share of top-notch professionals who look out for the best interests of their clients. Although I single out loan originators in this particular commentary, in my book Protect Yourself from Real Estate and Mortgage Fraud, I list nearly a dozen professions that contribute to real estate and mortgage fraud, including real estate agents, appraisers, loan originators, title company representatives, REO brokers, and notaries. You can find good and bad professionals in all of these groups. Second, as at least two people have pointed out, mortgage brokers are not typically the people who package up the mortgage loans and sell them to investors. The broker may earn a commission or fee for processing the loan, but the mortgage lender actually is the one who packages the loan with other loans and then sells it to investors for a markup. In addition, the broker and originator play no role in creating the product; they didn’t invent the risky products or allow homeowners to take out these loans without setting up escrow accounts for paying taxes and insurance.

Although I do stand corrected on these two points, I stand by the premise of my commentary–the major cause of the current mortgage meltdown has less to do with the fact that homeowners are not making their payments and more to do with the fact that mortgage companies are having to buy back their bad loans. And when they run out of cash and cannot buy back the loans, their warehouse line gets cut off, they are basically forced out of business, credit becomes tight, and homeowners can’t refinance their way out of trouble.

Several disgruntled readers (primarily mortgage loan originators) have pointed out that mortgage lenders (not brokers or loan officers) are to blame for creating high-risk mortgage products and for encouraging their brokers and loan officers to push these products. One person went so far as to describe the broker as “the tool of the lender,” simply marketing whatever products the lender chooses to place on the market.

I agree that lenders and Wall Street are to blame for making risky products available, but lenders can’t force brokers to sell these products to clients who are ill-served by them. As a Real Estate Agent, I would never think of selling a particular home to a buyer who couldn’t afford it or selling defective homes to my clients simply because a builder was pressuring me to sell those homes. I believe that Real Estate professionals who deal directly with consumers should be responsible to their clients, not to the manufacturers of certain products.

Let’s not forget who the customer is!

The origin of the word “mortgage” is intriguing. It is a French word generally believed to be derived from two Latin words–”mort” (meaning death) and “gage” (meaning pledge or something of value that’s forfeited if the debt is not repaid).

Although you might feel as though you are signing your life away when you take out a mortgage, that’s not really what the word means. The part of the word dealing with death applies to the passing away of the agreement. When the homeowner eventually pays off the loan, the lender’s claim to the property is dead. If the homeowner fails to make payments in accordance with the mortgage, the homeowner’s rights to the property cease to exist (or die).

A mortgage is a contract that enables people to purchase property without paying the full value upfront. In essence, a mortgage pledges the property to the lender (the mortgagee) in the event that the borrower (the mortgagor) fails to repay the debt according to the conditions stipulated in the mortgage.

Although a mortgage is the most common way to finance the purchase of a property, it is not the only way. The seller can also finance the purchase of the property by way of a Land Contract or Contract for Deed. Instead of allowing the lender to place a lien against the property, a Land Contract or Contract for Deed typically contains a forfeiture clause. The clause states that if the loan is not repaid in full, the property reverts to the possession of the seller (the person who financed the purchase).

To answer the question posed at the beginning of this blog entry, mortgages actually have little to do with death, unless, of course, you take out a mortgage to buy a funeral parlor. Mortgages have more to do with life–being able to purchase a home you cannot afford to pay cash for, so you can enjoy your life and raise a family sometime before you hit your golden years.

For more information about how mortgages work and which kind of mortgage may be right for you, call our office at (586) 751-0000. As a full-service real estate company, we’re here to help you succeed!

You have been reading about the mortgage meltdown and seeing daily news reports about the record number of foreclosures. Mortgage lenders are dropping like flies. Even large companies such as Countrywide Mortgage are feeling the crunch, having to borrow billions of dollars to keep their doors open. Based on what you have read, heard, and seen in the media, maybe you feel as though you have a pretty good grasp of what is going on and what caused it, but how much do you really know?

To find out how savvy you really are about this mortgage meltdown, take the following single-question quiz:

Why have so many mortgage lenders gone out of business?

A. Homeowners are unable to make their payments.
B. Massive amounts of real estate and mortgage fraud.

If you are among the multitudes of the ill-informed, you probably chose A. And if this were the 1950s, perhaps you would have been correct. Back in the 1950s when banks loaned money directly to people who were unable to repay the debt, the banks took a direct hit to their bottom line. They felt the pain.

In the current system, most banks rely on brokers to originate the mortgage loans. These brokers typically have loan officers who work for them and are in charge of selling loans to consumers, helping the consumers fill out their loan applications, and performing other tasks to expedite the loan process. Loan originators receive a commission for every loan that’s approved, and because they are lending someone else’s money, they take on risk only indirectly.

When someone borrows $300,000 to purchase a home, for example, the broker receives 2 points at closing for a total of $6,000. They then package the loan with other loans and sell it to the market at 104 percent or $312,000. In this case, the originator just “earned” $18,000 off the mortgage loan-the $6,000 commission plus the $12,000 markup.

When bad loans are traced back to mortgage fraud, misrepresentations, and misdeeds, originators takes a double hit. They are forced to buy back the bad loans, and the lender cuts off access to future transactions. With huge chunks of money flowing out and little or no money flowing in, the mortgage originator is forced to close up shop. That is what is currently happening and why we are now seeing a mortgage meltdown.

