Industry Commentary

Commenting on the Industry's use of Closing Cost Worksheets as a supplement  to the revised Good Faith Estimate (GFE) that is required as of January 1, 2010

Worksheets are useful as part of an initial discussion with the consumer. "It gives the consumer a snapshot" of the costs "before the GFE is issued," said Don Romano, vice president of the UpFront Mortgage Brokers Association.

"But it is critical now, because the GFE has to be so accurate," he said.

He noted that his association supports the upfront disclosure of the mortgage's broker's fee on the worksheet.

He also noted that the lenders are using higher estimates of fees on the GFE, so they don't get caught short at the closing table and have to pay for any mistakes.

"That is what you expect to see on the initial rollout of such a drastic change," Mr. Romano said. "As they get more comfortable with the accuracy of the numbers, they will get rid of the cushion."

Commenting on the changes in the Federal Truth in Lending Act that went into effect July 30, 2009:

The regulation mandates a three-day review period for the loan documents before the loan process can begin in earnest. And if the interest rate changes even marginally before the settlement date, a new set of disclosure documents must be given to borrowers, restarting the review procedure.

Don Romano, the past president of the New York Association of Mortgage Brokers, said the new regulation would "add a level of consumer protection" to the mortgage process. But he said, "it takes a lot of flexibility away from the borrower, in getting to the closing table at the best time."

Commenting on the February 25 report of the U.S. Treasury's Financial Crimes Enforcement Network (FinCEN) that identified an increase in Suspicious Activity Reports (SARs) of 44% in a 12 month period:

For Don Romano, president of Shelter Rock Mortgage Corp. in Lake Success, N.Y., the FinCEN findings confirm the the industry is winning its fight against mortgage fraud.

"My read on the increase in SARs is that we are not seeing an uptick in fraudulent activity, just an increase in reporting." he observes. "When the housing market was booming, many fraudulent mortgages were either performing well or the lender could pressure the participants to sell off the property in question.  It was only the 'organized ring' types of fraud that were being reported. Now that we are in a depressed housing market with even what seems to be well underwritten mortgages getting into trouble, fraud of all kinds is being reported. This cover-your-assets mentality is yielding a greater number of SARs being reported." 

"A Capitol Win" by Brian Collins, Broker Magazine, October 2008:

Commenting on the passage of H.R. 3221 regarding broker fee disclosure:

The Upfront Mortgage Brokers Association believes brokers should disclose their fee upfront so the borrower knows what they will be paying at the closing table. If the YSP paid by the lender exceeds the contractual amount, it is credited back to the borrower. "The upfront brokers' legislative policy is exactly how they conduct business," UMBA vice president Don Romano said. UMBA supported the inclusion of the National Mortgage Licensing System and Registry in the bill. "It is something that should have been done years ago. Unfortunately, everything is done on a reactive basis instead of being proactive," Mr. Romano said.

Commenting on the passage of H.R. 3221 regarding a bonding requirement for brokers originating FHA mortgages:

Mr. Romano noted that the issuer of the security bond also is going to keep an eye on the broker. "If the bonding agency isn't happy, it is not going to keep writing the bond," said the president of Shelter Rock Mortgage Corporation in Lake Success, N.Y.

PERSON OF THE WEEK: UpFront with Don Romano

By Phil Hall on Tuesday 26 August 2008

This week, MortgageOrb takes a view of the industry from the broker's side of the equation. Our person of the week is Don Romano, president of Shelter Rock Mortgage Corp. in Lake Success, N.Y. , and vice president of the UpFront Mortgage Brokers Association (UMBA).

Q: For those who are not familiar with your organization, what exactly is an "UpFront Mortgage Broker"?

Romano: Mortgage brokers conduct business through one of two models. The vast majority of mortgage brokers operate as independent contractors. They do not represent the best interest of the consumer, even though many consumers assume they do. The typical mortgage broker operates like a merchant that buys at one price and sells at a higher price.

The same can be said for loan officers that work for a mortgage banker, a credit union, or a bank. All can increase their personal compensation based on whatever they can induce the borrower to pay for a loan. And they can often increase their compensation based on the type of loan they can convince the borrower to take.

