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The Right Expectations.... the Mystery Behind the New CO Mortgage Broker Laws

This will help real estate brokers with expectations from their mortgage brokers, as well as help the expectations of buyers/sellers in the loan process---and hopefully cut down on mistakes-- if real estate brokers know what’s going on in Colorado now since January as well as the current “loan climate” in general…

For me, I went inactive with my Realtor(R) license after talking at length to mortgage industry watchdog, Jim Spray, at the Land Title CE class in March--- he’s on Erin Toll’s mortgage broker task force and I decided....

....then to choose the side I’m on and not risk the coming conflicts.

Then of course, is the conflict of interest with real estate brokers working both sides of the fence as mortgage brokers AND real estate brokers.

Some seem to handle the situation well, turning a lot of business. They "sell" the idea to their clients by letting them know if one person handles the entire transaction the process will go more smoothly, more controlled and cost them less too. They figure there is less chance of misunderstanding and mishandling the privacy of the client.... and with the rough reputation of most mortgage brokers such agents are able to garner more trust from their clients.

Gives one pause to consider such statements. From my perspective as a consumer, such claims are seductive and infer an easier home buying experience...all under one roof and all that.

The premise sounds good, sounds like a valid benefit to the purchaser, the consumer.

However, real estate broker laws written to prohibit acceptance of kickbacks, referral fees and rebates from those businesses directly related to the transactions...like from the title companies for example, were written into law to PROTECT the consumer from eventual scams that harmed the consumers in the end.

I see this coming here to Colorado in the future, the prohibition of being on 'both sides of the fence".

Then of course, there's the issue of the complexity of each business and staying on top of both and still representing the best interest of the consumer.

This post is about that complexity of the mortgage broker's business.

So... why do mortgage brokers have such a bad rap? Do I EVEN need to ask???

1. Failed closings for a wide variety of reasons
2. Wide variances of what is presented at the closing table to what was in the
Good Faith Estimate
3. Equity stripping
4. Prior lack-of-sophistication of borrowers
5. Last minute everythings
6. Once the application is taken and they've "woo'd you"... they NEVER CALL YOU or
the BORROWER BACK!

All this happened to me personally of course... showing up to a closing where the monthly payment was now fully $500 more than promised...to close or not to close?...showing up to a closing for an investor that wanted to re-sell the home to the rent-to-own tenant in two years and the loan now had a 3-year $15,000... that's FIFTEEN THOUSAND DOLLAR prepay...to close or to walk?

And my own home, way before I knew how to read these things called HUD1 Statements and Good Faith Estimates...such a mystery... my own home stripped of $24,000, that's TWENTY FOUR THOUSAND DOLLARS within the first four months of closing and I was oblivious because I was paying just $858 a month on a supposed $220,000 loan...didn't realize the stripping until 3 years later when I needed to refinance out of that loan because the $858 was now becoming $1600 a month...and there was barely enough equity left to refinance a $244,000 loan!

Am I on the right path here in painting a picture of "why I hate mortgage brokers"?

So, in the Colorado "mortgage broker" past:

1. Anyone could be a mortgage broker, no license, no laws, no one overseeing
2. There was a lack of borrowers sophistication...they too didn't know the laws, the rules
and mortgage brokers could totally hide behind the mystery of the entire process
3. The mortgage brokers could hide massive profits both upfront, and "back end" in the
rates game and what the lender investors were willing to pay for this or that rate or
this or that program and the brokers just told the borrower "this is all you qualify for"
whether or not that was true...if the brokers made more profit with it, that became the
instant qualifier and no one was the wiser.
4. Mortgage brokers in the past didn't even have to know much about what they were doing,
I think this is why most don't call back, they don't have a clue when this or that portion
of the process "doesn't work" and totally can't own up to their ignorance and total lack
of responsibility for their actions.
5. Forget about mortgage brokers knowing and understanding how a Contract to Buy/Sell
Real Estate works...bet they haven't even READ one lately!
6. In the past, mortgage brokers (and many today, even licensed unfortunately) don't all
know the title company rules, appraiser rules, Federal rules....
7. In the past...and certainly still now...there is still a big problem with the employees of
banks writing up loans...they STILL are EXEMPT from licensing. Who knows what kind
of training the bank is giving them...and many banks now aren't even hiring...some are
laying off massive numbers of loan sales reps!


