The Facts of Life

You can’t always get what you want. Whether you are looking to buy a home or refinancing your existing mortgage, you need to realize that compromises need to be made.

It’s easy to become over-selective when shopping for a home in a market that has a record high inventory of properties. It’s natural to think that you will be able to find a home that has every possible attribute you want. Unfortunately, that never happens and compromises need to be made or you will never be a homeowner. House hunting is a part time job and it comes with all the same stresses as working your regular job. The only difference is that “burnout” comes much quicker.

When deciding to refinance your current mortgage during what is now being called a “recession” by many, it’s easy to get greedy. When rates are drifting down, you continue to wait for even better rates to appear and you end up missing out on a good rate because you’re waiting for a great rate. The great rate doesn’t come and you miss the window of opportunity to refinance and save some money.

Being realistic with your housing needs or rate target is the prudent thing to do.

There are no free rides. In your house hunting, don’t feel rushed into making a purchase. You may be led to believe that you’re going to lose the deal if you don’t move quickly. Give yourself adequate time to completely analyse the purchase. Don’t take shortcuts such as forgoing an engineer’s inspection or making commitments without proper legal advise.

Don’t feel pressured when shopping for financing. If a rate quote seems too low or the monthly payments work out to be lower than you expected, look deeper into the details. Maybe the closing costs are inconsistent with other quotes; take the time to find out why. The majority of borrowers who find themselves in financial trouble got there because they jumped into a mortgage without thinking it through.

The most common error is looking at the initial monthly payment and nothing else. This is how people unknowingly get into an adjustable rate mortgage or end up with closing costs that are much higher than were expected. They heard only what they wanted to hear.

You can’t afford to win if you can’t afford to lose. There are no sure bets in life. Every decision we make can be good, bad or anything in between. People have entered into a contract to purchase a house or condo with the expectation that they could sell the property without having to close on it. They saw the potential profit in the transaction. Many ignored the potential loss if things didn’t work out as planned.

Any investment decision that you make needs to be based on realistic projections as well as your acknowledgement that things don’t always go as planned. The questions “how much money can I afford to lose” or “how long can I afford to wait” need to be addressed before entering into the investment. If you can’t afford to lose on the investment, you shouldn’t make the investment.

The only thing worse than a bad decision is no decision. If you never buy that house you wanted or never made that investment you liked, you can’t be wrong. Of course, you’ll never be in your dream house or make a profitable investment. By not making a decision you are stagnant, you will never improve yourself. By making a bad decision, you will take your losses but at the same time learn from the experience. This will make you better prepared in making the next decision.

Mistakes will be made. Accept that fact and move on. Make the best choices you can, based on the information you have at the time. The goal is simple; be right more times than you’re wrong. This yields you a comfortable life.

Learn from the mistakes that others make. We’ve all heard the expression “an education is expensive.” Whether we are paying for a formal education or paying the price of a bad decision there is an expense to be paid. However, if we watch what others are doing and try to understand what they did wrong, we can learn a lot without paying the price.

It’s easy to fall into the trap of following others blindly. Your neighbor makes money on a stock so you buy the same stock. Your neighbor loses money on an investment and you compliment yourself that you didn’t make the same mistake. You need to take the time to understand the reasoning behind each of these transactions. Was the stock purchase just a lucky guess? Why did the second investment go bad? Knowledge is power; it’s all around you. You just need to take the time and look out for it.

Don’t get caught in mob psychology. When real estate values were rising everyday, the push was to buy as soon as possible to avoid paying more for the same house at a later date. Now the general consensus is home prices are falling and waiting to buy is the best course of action. It’s great to be able to buy at the bottom of the market. Unfortunately, the only way to find the bottom is after it has passed. Remember, a house is primarily a place to live. The investment component is secondary. You need to buy when the time is right for you, based on your family needs, your proximity to work and schools, your financial situation, etc.

