- - Thursday, October 25, 2012

The mortgage world is a very different place since the financial crisis of 2008 and the ensuing regulations put into place under the Dodd-Frank Act. I spend most of my time explaining the outrageously confusing good-faith estimate. After I explain how the numbers add up on this form, my clients usually shake their heads and laugh.

Today, I would like to talk about another disclosure — the anti-steering options disclosure. I indignantly describe this form as the federal government’s attempt to do my job.

A mortgage originator’s job, among other things, is to hold a fiduciary role in advising a borrower about mortgage options, helping establish objectives and finding the best mortgage product at the best possible terms.

For example, a client might be purchasing or refinancing a home and expecting to sell it within five years. I will, of course, provide a menu of mortgage products that include 30- and 15-year fixed-rate loans, along with a 7/1 or 5/1 adjustable-rate mortgage, which carries a lower initial rate but can adjust in the future. This is part of a loan officer’s job.

The anti-steering options disclosure, I think, attempts to compartmentalize the important role of a loan officer’s advisement on one page. It says, in part, that the law prohibits mortgage originators from “steering you to close a loan based on the fact that the loan originator will receive greater compensation” from one particular lender over another.

The form continues with a simple-minded matrix that details the originator’s offered products, such as the “lowest rate” with the highest fees, an “option with the lowest rate without risky features” and the “option with the lowest total dollar amount” in fees.

The form is dumbing down a crucial part of a loan officer’s job, which is, again, to help establish the borrower’s objectives, offer a menu of practical products and make a suitable recommendation.

The irony of all this is the new way mortgage originators are compensated. One method is called “lender-paid compensation,” in which the lender pays the originator a predetermined percentage of the loan amount that can be renegotiated quarterly. So, yes, I have agreements with several lenders with lender-paid compensation equaling 1 percent, 1.50 percent and 1.75 percent.

The problem is obvious. If my company must make a minimum of $2,500 per loan to cover my company’s overhead and make a reasonable profit, I, like any other American business owner, will turn down the business of a loan that would make less. You don’t sell pies for $5 each if the cost to make the pie is $6. I learned that concept at some point while getting my master’s degree in business administration at American University.

So, the conclusion is obvious: A loan applicant with a $150,000 loan will get a quote from me from the lender with which my predetermined compensation is 1.75 percent.

The law effectively forces originators to steer.

To add to the irony, one of my lenders has spectacularly competitive rates for loan amounts that exceed $300,000. My predetermined lender-paid compensation with this lender is 1.50 percent. On a $300,000 loan, my fee turns out to be $4,500, far more than my budget requires. Dodd-Frank, however, says I can’t change it.

Despite the high lender-paid fee, my borrower receives better terms than had I sent the loan to a lender with lender-paid compensation of 1 percent. But my borrower would have received even better terms if my compensation weren’t fixed by law.

The law surely will prohibit originators from gouging. Unfortunately, it also prohibits originators from discounting, and that’s a shame.

Perhaps this can be best summed up by quoting one of my repeat customers in Charleston, S.C., when I explained the new rules: “Well, that sounds kind of un-American to me.”

Henry Savage is president of PMC Mortgage in Alexandria. Send email to henrysavage@pmcmortgage.com.