Ok, so now the "GOOD stuff"... the "now" of Colorado, the NEW RULES as of Jan. 1, 2008 (and there’s more to it than I’m giving here, exceptions, etc), see the CO Division of Real Estate site….)

Colorado Mortgage Brokers must be/have:

Licensed, good for 3 years, then renewed
Surety bond of $25k, renewed yearly
Errors & omissions insurance just like the real estate brokers, renewed yearly
Finger printed/background check
40 hr (or less depending) mortgage broker education class by Dec 31 08 (that’s
FIVE DAYS in class) plus pass a PSI Federal/State/Practical Exam
(I was one of the first ones to finish and pass the exam back in April)

There is now a massive new Colorado tome of laws, not just “real estate law” knowledge to figure out—now this tome is about “money” too. (When was the last time you had to read the Real Estate Manual Commission Position Statements several times just to understand them to get an answer…try reading through the new CO mortgage broker laws.... even more fun!

And, now there are loan audits, monitoring, scrutiny of loans originated…

There is a massive FINANCIAL RESPONSIBILITY of the mortgage brokers...if the new loan closes/funds and is found to be fraudulent and it can’t be “sold to the market” even because the borrower was not truthful…the mortgage broker could be liable for THE ENTIRE LOAN AMOUNT!

There are also now NEW 3 CO DISCLOSURE forms given to the Colorado borrower with their initial application estimation docs to sign:

1. locking of rates disclosure form
2. benefit of the loan to the borrower disclosure form (the borrower needs to initial which benefit they are receiving)
3. total mortgage broker commission (front and back) that will be earned disclosure form

And, those FHA approved mortgage brokers must meet ADDITIONAL requirements:

....(yes.... the FHA LOAN and LENDER/INVESTOR requirements to close a loan, DTI, appraisal requirements, etc.)...

But: to actually be approved to provide FHA loans (more to it, see the FHA site):

1. One of the company's senior officers have to meet experience/yrs in industry req
2. Net worth ($67k to $250k in LIQUID (not lines of credit) assets…usually $250k)
3. Audit every year
4. Renewal every year
5. Any loan officers working for them…not only individually licensed (unless a bank),
but must be EMPLOYEES of the brokerage, not 1099
6. Office facilities requirement…how the will protect people’s identity, shredder mgmt etc
7. Geographic restrictions
8. Must be sponsored in
9. Financial statements /personal credit reports submitted

So...a lot of hoops to jump through to get FHA approved.

Also, just for anyone's benefit of info here....there definitely is NOT as much money to be made now…maybe 1% to as much as 3% of the LOAN amount (front and back combined!).

There are not many that are making their fortune in this business anymore whether they’re one of the “good guys” or not. Yes, sometimes the mortgage broker can earn a little more if they are doing a difficult loan, but there is now a need for documentation of why the amount was earned, company policy of what is earned in general and etc. Many loans with high profit now are open to the possibility of audit.

So yes, we make maybe 2% in general, not the contract sale amount like the real estate broker, who usually gets their acknowledged, no questions asked, 2.8% when they close with the buyer…

Keep in mind too that many borrowers are getting more sophisticated, are being taught about “shopping” their loan now (without understanding even what they are asking to negotiate unfortunately!) and tie that in with the realization that many/MOST mortgage brokers, just like the real estate brokers with their brokerages…have to SPLIT their commissions with the mortgage brokerage too…

AND, since all are entrepreneurs like the real estate brokers... so too do they have upfront office fees, marketing fees, credit pull fees, processor fees, underwriting fees, lender fees, FHA fees, license/insurance/bond fees, etc. etc. etc!

