Back With a Passion

Okay okay... I've been hearing it from many people, what happened to the blog? With this being my official "back in action" post I think it makes sense to open with a a short explanation regarding my absence over the last few months.

As is true with most front page news, the media has done an exceptional job keeping an incredible story from breaking and becoming national cover. Namely the fundamental changes that were made to the real estate finance industry due to the passage of the Dodd Frank Bill some time ago.

Last April 1, (a cruel joke that it was implemented on April Fools but is in fact law) 2011 new compensation rules went into effect that created specific parameters in which the originating loan officer could be compensated for the work performed when securing a home loan for a client.

The new rule, designed in the favor of large institutions essentially creates two boxes from which the borrower can choose from: lender paid compensation, and borrower paid compensation.

Lender Paid Compensation requires that the originating agent determine before your transaction begins with the lender what their compensation will be for all loans that will be originated in the future. Once this fee for service is determined, it cannot change even if everyone involved with the transaction agrees/wants the fee to change. In addition the borrower is not allowed to pay any portion of the fee collected by the loan originator. the idea behind this is that everyone should have to pay the same amount as everyone else - that is after all what's "fair." Of course there is nothing fair about the real world, a cruel truth proven by the fact that the borrower and loan originator no longer have the ability to determine the fee structure between themselves - that choice has been removed in the lender paid compensation model.

Borrower Paid Compensation works differently. The borrower and and loan officer have the ability to negotiate the fee for service collected at closing know as the origination fee, however if this compensation model is chosen, the lender is prohibited from paying any portion of the origination fee with any credit generated from the agreed upon interest rate. In other words, third party charges can be paid for with the credit, but the loan originators fee for service must be paid in full by the borrower either in cash brought to the table or with equity out of the refinance. In addition if this compensation model is selected, the loan officer cannot directly collect any portion of the origination, their compensation for the work completed must come from either a salary, or an hourly wage their company is paying them. This requirement makes it mandatory for any lending institution that wants to offer the borrower paid model makes all their loan officers W2 employees, which increases the cost of overhead and operating expenses making the cost of closing more expensive (starting to see why this legislation benefits the big banks). While doing so, it removes the incentive for the loan officer to work to reduce your cost of closing because they get paid regarding of whether you choose to close the loan or not (remember they're getting paid an hourly or salary as the wage), and will be told by management what the origination fee must be if a borrower chooses that compensation model.

In addition the regulations now required to operate and the red tape that must be cut through has become a close to insurmountable task. The end result is most loan officers and even some lending institutions have determined it simply doesn't make sense operating in such an environment. With the additional costs and regulations experienced loan officers are leaving the industry, and being replaced with "order takers" trained to a bare minimum, unfamiliar with the history of our industry and real responsibility of a loan officer - namely securing the best possible terms for their clients. It has become, this is what is available and the cost, take it or leave it.

I was unwilling to accept this as my fate, and knew there had to be a better solution for my clients. The end result was my opening a new brokerage. My new brokerage, Culture Mortgage, currently offers both lender paid and borrower paid compensation models, something most brokerages do not offer because of the new requirements. In addition I have aligned myself with lenders and arranged my lender paid compensation to be in the lowest tier possible, which means you get the best possible terms.

In the coming weeks, this blog is going to be reactivated and you will again see regular posts from me regarding market direction and changes going on within our industry. What I broke down above has had and will continue to have a profound impact on the real estate market. If you would like additional details, and there are many about this post your comments or send me a personal email.

It's good to be back.