Responsibility

There has been a lot written in the media recently regarding the problems in the mortgage market. The tone of most of what has been written, has focused on the poor treatment of the homeowner/home buyer by the industry through the originator. The point of contact between the applicant and the mortgage market is the originator, making him responsible for most of the customer interaction. Problem mortgages occurred for a number of reasons. Right now I want to focus on the originator and the products he has at his disposal. We are not going to address the reasoning behind the formulation of the various products and their associated underwriting standards now, we'll do that at a later date.

The originator has a toolbox of programs at his disposal and it is his job to help the applicant decide what product best suits his needs. We need to keep in mind that I will be addressing originators working for a mortgage broker not a mortgage banker. There is an important difference. The originator working directly for a lender has a limited job description. His job is to explain the various products offered by his employer and then accept the application from the applicant. His job is information delivery, he is not serving as an advisor to the applicant.

The originator working for a mortgage broker has a higher level of responsibility. Not only is he expected to be able to explain the various products to the applicant but he is also there to aid in the decisions made by the applicant. It's important for a consumer to be aware of this difference. A consumer's expectation of an originator's scope of work needs to be in alignment with what the originator can do.

The industry, for the most part, has not done an adequate job in training and supervising its originators. This situation is in the process of being corrected through two main avenues. First, through government intervention. Up until now there were no standards for education, for an originator. It was left up to the employer to set his own standards. It seemed reasonable enough, after all the employer would ultimately bear the cost of any incompetence of an employee, so is motivated to set reasonable standards. Time has proven that this hasn't been the case, so each State is setting its own educational standards and is also doing background checks on originators before permitting then to conduct business. The second avenue is employers have learned that giving pricing flexibility to their originators is not sound business. It encouraged originators to price loans based on maximizing their personal profit, not based on competition in the marketplace. This resulted in applicants paying more than they should have for their financing when they trusted their originator. More bankers as well as brokers have moved towards more standardized pricing models.

The actions of these poorly trained and unprofessional originators are responsible for a portion of the problems we are currently facing in the marketplace. We'll never be able to calculate what percentage of the problems can be attributed to these individuals but they were not responsible for 100% of the problems. This is the subject of this post. The shared responsibility of the applicant and his originator.

For the purpose of this discussion the originator is working for a mortgage broker. He is knowledgeable and offers the same pricing model to all his clients. The applicant has his own particular goals and his own personal level of risk aversion. It's important to recognize that the originator and the applicant will have a different level of acceptable risk in their individual decision making process. Some people only feel secure working for a company & getting a regular pay check and full benefits. Others are more daring, owning their own business and never really knowing when their next pay check is coming. Some people have a lifestyle that carries heavy expenses every month, leaving less to pay a mortgage where other people are so focused on owning a home they will make whatever sacrifices necessary to own the home of their dream.

It is the originator's job to explain to the applicant, the details of the financing he/she is seeking, allowing the applicant to make an informed decision. When I'm training originators, I make a point of telling them they are the applicant's consultant, not his mother. It's not the originator's job to impose his opinion onto the applicant but to help the applicant understand the impact the mortgage payment is going to have on the applicant's personal life. It is the applicant's right to take whatever risk he feels comfortable with and only time will tell if he has made the right decision. If the applicant gambles and wins, he now can enjoy the benefits of the decision. If he gambles and loses, he then suffers the consequences.

The originator's responsibility is to supply the applicant with a clear understanding of what he is doing, make suggestions as to the recommended course of action and explain the potential consequences of the various courses of action available. His job is not to protect the applicant from making a bad decision, only warn him of potential shortcomings of the decision.
When the housing market is strong, all homeowners look brilliant. Even bad decisions turn out to be profitable ones to the homeowner. However, when the market takes a bad turn, the opposite occurs. What seemed like good conservative decisions do not turn out to be as profitable as they should and bad decisions become much worse.

It's at this point that a homeowner begins to look for reasons they got into trouble. When we are in trouble or facing a problem we reach out to find the reason it's happening. People will generally look outside themselves for the cause of the problem. They didn't make a bad decision, someone else told them what to do or nobody explained to them what could happen.
This attitude is wrong on a number of levels. If we don't look to see our own mistakes, we'll never learn from them and be destined to repeat the same mistake over and over. By blaming the mortgage industry for all the current problems, the availability of mortgage products will be drastically curtailed, limiting the options of tomorrow's borrowers. Originators who have been conducting business in a professional manner may be forced to leave the business, making it more difficult for a consumer to find good advice.

In order to minimize the damage of this housing correction and reduce the chances of it happening again, we need to examine all the contributing factors and address them. Everything from the government's drive to increase the homeowner percentage of the population, through aggressive underwriting standards from the lenders, to originators not doing their jobs properly right down to mistakes made by consumers. All aspects need to be considered not just the contribution made by the industry.