There is a great opportunity now for renters to become homeowners. Inventory of homes are high, interest rates are low. House prices have come down from their peak. If buying a home is a goal of yours do not let the fear of making a mistake or the gloom and doom of the news media decide for you. Take advantage of the market, move forward and don’t look back.

Purchasing a home is a long term investment and as such will ride the ups and downs of the marketplace. Your home provides shelter for your family over the years. It’s only when the time comes that you need to move on and sell your home will you see how profitable the investment component of the purchase decision was. If history is any guide, you will find that buying will prove to have been the right choice.

The Borrower's Responsibility

Caveat Emptor, Latin for “let the buyer beware” is a phrase we have all seen but too many of us, don’t live by. At the end of the day, we are responsible for the decisions we make. The world is full of con men and thieves constantly looking for ways to separate us from our assets. The government can only do so much to inhibit their ability to steal from us. Your last line of defense is your personal ability to analyse the information available to you and making the decision.

What does this have to do with mortgages? Over the last few weeks I’ve been addressing how each section of the mortgage market contributed to today’s problems. Companies made mistakes, employees of the companies made mistakes and con men and thieves have entered the industry. The trouble in today’s mortgage market derived from poor business decisions, incompetence, greed and fraud. It’s impossible to identify the magnitude of the contribution that each one of these components made to the problem. What we do know for sure is that in each instance the borrower let his guard down and either made a poor decision or allowed himself to be a victim.

We are all human and we all make mistakes. We do whatever we can to avoid injury, both physical as well as fiscal, with varying degrees of success. The big problem we face when dealing with our own personal financial position, is being objective. Emotion clouds our judgment. Emotion will make us hold onto a property longer than we should; it will lead us to believe that “everything will work out fine” without any basis in fact; it will enable us to ignore a problem, blindly hoping it will “go away”. In its worse case, emotional attachment to property will set us up to be scammed. It allows us to ignore the concept that something can “be too good to be true” and only see it as a solution to the problem. It is this mindset that a con man looks for.

During the period of easy lending that we’ve just been through I would tell my clients “getting the mortgage is the easy part, living with the payments is the hard part.” By addressing how the new housing expense was going to fit into the client’s budget we could see how their lifestyles would change. In many cases, this was an eye opener. Some clients saw how overextended they were going to be and modified their house hunting to suit. Other clients that were looking to improve their cash flow via a debt consolidation, quickly realized how deeply in debt they really were. Some discovered that they weren’t going to lower their payments enough and a refinance wouldn’t be the right course of action. There were even some that didn’t like what I was saying and went to another mortgage broker that told them what they wanted to hear.

There are areas of the country where there was a high level of investor speculation that is now seeing depressed prices such as the Florida market. Investors here are suffering due to one of a number of reasons. They could have been experienced investors that made a bad business decision in buying. They may have been novice investors that got caught up in the buying frenzy and ended up, in over their heads. There is also the group that was conned into buying. They are all suffering the same way from a down market but for different reasons. How many of these individuals may have avoided the problem if they would have just taken the time to do a more detailed evaluation before making the decision to buy?

We have other markets, such as Ohio, that have been hard hit with the contraction of the auto industry. As high paying jobs became hard to find, many homeowners over the last few years decided to cash out the equity they had in their homes. The theory was that they would ride out the soft employment market. They believed that things would get better and they would soon be earning the income they were accustomed to. The employment picture never improved, the values of their homes have declined and the mortgages started to go into default.

The news media keeps telling us that these mortgages should never have been written. If it weren’t for the cash out refinances, these homeowners would still have equity in their homes right now. There is one big problem with this statement. If these homeowners didn’t refinance their homes, they would have been forced to sell at that time or would have defaulted on their mortgages then instead of now. These individuals either had the false hope that the local job market was going to improve or they were sold on the idea by the mortgage originator. Two causes of action that lead to the same conclusion.

Did the industry become too easy in approving mortgage applications? Yes. Did the volume of originations and the profits that were being generated from them blind all the people and companies involved in the mortgage market? Yes. Did the mortgage industry become a destination for con men and thieves to practice their profession? Yes.

