Archive for July, 2008

What if I paid you $100 for every referral??

July 10, 2008

If I did pay you for your referrals, I would be breaking the law.  I would be in violation of the Real Estate Settlement and Procedures ACT (RESPA), which has the following to say about kickbacks, fee-splitting and unearned fees:

Section 8 of RESPA prohibits anyone from giving or accepting a fee, kickback or any thing of value in exchange for referrals of settlement service business involving a federally related mortgage loan.  In addition, RESPA prohibits fee splitting and receiving unearned fees for services not actually performed.

Does this mean that no one gives away gift certificates each time a new client is referred to them?  and that no one gives “marketing” dollars to builders in exchange for referrals?  or title companies to realtors in exchange for closings?  No.  It just means that there are probably [a lot of] people out there breaking the rules . . .  

Now, there is a lot of discussion about the difference between giving someone something of value in exchange for the referral of business and giving someone something of value in appreciation of the referral.  And while some people would take the very hard-line (like the woman that taught a RESPA class I attended), and say that even the exterminator man who brings doughnuts to the Realtor office each month is in violation of RESPA (because he is giving something of value in exchange for the hope of referrals).  I would probably lean more towards the idea that a small thank you (some people use a benchmark of $25) would not likely cause a RESPA-stir . . . not saying that I do that, though.

Other mortgage and real estate professionals lean (or rather run) to the very other side of the spectrum (off the spectrum actually) and flat-out break the rules.  I remember hearing about one mortgage professional who actually grouped his clients in different tiers based on the referrals he received from them and then had a marketing budget directed per tier for dinners, cruises, gift cards, etc.  Not surprising that his business was booming . . . also not surprising that the people pictured above were at the “top of their game” as well.

There is another mix of professionals who have invented and discovered ways to beat-the-system, so to say.  There are joint-ventures of builders and mortgage companies where fee sharing can take place because they “work” for the same company.  There are title companies formed between real estate firms and settlement agents for a similar purpose.  But, by far, the most interesting one that I have seen is the mortgage company who’s website roster of loan officers is almost completely full of Realtors.  I assume that in this scenario, a realtor refers their client to the mortgage company (or legally, they “help” the client get prequalified, complete the loan application, etc) and now the Realtor/Loan Officer can earn a commission for the referral . . . I mean, for their loan closing.

So what can you receive from me in exchange for the referral of business?

How about honest, timely mortgage advice; great, competitive interest rates and closing costs; and outstanding customer service!?!  But, aren’t those things “of value” as well???  : ) 

Jeffrey Pinkerton is a Mortgage Consultant and President of Hillside Lending, LLC and writer for “the Mortgage Blog.”  Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing.  For more information about available programs and interest rates, please visit www.hillsidelending.com.

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Wachovia executives (possibly) take advice from “the Mortgage Blog” (but not likely)

July 3, 2008

After writing about the risks of the MTA loan at the end of 2006 here on “the Mortgage Blog”, only a short two years later, Wachovia apparently agrees with me, and this week announced that they will no longer offer their “Pick-A-Payment” Option ARM to consumers.  You can read the corporate-speak as to why they are no longer offering these types of loans, but the spokesman for Wachovia said that they want to make sure that “consumers have the right products to meet their needs,” which would actually be the opposite of what they have done by cancelling the program.  What if that program was the right product to meet someones needs?  Honestly, if there was ever a time to have an option ARM, (to be able to make a monthly payment less than the monthly interest as a last resort to avoid foreclosure) now would be the time to use that product.  What about all the great marketing with lots of smiling people and different color doors where you can pick the payment you want??? 

What the spokesman for Wachovia probably MEANT to say is this . . . While in the past we offered the option ARM program as a way to provide payment flexibility to our customer-base, in light of the current market conditions, this product is no longer a wise risk for the bank and it’s quite probable that it is no longer a wise risk for consumers.  In addition, due to fears of declining value markets (by the way, “the mortgage blog” by Jeffrey Pinkerton provided some great insight into this as well as a very funny video), the negative amortization feature of the option ARM program puts the bank in a miserably risky situation should a borrower continue to only make the minimum payment (not covering the monthly interest), hence the loan balance increasing, while at the same unfortunate time, the value of the home (our collateral) decreasing.  Not to mention, that this was not a good program for most consumers — also highlighted by Mr. Pinkerton in his blog. (end of what I think the spokesman meant to say).

The unfortunate reality (for me and other mortgage professionals like me) is that these types of products are actually GREAT profit engines for companies.  Much like the interest-only LIBOR ARMs from a handfull of years ago (1 month and 6 month varieties), these programs create multiple loan transactions — practically guaranteed.  If I put you in a mortgage loan product that will most certainly need to be refinanced in a few years, it’s like two-for-one.  One now . . . and one when it’s time to refinance. 

For me, I’ll stand by original advice on MTA loans and be glad that none of my clients have the worry of that type of loan (even if it means there will be fewer refinances in the future).  Unless, of course, the consumers who got placed into these types of products don’t go back to the person who sold them the idea in the first place — and call me instead.  : ) 

Jeffrey Pinkerton is a Mortgage Consultant and President of Hillside Lending, LLC and writer for “the Mortgage Blog.”  Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing.  For more information about available programs and interest rates, please visit www.hillsidelending.com.