My new program to certify mortgage loan officers (LOs), which will become operational early next year, will focus on two features that are critically important to borrowers: price integrity and decision support.
Last Saturday's article in this series discussed price integrity, which requires LOs to quote complete prices that include all price dimensions, and valid prices the lender is prepared to honor. LOs offering price integrity do not understate the prices they quote to mortgage shoppers in order to corral them as clients, and do not overstate the price when they lock it for an already committed client.
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Decision support means that the LO offers expert counsel to the borrower on the type of mortgage, and the combination of interest rate and upfront fees on that mortgage type, that best meets the borrower's needs. These decisions, which can have very important consequences for the borrower in future years, are often made in haste, subject to bias or questionable rules of thumb, with little or no consideration of alternatives. Here are some common examples:
• Some borrowers opt for 30-year fixed-rate mortgages for no other reason than its popularity, without considering the possibility that an adjustable-rate mortgage, or ARM, would reduce their interest cost over the period they are likely to have it.
• Some borrowers opt for ARMs for no other reason than their relatively low initial monthly payment, without considering the risk of future payment increases.
• Some borrowers select the rate/fee combination that involves the lowest upfront fee without considering what this will cost them in higher interest payments down the road.
• Some borrowers fail to take advantage of their transaction being close to a pricing "notch point," where a small reduction in the loan amount or increase in fees will reduce their interest rate.
• Strangest of all, some borrowers select an FHA over a comparable conventional mortgage, disregarding that the FHA is more costly.
A good LO will prevent borrowers from making such mistakes, but many won't and there is no good way for a borrower to know in advance whether an LO will be helpful. The natural bias of LOs is in getting the deal done as soon as possible, and they have no financial stake in how it works out for the borrower in the future. If a borrower has made his or her own decision and expresses no interest in the LO's views, the natural tendency of the LO is to go along. This makes certifying LOs on the quality of decision support a formidable challenge.
We have confronted the challenge by developing a unique decision-support program with the following features:
• It calculates the total cost to the borrower of each type of mortgage, and each combination of interest rate and upfront fees, over the period the borrower expects to have the mortgage.
• Costs incurred at different times are adjusted for the time value of money.
• Tax savings and amortization are deducted from total costs.
• On ARMs, costs and payments are shown for both "no change" and "worst case" scenarios.
• Because comparative results in many cases depend on how long the borrower has the mortgage, which few borrowers know for sure, the program makes it easy to see how changes in the period affect the results.
The program forces the user to look at alternatives, and quantifies the differences between options. It does not eliminate the need for judgment, but informed judgment replaces preconception and bias.
To be certified by us, LOs must master the program, must inform borrowers that the program is available, and must offer to guide them through it. Some borrowers will refuse, but those who want expert help will be assured of receiving it.
While the certification process has not yet begun, the program is freely available on my website to anyone. Resourceful borrowers can access it on their own, and those who want to work with an LO don't have to wait for my certification. They can ask any LO they approach to work through the program with them. If the LO says no, that should tell you something about the LO.
• Contact Jack Guttentag via his website at mtgprofessor.com.