Yes, mortgage brokering is highly complex and not for the feint of heart:

We have to look at a massive amount of information (and entreat the borrower/ real estate broker to be telling the absolute truth) and match that information up with the laws (Colorado and FEDERAL), with the lender/investor information, with the commissions offered per rates, with what rates can qualify, with the analysis of the each different "program" requirement....just in order to not have to come to the closing table with money….let alone make a "profit"!

(Yes, the owner of the company I work under brought $3700 of HIS OWN MONEY to close on a promised loan he made because he wanted to keep his word...I can’t ever remember having to bring potentially thousands of dollars to close on a sale where I made a mistake as a real estate broker…

But anyway, (lenders/investors charge FEES to the mortgage broker if the rate is such and such, the FICO score is such and such, if the property is in a certain city/county…all kinds of things and EVERY LENDER is DIFFERENT, each LENDER has their own “declining market” for example, score levels they will or won't take, loan limits they will or won't loan on...) So when (notice I didn't say "if"!) a mistake is made, the loan officer/mortgage broker is potentially liable for payment!

As a note too, there are Laws about rate disclosures how the APR must be presented… (and real estate brokers can NOT quote rates/terms unless are licensed mortgage broker now)

There is also a new Colorado ADVERTISING rule now that says every piece of advertising... flyers, postcards, websites and the like, that the mortgage broker license, address/phone must show AND the little statement about checking the status of the mortgage broker license by going out to the DRE site.

Couple the new requirements, the huge financial liability and responsibility of these "newly minted Colorado mortgage brokers"... and here's the fun part:

I can now with all certainty and confidence GUARANTEE....only that I WILL make a mistake! And like they say..."as long as you can jump in there and do all in your power to make it right"...

I say this about making mistakes, because think for a moment on what goes on "behind the scenes", the mystery of the dark secrets, the "man behind the curtain".... here's a line up:

Keep in mind all the new laws and rules, all the old laws and rules, Colorado and Federal, all the laws and rules of every LENDER/INVESTOR and all the laws and rules of HUD and all the laws and rules of FHA itself and then:

Work with/coordinating:

1. Lenders and their underwriter’s parameters
2. Appraisers who now are under the gun to not be fraudulent,
3. A surly processor who might get busy with loans ahead of this one and the
file sits on his/her desk for 4-5 days and they don’t tell the mortgage broker
4. Or it makes it timely to the lenders UNDERWRITER who finds a piece of
document they need missing and sets it aside for 4-5 days and
DOESN'T TELL THE PROCESSOR or the mortgage broker
5. AND the borrowers needs to provide “just one item” and they drag their feet even
though the mortgage broker is calling them every day
6. Keep in mind the real estate brokers on the buy AND sell side with their
deadlines and who might not communicate


And you can maybe now see how many loans are painful to finish and the good mortgage broker does everything in their power to shield the real estate broker and the borrower from that pain…big problem if any parameters (CBS/price/credit etc) are changed mid project:

So to set expectations with yourselves and with the borrower: I have copies I can give you of the “very personal questions” I MUST ask a borrower to get it started, and a copy of the possible required docs I will eventually need from them…if any of you on my exclusive email list want a copy, email me and I will forward those to you.

You can help set up the expectation that these questions to the borrower are critically important and timely and know in the back of your mind what’s going on too with the mortgage broker.

And by-the-way, a couple of reminders from Jim Spray: if you gather prequal info yourself as the real estate broker, don’t get SSN/dob…liability identity theft issues now, and definitely DON'T quote rates/terms... you MUST now be a licensed mortgage broker to do that.

The best.... pass your prospects over to me, I'll ask those questions privately with the borrower, or together with you in your office.

Happy cattle ranching and farming y'all!

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This page contains a single entry from the blog posted on July 10, 2008 9:29 PM.

The previous post in this blog was Melisa Billman has a LAND LISTING.

The next post in this blog is Leann Boatright working diligently for her buyers....

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