The alternative business model is that of the UpFront Mortgage Broker (UMB). A UMB operates in a quasi-agency manner. A broker conducting business through this model is offering his services to the consumer for a set fee (compensation) that is agreed upon between borrower and broker at the very start of the process. He agrees to act in the best interests of the customer, guaranteeing that the fee quoted up front will be the total compensation for services. The broker enters into a service agreement with the applicant, which states that for the agreed upon compensation, a bundle of services will be provided to the applicant.

Because the UMB's fee is established up front, the UMB has no incentive to place a consumer in anything but the best loan that fits the consumer's needs. The consumer knows that the information and counsel that they receive from a UMB is objective and impartial.

Q: Many mortgage bankers have a poor view of brokers, and more than a few industry leaders initially blamed brokers for much of today's crisis environment. How is UMBA working to improve relations between the mortgage banking and mortgage broker sectors?

Romano: If you look closely at pending legislation on the federal level and in various states, you will see that the trend is to legislate all mortgage brokers to conduct business as UpFront mortgage brokers do. Our brokers have been conducting business in this manner for most of their careers and organized themselves into an association back in 2000 to encourage more of the industry to conduct business in the same manner. We have in effect created the working model for the future of the industry.

Speaking on behalf of the industry, mortgage brokers are taking more blame for today's crisis than they deserve. To begin with, we make an easy target for the lenders. We are small businesses who are totally dependent on the lenders to place our mortgages.

In order to protect their own creditability in the marketplace, it became beneficial for lenders to deflect blame towards us. Third-party originated mortgages may be the most profitable channel for a lender, but we became collateral damage, as they protected their images.

We also can't lose sight of the fact that the programs and pricing options were designed by these lenders and then were underwritten by these same lenders. The mortgage broker was offering to the public what was being presented to them by the lenders.

Every entity involved in the mortgage market, from the regulators right on through to the consumer, share in the responsibility in what happened. This mortgage crisis will end only when everyone recognizes what went wrong and each one of us works to correct the errors.

Getting back to your question - we're working to improve relationships between bankers and brokers by example. We feel our business model better serves the community and therefore is a more professional way of conducting business. We are doing whatever possible to encourage all brokers to embrace our business model.

Q: The UMBA recently sent a letter to the Federal Reserve Board expressing disappointment in the final rule amending Regulation Z. What was UMBA's problem with this amended rule?

Romano: In the original draft of the rule change of Reg Z, there was a requirement that mortgage brokers commit to their compensation at the start of the application process. This was, in effect, the UMB model of operating. This requirement was eliminated in the finished version of the rule change.

Since we believe that the UMB model is the best way for consumers to shop for a mortgage loan, we felt that the Federal Reserve would have better served consumers by leaving that requirement in the rule change.

Q: How do you see the current housing crisis evolving? And what effects will this have on the mortgage broker sector?

Romano: The industry has learned a very expensive lesson. As much as we would like every American to own a home, there are certain minimum standards that an applicant needs to meet in order to afford that home. The industry has overcompensated by making mortgages unavailable to many Americans.

Underwriting standards will move back to a condition of common sense underwriting, where the average American can buy a home they can afford and one where they can raise a family without going deeper into debt. A mortgage broker will need to provide the services of a trusted advisor to the applicant if he wants to continue in this business.

The business of being a mortgage broker will need to evolve into being the profession of mortgage advisor. There is a definite need for this profession in the housing market.

Companies acting as both the real estate agency and mortgage broker in the same house sale can lead to so many problems for consumers that the "two hats" practice should be outlawed, the New York State Commission of Investigation concluded after holding hearings on the subprime crisis. Though the practice is not illegal as long as there is full disclosure, there is still concern it could be abused, according to the report released Thursday." The potential for conflict of interest and outright criminality is so great . . ." according to the report, "A Perfect Storm: Easy Money and the Mortgage Meltdown." It was probably the most provocative recommendation in a report that also laid out much of what's known about the subprime collapse. The commission also faulted "one-stop shopping," which also isn't against the law but can foster a "breeding" ground for crime when appraisal, legal and other services are provided or arranged by one company or person...The suggested ban against the "two hats" practice partly hinged on Lake Success mortgage broker Don Romano, whose testimony mentioned a woman who asked for help after buying two Brooklyn properties as rental investments. She ending up using the seller's agent's in-house broker and attorney and paid 7.4 points on the loans -- totaling more than $43,000 -- when she shouldn't have had to pay more than three points, he said. "The real estate office is so concerned in making the deal work that they put that above and beyond giving the client the best possible advice," said Romano, president of Shelter Rock Mortgage Corp.

