With the author’s permission, I am posting a reader’s follow up thoughts to yesterday piece on the fiduciary responsibility in the current mortgage meltdown:

Thank you, Ralph, for your very balanced article today. I think you framed the situation pretty well. It’s so nice to read an article that provokes thought (rather than the usual outrage or hysteria).

I, too, have pondered the incentives created by a commission-based compensation system. It does lend itself to the salesman mentality. However, the mortgage market, because of its unequal treatment of market participants, tends to work against any alternative. In a simplistic sense, the market is composed of brokers and bankers. Brokers are required by law to reveal all of their compensation (including yield spread premium). Bankers are not. As a result, a banker always is able to make his loan LOOK cheaper by burying fees and his compensation into the interest rate.

I truly think the best thing we can do as a society is better train consumers about shopping for a mortgage. This training should start in secondary school. It’s ridiculous that we don’t equip our teenagers with financial skills. And we wonder why so many of them get in trouble with credit cards as young adults.

The government mandated that those who offer mortgages (and other consumer debt) reveal an annual percentage rate (APR) that accounts for costs associated with creating the mortgage. It’s a good tool for comparison shopping, but I don’t think most consumers know how to use it.

People have to be responsible for their own decisions. Let’s give them what they need to make informed, smart decisions.

Thanks again and Happy New Year.

Steve

——————————–
G. Steven Bray
Commercial and Operations Manager
Texas Lone Star Lending
“Your Loan Educator”

512-261-1542
877-546-7079
steve at lonestarlending dot com

Thanks, Steve. Appreciate the feedback.

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 my clients is clearly delineated. I have a fiduciary responsibility to 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.

Around this time last year, I wrote a blog entry inviting Real Estate industry professionals of all levels of experience to join me in 2007 on one of my free weekly conference calls where I interview leading industry figures and share from my 30+ years of Real Estate industry experience. As if sent on cue, I received the following email message just a few minutes ago:

From: Poncie McDearmon
Date: Sun, 23 Dec 2007 10:41:28
To: Ralph Roberts
Subject: Thank you and Merry Christmas

Coldwell Banker Residential Brokerage
Phoenix, Arizona

Seriously folks, I cannot make this stuff up, even if I tried!

“Making it Great in 2008” is my motto for the upcoming year, and comments like Poncie’s give me faith that we’re heading in the right direction. Information about 2008’s line up of conference call topics will appear shortly. In the meantime, here’s wishing everyone a safe and happy Christmas and New Year!

2007 has been a tough year for all of us in the real estate business, but the hardest hit are the families who have been victimized by the mortgage meltdown. Millions of families stand to lose their homes to foreclosure, and most of these people don’t know where to turn for help.

If you are a real estate professional, you are in a unique position to assist those in need. In my experience, I have found that the best option for over 90% of homeowners who are facing foreclosure is to sell their homes and find more affordable accommodations. Real estate agents can help a family accomplish both of those tasks. The United States has more than two million real estate agents, over 1.2 million of which are Realtors®. If every one of us helped just one family, we could transition every family into more affordable housing.

This holiday season, I offer the following call to action:

• Find the family in your area who is in the most dire need of your assistance and offer to waive your listing fee.
• Donate your expertise to the cause and then come back here and post your story.

Let’s just see how a small army of grassroots real estate agents can dampen the fallout from the current foreclosure epidemic and lift the spirit of millions of families this holiday season.

If every one of us helps just one family between now and the end of 2007, we will have helped over one million families through their foreclosure crises and left a lasting legacy to ring in the New Year.