A better way to select a mortgage loan originator

One important reason the home-loan market works so poorly is that borrowers have no reliable way to select the loan originator (LO) - the individual who takes the borrower through the loan process.

LOs are loan officer employees of a lender or broker, or a broker herself. The problem is that LOs have a financial incentive to use the large knowledge gap between themselves and borrowers for their own benefit.

In other markets, people acquire the information needed to select a service provider through experience. I tried numerous barbers before I found one who cut my hair exactly the way I wanted it. In my 51 years as a homeowner, however, I had only two mortgages, spaced 15 years apart - not nearly enough for the trial-and-error approach to work.

The most widely-used tactic is to follow someone else's recommendations, but those of other borrowers are typically based on a single episode that is often misinterpreted. Referrals from real estate agents are based on multiple transactions, but the interest of agents is not entirely the same as that of borrowers. Agents recommend LOs who can be relied on to show up at the closing table with a fully processed loan. Whether it is the right loan for the borrower, and fairly priced, is not their concern so long as the borrower doesn't complain and blame the agent.

This article describes a new way for borrowers to select an LO: certification by an unbiased third party.

I plan to use this approach on my own website in connection with reverse mortgages, where the need for disinterested advice is the greatest. Reverse mortgages are more complicated and less well understood than standard mortgages, and despite mandatory counseling, the potential for abuse is enormous. When this approach is fully implemented, seniors will be able to select an LO from a list of certified LOs in their ZIP codes. The listing will include biographical information about each LO.

The LO certification process focuses mainly on two objectives: decision support and price integrity.

Regarding the first, seniors who take a HECM reverse mortgage must choose between mortgages with fixed-interest rates and those with adjustable rates. In many cases, they will also choose between a high mortgage insurance premium and a low premium with reduced borrowing power. Seniors who take the adjustable-rate mortgage, and most of them will because of its greater flexibility, must also decide on a particular combination of draw options: upfront cash, monthly payment and unused credit line. The number of combinations has no limit.

To make sure that these decisions are as good as they can be, we will require the LOs we certify to take seniors through a four-step process using my powerful HECM calculator. The calculator shows, among other things, how the allocation of borrowing power to one option affects the amounts available of other options. For each combination of options considered, furthermore, the calculator shows the consequences for the senior's future financial status. This includes her remaining equity in the home, and options to convert from one way of drawing cash to another. Reverse mortgage counselors do not do any of this.

The price integrity objective is equally important because the dual interest rate system that is used on HECM reverse mortgages makes it relatively easy to overcharge the borrower. The "expected" interest rate used to calculate the amounts the senior can draw is locked for 120 days shortly after the borrower submits an application. The actual interest rate on the mortgage, however - the rate the borrower will end up paying - is not locked until the processing is largely completed, which typically occurs shortly before closing. A change in that rate from what the borrower might have been told earlier - assuming that the matter came up at all - will not affect the amounts the borrower can draw, and therefore may not be noticed.

To prevent that and other possible abuses, we will require complete price transparency by the LOs we certify. They must maintain up-to-date prices on my website, where they will be accessible to any senior dealing with them, at any stage of the process including the day that the price is locked.

Certification of LOs in the standard mortgage market will be based on the same principles, implemented with powerful online calculators. The LOs will be required to provide decision support on the type of mortgage and on the combination of interest rate and points that best meets the borrower's needs. Price integrity will be guaranteed in the same way as in the reverse mortgage market.

The promise of the certification approach is that it will make the market work better for people without adding new players to the loan-origination process, or slowing down the process.

• Contact Jack Guttentag via his website at mtgprofessor.com.

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