A Mortgage Consultant?

I received a call this week from a person on the mainland inquiring about getting a mortgage for one of his clients.  He gave me a somewhat sketchy story of the borrower’s situation, and that’s when I got that feeling that something wasn’t right.

 

If you’ve ever spoken with me on the phone about obtaining mortgage financing, I ask some very detailed questions.  The ones that call asking “hey, what’s your rate today?” and expect me to spit out some number, obviously have no clue how mortgage rates are determined.  On a side note – that’s why I stopped publishing rates in the newspaper 15 years ago and shake my head when a client references the menu of rates on another lender’s website.  Our website will provide you with a rate quote, but you’ll have to enter a lot of (non-personal) information to get an accurate quote.  Anything less, simply isn’t accurate.

 

What got my suspicions about this call from the financial consultant was the lack of clear information he had on his client.  What really triggered by “Spidey-Sense” was when he asked if his fees could be paid at closing from the loan proceeds.

 

The Real Story:

When I was finally able to talk directly with the borrower, I got the real story, which turned out to be very typical here in Hawaii.  Kainoa is a hard-working union carpenter that lives in his family’s home on Oahu.  His parents have now finally passed away and he needs to get a mortgage to pay off the current mortgage plus tap into the equity to pay his brothers in exchange for Kainoa getting the home for himself.

 

I love working with clients like Kainoa because they are genuine people that work hard every day at their job and expect the same from those they hire.  But in so many cases, guys like Kainoa lack any financial education and rely on friends and family to connect them with the right people when needed.  Referrals can be either hit or miss.  And if you lack understanding of the situation, you can easily get taken advantage of.

 

Kainoa asked a high school friend where he should go to get the loan he needed.  His friend hooked him up, saying he “knew a guy that could help”.  That’s how Kainoa met the mainland financial consultant.

 

 

The “Work” to be Performed:

In my initial call with the mainland “consultant” I asked him what work he was doing on behalf of Kainoa.  He told me his service was to find Kainoa a lender for his situation and help gather what documents would be needed.  To put in plainly, he expected a fee in exchange for doing research to find a lender like me and be the go between throughout the transaction.

 

Sending your personal private documentation to a 3^rd party is a bad idea for many reasons.  First, every time your documentation jumps to another recipient it adds a layer of risk for possible exposure to thieves.  Second, using a 3^rd party will slow down the process.  And third, it isn’t necessary, because you should be dealing directly with the entity that is requesting your personal information anyway.

 

This individual clearly did “some” work to find a suitable lender.  I am sure they started with a google search for “mortgage in Hawaii” and proceeded to make some calls.  Should this “consultant” receive a fee for that kind of work?  And if you think they should, how much should they earn for 30 minutes of work?  What about the work of being the go-between?  How much should someone get paid to forward document requests, get the documents emailed, then forward them to the lender?

 

If you were busy, or in Kainoa’s case swimming in unknown waters and needed a helping hand, how much would you be willing to pay for this service?  In the case of the consultant, he felt his services were worth 2% of the mortgage loan amount, which would be $13,000.  Another red flag was the compensation being tied to the loan amount.

 

 

Mortgage Regulations are Specific and Strict:

Residential mortgage financing is one of the most heavily regulated industries in the US, and for good reasons.  Because consumers are dealing with such large sums of money, the temptation for bad actors to take advantage is significantly higher.

 

Let’s start with the consultant’s fee to find a lender.  What if Kainoa had asked his tax preparer or a real estate agent for a referral.  Could they have earned a fee?

 

The answer is NO!  The Real Estate Settlement and Procedures Act (RESPA) specifically prohibits referral fees to anyone.  Why?  Because no matter how small the fee requested, no one should be making money by connecting a borrower with those earning fees from the transaction.

 

Why should Kainoa pay a fee for someone to find him a lender?  The steps required by a consumer to find a mortgage lender are relatively easy.  Some start by asking the teller at their bank.  Others look at those generic rates in the newspaper.  By far, the most common approach today is doing an internet search.

 

Paying someone to find you a mortgage lender only drives up the cost for the consumer.  That’s why it is illegal. 

 

The same holds true for someone wishing to collect a fee for handling your documents.  In the eyes of regulators, why would the consumer need to pay for an extra step in the process?  If the consumer can provide documentation to a 3^rd party, why can’t they just as easily provide it directly to the lender?

 

 

How This Story Ended:

Kainoa’s story is no different that lots of people out there.  Kainoa just didn’t know any better and relied on advice from a friend.  I have a sneaky suspicion that Kainoa’s “friend” was ultimately going to receive a portion of the consultant’s fee.

 

I informed the consultant that I believed his request for compensation was a violation of RESPA.  And as such, he was not going to be able to get paid from the loan proceeds.  I have not heard from him again.

 

I also informed Kainoa of RESPA and that what this consultant was trying to do was not allowed.  At the conclusion of my conversation with Kainoa, he was thrilled that despite the path he took to get to my door, he feels he is now in good honest hands.

 

 

The Conclusion:

The only people that can get paid for providing you residential mortgage financing are licensed Mortgage Loan Originators.  And to get paid, that MLO must do work on your behalf.  A referral is not considered actual work.  That’s why it is also illegal for an MLO to pay a referral fee to another MLO.  I get calls regularly from prior clients asking for a referral to finance a mainland transaction.  I never receive compensation for that referral.

 

All of us know a Kainoa.  Share this story with them.  There’s a link at the top of this newsletter to make it easy to share, or just forward this email.  Kainoa is fortunate to find an honest lender.  It saved him from paying an illegal fee of $13,000.  Help the Kainoa is your life avoid the same mistake.

 

 

 

 

 

And now the week’s economic news…….

 

Mortgage Rates Rise

Stronger than expected economic data was unfavorable for mortgage markets this week.  While the latest inflation data was close to expectations overall, consumer spending displayed surprising strength.  As a result, mortgage rates climbed to the highest levels since early July.

 

The Consumer Price Index (CPI) is one of the most closely watched inflation indicators released each month.  To reduce short-term volatility and get a better sense of the underlying inflation trend, investors look at core CPI, which excludes food and energy.  In October, Core CPI was 3.3% higher than a year ago, matching the consensus forecast and the same annual rate of increase as last month.

 

Although this annual rate is down from a peak of 6.6% in September 2022, it is still far above the readings around 2.0% seen early in 2021, which is the stated target level of the Fed.  Shelter (housing) costs were 4.9% higher than a year ago and continued to be a primary reason why inflation remains stubbornly elevated.  Other categories which posted large monthly increases included airfares, used car prices, and medical care services.

 

Another significant inflation indicator released this week which measures costs for producers also was essentially in line with the consensus forecast.  The core Producer Price Index (PPI) was 3.1% higher than a year ago, up from an annual rate of 2.8% last month.  Of the two major inflation reports, investors tend to place less weight on PPI, since it reflects a smaller slice of the economy than CPI.

 

While many forecasters have been predicting a slowdown in spending by consumers due to higher prices and credit card rates, the latest report indicated that consumer spending remains unexpectedly strong.  In October, retail sales rose a solid 0.4% from September, just a little above the consensus forecast, but the results for the prior month were revised significantly higher from an increase of 0.4% to a massive 0.8%.  Some of the categories displaying strength included autos, bars/restaurants, appliances, and electronics.

 

 

 

 

Next Week

Investors will continue to look for additional guidance from Fed officials on their plans regarding future monetary policy.  It will be a light week for economic reports with a focus on the housing sector.  Housing Starts will be released on Tuesday and Existing Home Sales on Thursday.

 

 

 

 

Until next week…….