Broker Don Romano, head of Shelter Rock Mortgage Corp. in Lake Success, said minority borrowers tend to distrust outsiders, so many go to the local mortgage brokers, who often charge them higher fees. But Romano said a lender should be looking for consistency in fees to see if there are any discriminatory practices in the loans from each broker. "Any lender has the ability to limit a broker's compensation," said Romano. "It's a business deal between two business entities."

COMMISSION OF INVESTIGATION OF THE STATE OF NEW YORK A PERFECT STORM:

Easy Money and the Mortgage Meltdown The Subprime Mortgage Crisis in New York State July 2008

Furthermore, the new reforms implement a suggestion made by Don Romano, Vice President of the UpFront Mortgage Brokers Association (“UMBA”),112 who testified before the Commission. As the Commission learned during its public hearing, the broker’s fee, known as the yield spread premium, is a tool that can be used by unscrupulous mortgage brokers to charge borrowers higher interest rates on loans than they actually need to pay. Yet, because of the existence of the yield spread premium, a broker can offer a borrower who is short on ready cash the option of a no-money-down mortgage.113 

Eliminating the yield spread premium might close down an avenue of credit for a borrower who, but for an initial cash outlay, should otherwise not be denied credit; thus it was suggested to the Commission that the State consider curbing the abuse of the yield spread premium, but not eliminating it entirely. It was proposed during the Commission’s public hearing, that a broker identify in the fee agreement with the borrower his total compensation, including any possible compensation coming from the lender. If it turns out that the yield spread premium going to the broker is greater than the agreed-upon fee, the broker would be required to credit that excess to the borrower to offset closing costs.114 In essence, this approach will soon be codified as part of New York’s Banking Law prohibiting “abusive” yield spread premiums for subprime home loans. 

112 The UpFront Mortgage Brokers Association (UMBA) is a non-profit, voluntary organization of mortgage brokers whose purpose is to develop a code of standards for brokers, curb predatory practices, increase public knowledge about financing and monitor its members for compliance with the code of standards.

113 Testimony of Don Romano.

114 Id.

"Consumers presume that there is accountability over the mortgage industry, but there is a higher level of training to become a hairdresser," said Don Romano, president of Shelter Rock Mortgage in Lake Success, N.Y., and past president of the New York Association of Mortgage Brokers...The association of mortgage brokers has lobbied for state oversight for 20 years, said Romano.

"People couldn't believe that we actually wanted to make more work for ourselves by promoting professionalism," he said. "It's unusual, but it's in every party's best interest, except the thieves'."

"The subprime market has created exotic mortgages that are very powerful tools," said Romano. "But they're like a chainsaw: if you use it right, it's a great instrument; if you use it improperly, it's a bloody mess."

Commenting on the condition of multiple parties purchasing a vacation home together:

Mr. Romano said that he discusses how one person's financial situation could affect his or her ability to carry the costs of the venture and how it could raise the borrowing costs for the whole group. "If there are any rough spots, having that discussion focuses light on them, and they either address things, or they don't go through with it," he [Don Romano] said. "People don't want to jeopardize their personal relationships because of this."

Commenting on the way to protect yourself when selling your current resident while purchasing another home:

Those who feel a time crunch should prepare for the possibility of needing a bridge [loan], even if they may never use it. Don Romano, a Lake Success mortgage broker, says he sets up a home equity line of credit for his clients before they even put their homes up for sale. "They effectively have a bridge in place if they need it." Roman says. "We always did that as a matter of course for anybody who is selling and buying."

...many brokers like Romano have been pushing the banking department to require some education to become a mortgage broker. There is more testing required to become a beautician in the state, he said. All that is currently needed to be a registered broker is a real estate broker's license or two years of experience working with a lending-related firm.

Testifying at a New York State Banking Department hearing on predatory lending: 

"I think that if the industry comes to the table...and we show we're here to come up with a framework to protect the consumer, then a good regulation can be developed," said Donald Romano president of Lake Success, N.Y. based Shelter Rock Mortgage Corp. and a former president of the New York Association of Mortgage Brokers. Mr. Romano said, testifying at a hearing on the proposal last month, that companies that take advantage of the public should be put out of business..."The Banking Department has, until this revision, depended on competition in the marketplace to keep the cost of financing down" he said. "Apparently, the Department feels that this is not working in the subprime market." 

