BluefoxToday blog : A suitable mortgage.

A suitable mortgage.

Now that the subprime woes are generating fat headlines across the land, a debate is roiling around what to do about it. One idea that has received a fair deal of attention is the loan suitability requirement. Which means that lenders can only put borrowers in loans that are suitable for them. That they are able to repay. Some consumer advocates also propose that the borrower should have the right to sue if there is any breach of this fiduciary duty. Hmmm.

Frankly, I do have deep reservations about a loan originator being called to make subjective judgments about which mortgage program best suits an applicant. That would translate into him taking the responsibility of making a financial decision for someone else. Just doesn't sound right. Would that potentially open the door to allegations of discrimination? Yes, indeed.

Let's go into it a little deeper. A professional loan officer normally strives to become a trusted adviser for the prospect. So, by looking at the credit report and the application he can form a decent picture where the customer is financially. This is pretty standard. Now the discussion is steered into the borrower's future plans regarding the house purchase or refinance and then, armed with a full package of information now in front him, he can suggest a couple of mortgage programs for consideration. He'd also take a moment to explain the various loan features and answer any questions. Isn't that his role?

If the loan officer follows the suitability doctrine, he would make that decision for the borrower based on what he knows and has been told. What if the borrower falls ill three years later, can't make the payments and defaults on the home loan? He could sue the lender for the breach of his fiduciary duty. What if there is a divorce and the same thing happens? Or the consumer just simply changes his future plans for the worse? The payments were made on time up until that point, the mortgage was deemed suitable, but all of sudden the loan is in dire peril and now the lender could be liable.

I can see the investors who are buying mortgage-backed securities reacting to any legislation like this with alarm. Liability could come knocking on their door, too. What would it do to the cost of mortgage funding? Increase it.

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Provided by: 

Esko Kiuru
Mortgage, real estate and apartment industry analyst 

www.BluefoxToday.com - syndicated mortgage, housing and property management blog

eskokiuru@gmail.com
My cell: 702-499-1006

Comment balloon 9 commentsEsko Kiuru • April 28 2007 05:18PM

Comments

Glad to finally see someone blog concerning what's happening in the mortgage business.  Here's a good website for you if you would like further information, www.mortgageimplode.com.

It's a hard question, with an even harder answer.  Part of the problem is that individuals with "less-than-perfect credit" were give the opportunity to achieve the american dream of home ownership.  Did lenders and investors "just not think" that someone who never paid a bill in their life, would all of a sudden "start paying their bills?"  As you had mentioned in your blog, the problem crosses other borders than just credit impaired borrowers.

As far as legal liability... adults will be adults.  You can only advise and consult till your blue in the face.  People dig their own financial hole.  Professional loan originators/ officers only provide the options to our clients - yet some do steer consumers into loan products that are better for them than their clients. 

The affect and changes in the mortgage industry are nowhere near done.  This affects all of us in the real estate industry - from the banker, broker, real estate agent, appraiser, attorney etc.

Posted by Doug Capps, MMS, CLO, CRMS (Guaranty Bank and Trust Co) over 11 years ago
Excellent post Esko. Having been in this business now for the past 5 years, I really appreciate a logical analysis of what brought us to this point in the mortgage world. Loan officers have a significant duty to do what is right for their clients, but it seems that has been lost in recent years. I'm glad to see we all here to help our clients. 
Posted by Jacob Morales - Arizona Mortgage Planner (US Bank) over 11 years ago

Doug and Jacob,

Thanks for commenting. Looks like this suitability proposal is going nowhere over in Washington. It just wouldn't work.

Posted by Esko Kiuru over 11 years ago

I worry about suitability test however I truly beleive there should be a federal lisc. requirement for individual brokers with no bank exemptions ( for a level playing field) We have to have this industry change to reflect a fiduciary responsibility to the clients. The concerns this would create like the need for individual e&o policies or bonds would concern me but it would take many part time people out of the equation and require mandatory training for new hires. I want to keep new blood coming into the industry, but I don't want them in a place where they learn the wrong way. I have been in the business for 10 years some new people I have watched come into the industry at good employers have lasting mindsets for success and integrity. Those that came in at lesser companies either leave or reflect their coworkers.

 

Great topic 

Posted by Alan Lacey (Alan Lacey-) over 11 years ago

Personally, I do not worry about the suitability test.  Just like those in the securities arena, I use questionnaires that help show what loan solutions I suggest fall into their suitability anyways.  Also, bad things happen unexpectedly and just as in securities, if the product you suggested at the time met their suitability at the time, you will have no issues. 

The key, if this issue does go through, will rest in proper documentation to prove the product was suitable at the time and that you offer ways to change it accordingly as their siuation changes, such as an annual mortgage review.

While I prefer greater issues being regulated, I am not worried about this issue if it happens.

Posted by Robert D. Ashby, Turning Visions into Photographs (and Videos) (Visual Approach Aerial Photography (Visual Approach Photography)) over 11 years ago

Alan and Robert,

Appreciate you weighing in on this. Debate is so important, among us AR people and those in Washington.

Posted by Esko Kiuru over 11 years ago

Great post

 

i also enjoyed others comments on it

 

adults will be adults...............

 

i said if they didnt use me and i said "morally" we shouldnt do this loan.....they would just go somewhere else

 

something else to consider there

 

DOMINICK GACCINO

First Suffolk Mortgage Corp

Posted by Dominick Gaccino (Dominick gaccino) over 11 years ago

Dominick,

That's a great point. Fortunately, looks like this suitability movement is losing steam.

Posted by Esko Kiuru over 11 years ago

Ben'

Unfortunately some people got caught up in the hype of soaring real estate values and lost their good judgment. Paying bills is paramount.

Posted by Esko Kiuru over 11 years ago

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