This week, as usual, we have a lot of input “from the trenches” – from readers on the legality of referral fees, the lack of programs, first time home buyers, the general state of lending, and spiraling education costs.
Brad writes, “The government calls it ‘fair housing’ when they lower underwriting standards to fringe borrowers. When the loan origination sector attempts to assist a wider range of borrowers, however, they are called ‘predatory’. I guess the adjectives associated with the person trying to broaden underwriting constraints depend on which side of the tracks you’re on.”
And on the current state of the industry Bruce Calabrese contributes numbers to what many are thinking. “It is all about down payment and PMI. Do the numbers. If there are no zero down programs and the 3.5% down payment program requires 1.35% per year in PMI without removal and 1.75% up front then I don’t blame the young ones for not getting into the homeownership game. They aren’t stupid. I have hundreds of borrowers (young college grads) that took a zero down program or an 80/20 and are now on their 3rd home thru me. I am dating myself. But these programs need to be available for the upwardly mobile kids with good credit to start their families and grow them. Any idea why growth has stagnated? For instance, a young borrower buys a $200,000 home and makes a 3.5% down payment and takes an FHA loan with 2.5% in annual property taxes. After 10 years of paying on that loan the borrower has paid $77,377 to FHA and the County in taxes and PMI. They have paid approximately $60,000 in interest to the Bank at 4.0%. The Bank put up $193,000 to get that return. The County and FHA put up what??? Big Government is so out of whack.”
On question of government interference versus the ability of market forces to shape lending, Norm Ottley with Reliable Lenders sent, “In response to ‘The two obvious questions are these: (1) Is the borrower more protected now from bad lenders and bad loans, and (2) are these loans going to perform better?’ the answers are NO and NO. There are no bad lenders or loans thanks to Mr. Market and the loans will perform the same. The standard 30 year performed well in the past until the market as a whole took some down. I just finished my 8 hour required CEU. The bogus self-justifying of government is amazing. ‘Recent cases’ were all stemming from 2005 to 2007. There are no bad loans and fraud is at a minimum and all done by the MARKET not Dodd and Frank. The course material covered all the wonderful things Dodd Frank addressed in 2010. We are run through the ringer to prevent borrowers from being steered into bad loans. The I/O and Neg Am loans are not allowed – funny how they disappeared in 2008 along with the banks that offered them. So we spend hours following rules and functioning by regulations for loan products that no longer exist.
“They must have spent hundreds of billions of dollars between all the government workers, lenders, banks and loan officers to stop a practice for something that has been gone for over 6 years. The simple solution was to remove the toxic loans and the problem would have been solved (Mr. Market to the rescue!). With the easy money gone, the bad players would be gone. We would have saved a ton of money – even paying those government workers unemployment benefits instead of working. But our government in their infinite wisdom created a whole bureaucracy that in essence does nothing at all except enforce rules and regulations that have no purpose other than to justify the government workers and programs. Seems to me there is something amiss. Government efforts are a waste at best and a barricade to successful business at worse. Jamie Dimon said he is concerned that the bank will be penalized if underwriting errors occur and the loans default. Therefore, He’s suggesting they back away from issuing FHA loans. We are truly ‘A Country Founded by Geniuses but Run by Idiots’”.
And this note on referral fees – always a hot topic. “I think that many brokers face the same issue, but as a mortgage broker, can I give referral fees to past clients? If yes, is there a limit? What about to real estate agents, who are not part of a refinancing transaction?” I sent the note along to James Brody with American Mortgage Law Group. “Concerning your reader’s query, RESPA’s prohibition on referral fees, commission splits, and ‘kickbacks’ is probably one of the most discussed and debated provisions of mortgage lending regulations. As most brokers and lenders are aware, RESPA Section 1024.14 governs these prohibitions, with subsection 1024.14(g) providing the ‘exceptions’ to the prohibition, outlining when and how you can pay referral fees. As you point out in your question though, many times brokers or mortgage professionals will inquire as to whether they can pay a referral fee to past clients, friends, or non-mortgage-professional individuals who refer a new client to them. The short answer is that they should shy away from such a practice, as it is almost always seen as a violation. First, it is important to note that payment for such a referral may violate various state laws if it is deemed that the payment was paid to an unlicensed individual for licensable activity. Most states’ real estate laws have provided an exemption to this if the referring individual’s only action was simply the referral. However, depending on the regulator, this can be a slippery slope as well, as many regulators are taking a tough look at this and may find even the slightest involvement beyond the simple act of referral to kick this over the fence into prohibited payment territory. Beyond the concern over real estate laws in various states, this does tend to run afoul of the federal RESPA prohibitions on referrals as well. Interestingly enough, in a Spring 2006 bulletin, the California Department of Real Estate noted that this exact type of scenario is prohibited under RESPA, stating that a prohibited payment under RESPA Section 8 includes ‘Real estate agents and mortgage brokers paying ‘finders fees’ to friends and past customers for referring new business.’ (A copy of the bulletin can be found here). That same bulletin also noted that paying a real estate agent or broker a referral fee is also likely prohibited. Keep in mind that the safest way to ensure compliance with RESPA’s prohibition on unearned fees is to simply ensure that all payments paid are for services actually rendered and are based on market competitive rates.” Thank you James!