Commenting on pending New York State Regulation addressing predatory lending: 

"I would like to see a requirement that the lender perform a formal analysis of the deal and that would become part of the loan file. In this way, the lender would be able to answer the question, 'Why was this loan made?'

Determine if an equity loan is your best alternative. "This is the step everyone overlooks," said Don Romano, president of Shelter Rock Mortgage Corp., a Lake Success mortgage broker. Calculate how much you need to borrow. Then look at the size of your first mortgage and its interest rate. Say you have a first mortgage at 9 percent with a $50,000 balance. You need $25,000. Rather than taking an equity loan at 8.5 percent, you'd be better off refinancing your first mortgage and adding the money you need, Romano said. With first mortgage rates now around 7 percent, you will have reduced the rate on your current balance and gotten the money you need for less than the home equity rate, he said.

Q: What is the greatest threat to the future of the mortgage brokerage industry?

A: There's a tendency to bring the mortgage origination process down to a commodity. The concept of going out and getting the best rate is constantly being talked about by trade groups when if fact, the mortgage broker is a service provider. We are bringing together what the mortgage industry has to offer to the applicant on a case-by-case basis. Putting people in the right mortgage program in a cost efficient manner is what the mortgage broker does.

Q: What's the difference between a thrift, a mortgage banker and a mortgage broker?

A: ...Mortgage brokers are not bankers and have no money of their own to lend. They act instead as middlemen, working with a number of lenders to find a loan to match a particular borrower's needs. By state law, brokers work for the borrower, said Don Romano, former president of the New York Association of Mortgage Brokers.

Q: But the mortgage broker has to be paid. Doesn't this mean I automatically pay more for the loan?

A: It shouldn't, Romano said. Because the broker is processing the paperwork, it costs less for the lender to make the loan. In return, the lender discounts the loan to the broker. For example, a borrower who finds a loan on his own may pay 7.5 percent with two points. (One point is equal to 1 percent of the mortgage amount.) But the broker receives the loan for 7.5 percent with one point. True, the broker then adds a fee to the loan, Romano explained. It it's one point, using the above example, the borrower has benefited from the broker's service with the discount covering the fee. By state law, both the broker's fee and the discount the broker is getting from the lender must be disclosed upfront to the borrower, he said.

"The broker channel is still the lowest cost way of originating loans," said Don Romano, president of Shelter Rock Mortgage, Lake Success, NY. "It's the American way for the consumer to get the best price, so I think we'll see brokers continuing to capture a large portion of loan originations." Romano is upbeat about the state of the industry, but says he has concerns about the rush to implement technologies that haven't proved their ability to reap economic returns. "The biggest challenge facing our industry right now is the feeling out there that anybody can originate a mortgage." Romano said. "The consumer is not being serviced in a situation like that. They are not going to know if they got the proper loan under those circumstances. Technology and how it's being used will become a bigger issue as we move into the year 2000, with many things done under the guise that it will help companies to save money." Roman said. "Instead, what could eventually happen is the loss of the services that we to provide our customers."

"Don't put off buying a home because we may be approaching a turning point," noted Don Romano, president of Shelter Rock Mortgage Corporation of Lake Success, N.Y. "In the coming months, there are strong indications that both home prices and interest rates will rise. So buyers are well-advised to act now while the conditions are still favorable." The rental market is a precursor for the changes that are expected in real estate sales in 1997, contends Romano, who is the newly-elected president of the New York Association of Mortgage Brokers. Rents on all kinds of apartments have risen dramatically in the past few years, he points out, and even studios that were once difficult to rent are going quickly now and fetching higher monthly rents than ever before. "The public is noticing the inequality that makes it more affordable now to buy a residence than to rent one," says Romano. "This trend will almost surely work to drive home prices up. In addition, the inventory of saleable homes is already decreasing, and is expected to continue throughout the spring - a condition that will also drive home prices upward as demand outstrips supply. As a result we may see real estate turn from a buyers' to a sellers' market as the year progresses." 

...Romano, president-elect of the New York Association of Mortgage Brokers, said refinancing may not be worth the bother if the rate difference is that small. The borrower still has to go through the paperwork, such as the appraisal and credit check, Romano said. On a $100,000 loan for 30 years that drops to 7.375 percent from 7.5 percent, the monthly savings is less than $9, he said.