The Mortgage Professor: What to Look for in a Mortgage Loan Officer
When a mortgage borrower selects a lender with whom to deal, the identity of the company is much less important to the borrower than the identity of the individual loan officer.
Real estate agents have always understood this. In looking for the smoothest possible financing process, they refer home purchasers to an individual loan officer, not to a company. If a preferred loan officer moves to another company, the real estate agent usually will follow.
This suggests that an easy way for home purchasers to select a loan officer is to follow the recommendation of their real estate agents, and without doubt you could do worse than following that rule.
But you might also do a lot better, because the real estate agent’s criteria for selecting loan officers are not the same as yours. The real estate agent wants a loan officer who will get the loan processed in time for the loan to be available on the settlement date, and you want that as well. But you also are very much concerned with the price of the loan, and with the quality of decision support you receive: what type of loan and what combination of interest rate and upfront fees best meets your needs. These issues are of little interest to the real estate agent.
The problem is that the typical borrower has no reliable way of determining which loan officers do well in providing these services, and which don’t. I have long tinkered with the idea of providing a certification process for loan officers, and finally have one in development that should become available early in 2014. In the meantime, it occurred to me that it might be helpful to prospective borrowers if I explained what will go into the certification process. Astute borrowers can do their own certification.
Certified loan officers will offer price integrity, discussed below, and quality decision support.
Price Completeness: For prices to have integrity, they must include interest rate, upfront charges expressed as a percent of the loan, called “points,” and upfront charges expressed in dollars. On adjustable-rate mortgages, they must include the margin, index value, maximum and minimum rates, and rate change caps. It is not unusual for loan officers quoting prices to omit fees expressed in dollars, and omitting important features of adjustable-rate mortgages is more the rule than the exception.
Posted Prices: Mortgage prices have integrity only if they are the lender’s “posted prices” - those at which the lender is actually prepared to lend at the indicated point in time. Lenders distribute their posted prices every day to all loan officer employees through a variety of electronic systems. Borrowers seldom have access to these systems.
Actual prices may differ from posted prices at two critical points in the loan origination process: the point where a price is quoted to a shopping borrower, and the point where the price is finalized or “locked.”
Price Quotes to Shoppers: The prices quoted to shopping borrowers are often used to select a loan officer. In many such cases, the shopper selects not the loan officer with the best posted price but the loan officer who is the biggest liar. The temptation to “low-ball” quoted prices is difficult for many loan officers to resist.
They can’t be held to the price quote because prices are not final until they are locked, by which time the market will have changed. Lenders post new prices every day, and sometimes within the day.
Prices depend on numerous features of the loan transaction, including credit score, ratio of loan balance to property value, type of dwelling, and type of occupancy. The loan officer looking to land a client, who is asked for a price quote by an impatient shopper who doesn’t volunteer this information, will often assume the best: that all the loan features are such as to justify the lowest possible price quote.
If this assumption turns out to be wrong, which is more often the case than not, the quoted price is too low and will have to be revised. By the time that happens, however, posted prices will change, wiping out evidence of the deception while providing the loan officer with a way to explain the price change.
To protect themselves against this ploy, the shopping borrower must have access to the prices posted on the loan officer’s computer, and must make sure that all the transaction features that affect the price have been properly entered. Don’t expect this to be easy; if it were easy, my job would be done with the completion of these articles. The loan officer certification I have under development will require loan officers to make this process easy for borrowers.
Locking the Price: At the point where the mortgage price is locked, a home purchaser with a scheduled closing date may be fully committed, which provides a second temptation for the loan officer to cheat - this time by locking a price above the posted price. The protection against this abuse is the same as the protection against low-balling: The borrower must have direct access to the posted price.
Jack Guttentag is professor emeritus of finance at the Wharton School of the University of Pennsylvania. Comments and questions can be left at http://www.mtgprofessor.com.