John Meadows, and Underwriting Manager, sent in, “At 33, I am one of the older Millennials and the reason for the lack of homeownership desire is pretty simple. We saw friends, relatives, and coworkers buy beautiful homes filled with cool stuff. Then we saw them lose the beautiful homes and the cool stuff in a breathtakingly short amount of time. So it’s no surprise that we aren’t rushing out to live out that American dream. I think once that becomes more of bad memory and less of an actual impact on the person, my peeps will come around.”
AmeriHome’s Bridgette Williams writes, “In response to the comments that MountainView made about providing financing for borrowers that are credit worthy but cannot meet current prime programs, I think that there are a lot more companies in the market place offering these expanded credit guidelines. Credit is slowly becoming more accessible, as it should. What I am finding is that the market for these products isn’t there yet because borrowers don’t know or believe that they have financing options. How does our industry get the word out that credit requirements are expanding and more borrowers can qualify for financing? Many borrowers aren’t even looking because they don’t believe they are credit worthy. Articles about Bernanke not even being able to refinance his own home don’t help this perception. Now that the products are available, we have to change the overall perception about credit if we want to open up the market and increase the borrowing base. It seems that our challenge now is changing the perception of the collective consciousness rather than finding outlets for more flexible financing.”
On varying college costs based on major & future employment odds, Aaron Miller with Banner Bank supplies, “Hi Rob, while James suggests that an economics degree should cost $125,000 and an art history degree $45,000 as a possible fair solution to how higher education is distributed, I might add that this plan could have just a few unintended consequences. The ‘better paying’ degrees might then might solely be available to those that can either afford to pay their own way or to those who are able to persuade their student loan officer of their merit to pursue a ‘better’ higher education. It might also incent folks looking for the shortest and cheapest path through college to flood degree programs that are known to produce less income on the hope that they will be the lucky one that makes it big in the humanities. As it is today I don’t hear a lot of people saying we are overwhelming the job market with the number of STEM field candidates so maybe increasing the cost of these educations just might not be the best solution.”
Mr. Miller’s note went on. “While our leaders at institutions of higher education may continue to debate this point, I would suggest that they look at the amount of state funding for public institutions and try to increase the levels simply to the same amount that was available to them as students rather than charge more for the certain degrees. I hear prior generations talk about how they paid their own way through school and so should every other generation. The simple fact is that when a credit at the state university cost $15 per semester it was a bit easier to float that cost on the job worked during the summer or after class without student loans. Today, even adjusted for inflation the relative cost is just a tad higher, regardless of the degree, and burden much larger. If as a society we feel that having engineers, accountants and art history professors if not in equal at least proportionate numbers, so that we are not myopic in our thought process about how we see the world and build our culture, this differential pricing might just be short sighted. Thanks for the great topic, while not mortgage related I think interesting given the impact of student loans on our markets and our future mortgage customers.”
(Editor’s note: Aaron raises some good issues. A complete analysis of higher education costs is beyond the scope of this mortgage commentary. But at this point, given the continued pool of young people willing to pay for, or borrower the money for, tuition and $150 text books, universities and colleges have little incentive to control or reduce costs. And since the government is the beneficiary of student loan debt payments, and professors and academics flow freely from universities to government and back again depending on the administration, it has little reason to require universities reduce costs.)
Speaking of education…
In ancient Greece (469 – 399 BC), Socrates was widely lauded for his wisdom.
One day an acquaintance ran up to him excitedly and said, “Socrates, do you know what I just heard about Diogenes?”
“Wait a moment,” Socrates replied, “Before you tell me I’d like you to pass a little test. It’s called the Triple Filter Test.”
“’Triple filter’?” asked the acquaintance.
“That’s right,” Socrates continued, “Before you talk to me about Diogenes, let’s take a moment to filter what you’re going to say. The first filter is Truth. Have you made absolutely sure that what you are about to tell me is true?”
“No,” the man said, “Actually I just heard about it.”
“All right,” said Socrates, “So you don’t really know that it’s true. Now let’s try the second filter, the filter of Goodness. Is what you are about to tell me about Diogenes something good?”
“No, on the contrary…”
“So,” Socrates continued, “You want to tell me something about Diogenes that may be bad, even though you’re not certain it’s true?”
The man shrugged, a little embarrassed. Socrates continued, “You may still pass the test though, because there is a third filter, the filter of Usefulness. Is what you want to tell me about Diogenes going to be useful to me?”
“Perhaps, perhaps not.”
“Well,” concluded Socrates, “If what you want to tell me is neither True nor Good nor even useful, why tell it to me or anyone at all?”
The man walked away bewildered and ashamed.
This is an example of why Socrates was a great philosopher and held in such high esteem.
It also explains why Socrates never found out that Diogenes was banging his wife.
(Copyright 2014 Chrisman LLC. All rights reserved. Occasional paid job listings do appear. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Rob Chrisman.)