Should the industry take all the blame for the trouble we’re in? No, there is a level of accountability that the borrowers are also held to.

Should the government enact laws that make it difficult for the con men and thieves from entering the business? Yes. Should the government, through its regulatory bodies, do whatever is possible to make sure all companies are operating in an ethical manner? Yes.

Should the government enact laws that protect consumers from themselves? No, It would make the availability of financing for individuals too restrictive and make it more difficult for families to improve their financial well being.

One of the basic tenants of the American culture is we all have the freedom to take a chance. Whether you want to start your own business or invest in your own home, you are free to try. If you’re successful you are entitled to all the benefits associated with the decision. If you’re not, you deal with the consequences, and try again. It’s this attitude that has made this country great and a destination for people from all over the world who want to establish a new life.

If we encourage the government to enact laws that protect us so completely that we lose the ability to overextend ourselves, we will never discover our true potential. We will tend become a country devoid of all innovation and creativity. Is this something we really want?

Originators - Good and Bad

The originator can be working for a banker, broker, credit union, commercial bank, etc. Any entity taking applications for a mortgage will need a person to work directly with the applicant. This individual’s job title is “Originator”.

The originator’s compensation depends on the entity he is working for. He could be on straight salary. This means it wouldn’t matter how many mortgages he writes, the size of the mortgages he writes or the profit margin on the mortgages that closed, he was still paid the same. An entity that doesn’t depend on mortgages as a major source of their business would probably have a member of their staff take on the role of an originator as one part of their job description. Under these circumstances, the originator is most likely on salary.

Most originators are paid based on some form of commission structure. The entity an originator works for sees the position as a sales position and as is typically done in sales, compensation is based on productivity. This is done to motivate the originator but it can have a negative side effect; in his drive to write more applications, the originator may not be giving his client the level of service that they deserve.

Making matters worse, there are some entities that give their originators a certain level of pricing flexibility. This allows the originator to increase his compensation from certain mortgages by simply charging more when he feels he can get away with it. This “up pricing” as it’s called, is not fair to the consumer and is done in such a way that the consumer doesn’t even know it is happening. There are nationally renowned lenders that utilize this form of compensation to their originators, making this a wide spread problem. Fortunately, up pricing is becoming less and less prevalent as it has gained the attention of both Federal and State regulators.

As long as the originator presents himself to the public as a source for a person to obtain a mortgage, and nothing else, there is no problem. When a customer goes to buy a car, he anticipates that the salesman is looking to maximize his profit on the sale. As long as the customer sees the originator as a salesman, the customer will deal with him with the same expectations as when buying a car. The problem arises when the originator presents himself as an "advisor" to the applicant but in reality is only looking to maximize his profit. Now the customer thinks he is dealing with an individual who is looking out for his best interests when, in fact, he is dealing with nothing more than a salesman.

Not all originators work as salesman. Many do conduct themselves as advisors to their clients. Those that do, strive to give a high level of professional service so their clients are better equipped to make informed decisions about their mortgage financing. These originators see themselves as professionals and the business is not just a job, but their career. Their greatest source of business is from satisfied clients recommending new clients.

The untrained, unethical originator’s contributed to the current mortgage market trouble by putting their own personal interests above those of their clients. Making matters worse, they were purposely misleading their clients into thinking that they were the client’s advocates.

The mortgage market grew at an unprecedented pace and the industry’s need for manpower grew accordingly. With such a large number of new employees entering the industry, training suffered. This problem was most evident at the originator level. As companies pushed for higher and higher levels of originations they increased their staff of originators without any thought given to training. Originators were giving out incorrect information and making promises they couldn’t keep to their customers. The contact person that the consumer was using to access the mortgage industry, in many instances, knew less about the business than the consumer.

One positive effect of this market correction is that these untrained originators are leaving the business as fast as they entered. Mortgage companies are now more concerned about the quality of originations and less about the quantity. A welcome approach that is totally different from the one that was used over the last several years.