When interest rates were low and housing prices were soaring, mortgage fraud was rampant, but the problem remained hidden because homeowners were awash in equity. Credit was easy to get, and mortgage brokers and loan officers made it even easier. If an applicant couldn’t qualify for a particular loan, the loan officer would simply encourage the applicant to fudge the numbers or would fudge the numbers on the applicant’s behalf. If a home buyer wanted a larger loan to cash out some money at closing, you could always find an applicant to accommodate-inflating the appraisal to make the property appear to be worth more than it really was. Loan officers were tripping over each other to approve risky loans and nab their commissions.

MILA, a subprime wholesale lender that was based in Mountlake Terrace, Washington shut down during the spring of 2007, primarily due to the fact that its loan officers were responsible for huge numbers of fraudulent loans. Several employees who refused to go on the record reported that they passed along proof of fraud committed by at least one of the company’s loan officers. This person made so much money for the company that instead of firing its employee, MILA relocated and promoted the person.

Now that the housing market is in a slump, it’s as though the water has been drained out of the pond, and now we can see what is at the bottom… a whole lot of muck.

According to a recent study, Detroit had one the three highest foreclosure rates among the nation’s 100 largest metropolitan areas during the first six months of this year. Detroit’s woes–one foreclosure filing for every 29 households–ranks it second in the nation. The metro area, comprised of Wayne County, reported 28,705 foreclosure filings, which translates into a 26 percent increase from the previous six-month period and nearly double the number reported in the first six months of 2006.

If you are one of the many Michigan residents caught up in this subprime lending/foreclosure mess of ours, this blog entry may interest (no pun intended) you.

First though, a little background information: Subprime lending is highly controversial. Opponents say that the subprime lending companies engage in predatory lending practices such as deliberately lending to borrowers who could never meet the terms of their loans, thus leading to default, seizure of collateral, and foreclosure. Proponents of subprime lending maintain that the practice extends credit to people who would otherwise not have access to the credit market.

The controversy surrounding subprime lending has expanded as the result of an ongoing lending and credit crisis both in the subprime industry and in the greater financial markets. This phenomenon has been described as a financial disease which has led to a restriction on the availability of credit in a number of financial markets. Hundreds of thousands of borrowers have been forced to default and several major subprime lenders have filed for bankruptcy.

Well, last Friday, in a widely publicized address from the Rose Garden, President Bush said that a bailout is out of the question: “A federal bailout of lenders would only encourage a recurrence of the problem.” This is certainly true. Bailing out the lenders would simply lay the burden on taxpayers and provide the carpetbaggers with another opportunity to pillage.

The President did reach out to some distressed homeowners–those with good credit histories who could probably pull themselves out of their current crises with a little help from the federal government. The FHA (Federal Housing Authority) will be given more flexibility to assist homeowners who have subprime mortgages. Homeowners may also be spared having to pay additional taxes in the event that the lender forgives a portion of their debt. Perhaps this will encourage lenders to work out reasonable solutions with homeowners.

Nevertheless, what about all the other consumers–what about hard-working American families who are too deep in debt to be saved? What about the children of these people who are going to be uprooted from their neighborhoods and the school districts where all their friends go?

Government officials, lenders, and people who have not been victimized by the shoddy lending practices of the last decade are quick to judge. After all, they are not the ones paying the price. The people who are suffering are the same people who usually suffer in these situations–consumers. These are the people who were sold ARMs (adjustable-rate mortgages) that ended up costing an arm and a leg. They were told that they could refinance before the rates went up or could build higher credit scores by making their payments on time and then refinance with a low interest rate mortgage later.

Then, the bottom dropped out of the housing market, making it nearly impossible for these hard-hit homeowners to refinance. Some of these loans even came with stiff prepayment penalties to further discourage people from refinancing. These folks were led down this path simply because they trusted an “expert” in a fancy suit with a silver tongue who failed to warn them of the looming trouble and the risk they were taking on. Where are these smooth talkers now? Probably out of work and seeking more fertile fields to ply their trade. They turned the American Dream of Homeownership into a nightmare, but they certainly are not the ones having to wake up to it.

Instead of letting them off the hook, they should be forced to take ownership of the problem they created. Instead of waiting around to see whether the federal government is going to bail them out, they should be actively pursuing the homeowners they led astray and offer them real solutions that can help these distressed homeowners regain their financial footing.

In case you missed it, earlier this week the Federal Reserve chose to leave a key interest rate unchanged for a second straight time. Federal Reserve Chairman Ben Bernanke issued an announcement on Wednesday stating that the Fed would leave the federal funds rate–that’s the interest banks charge each other–at 5.25 percent. The banks’ prime lending rate, the benchmark for millions of consumer loans, will remain at 8.25 per cent.

Bottom line… this is great news for homeowners, especially those with Adjustable Rate Mortgages (as it gives them breathing room and time to find a fixed rate product to move into). Here at Ralph Roberts Realty, we strongly recommend that anyone with an ARM refinance now to avoid problems in the future with rising interest rates. If you would like additional information on benefits of a fixed rate mortgage verses an ARM, contact our office today.