This is a question everyone in the mortgage business should ask themselves, especially those originating loans. Why? Time and again I see "mortgage Professionals" that act unprofessionally, if not unethically.
In times like these, with pipelines less than they were, especially when money flowed freely, many in the mortgage business are struggling and seeking any way they can make money, even when it is not in their client’s best interests. Case in point, the rush to get borrower’s into a fixed rate product.
Selling the "easy sale" like the 30-year fixed is currently is a copout. It may even be that that product is not the best for the client. Sure, we all hear from the media and other sources that borrowers with ARMs (adjustable rate mortgages) could be facing foreclosure when their rate adjusts. We hear how the Option ARM is an evil product that never should have existed. Our borrower’s even come to us sold on one product, usually whatever the latest fad, such as mortgage acceleration or Money Merge Accounts are. Selling the client what they perceive is best is not necessarily the in the best interests of the client, it is simply easy money and countless mortgage professionals are going for the easy money these days.
I have a problem with that. We, as mortgage professionals, should keep our commissions out of our thoughts for the most part. Our focus should always be customer needs first. Let me go on to explain how far off some have gone, using the ARM versus fixed rate argument…
30-year Fixed rates are at the lowest they have been in over 2 years and will likely tick up (they are right now). That may lead you to think that someone with an ARM will do best to switch to a fixed rate loan to protect themselves. But is that the best choice in reality? Maybe not.
With the constriction of lending sources, many homeowners are simply out of luck, they have fallen outside the puckered up lenders guidelines. Nothing you can do for them but pray the lender will have mercy and not foreclose.
Here is how the scenario that challenges you goes…
A husband and wife come into your office asking to refinance their home. They have heard all of the problems associated with ARMs from the media and have been seeing lots of emails and advertisements stating that they need to refinance into a fixed rate mortgage right now or else (perhaps even your advertisement). They are dead set on the 30-year fixed even before they walked in your door. What do you do? (Write down your first response before continuing)
OK, you have gotten them something to drink and told them to relax and clear their minds from what they have heard from virtually everyone from everywhere, including the proctologist. Once they are settled in, you ask them a few questions about their situation and find out the following:
- ARM index is LIBOR with a standard margin (2.25%)
- Couple plans on being in the home for about 10 more years then either downsize or move (kids out of the house)
- Couple has a moderate risk tolerance
- Couple has great credit and income, so qualifying is no problem
- Couple states main concern is fear derived from what they have been hearing about ARMs and foreclosures.
What do you do now? (Again, write down your response before proceeding)
First off, let me say that there is no "real" right answer at this point. Why? There is still not enough information, however, you should be realizing at this point that going for the "easy sale" may not be in the best interests of the client. Other factors do need to be considered, such as rising or declining real estate values, ability to qualify later on, etc.
The big question here is this…"ARE YOU WILLING TO TELL THE CLIENT THEY WILL BE FINE AND SEND THEM AWAY WITHOUT GETTING PAID?"
Here is why I say that. This couple has an ARM tied to LIBOR with a 2.25% margin. That fully indexed rate is only slightly higher than a 30-year fixed rate and will most likely go considerably lower with the Fed cutting rates (see chart below). That means that the couple’s rate will actually be lower than they can get on a 30-year fixed rate, and will probably do so for a long time.
So, if this couple would actually be better off in the ARM and not refinancing, are you willing to tell them that, even if it means you don’t receive compensation. I know a lot of those in the mortgage industry would put money over their clients and do the refinance anyway. Mortgage acceleration and Money Merge Accounts are another area I see people putting their interest above their clients.
Personally, I have turned away several clients from refinancing their ARMs right now, even knowing mortgage rates are going to move higher in all likelihood. It just was not right for their situation to do the refinance, but that doesn’t mean you should turn every client away as there are many who need to refi right now.
Add some situations where you have turned clients away and put their interests over your own. I would love to hear them, as would many others in the business.
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{ 6 comments… read them below or add one }
What a great post Robert. I was thinking something similar when the Fed cut rates again. In the most unexpected, and delightfully capitalistic way, the market is easing the burden of the very people (ARM holders) that threated the market in the first place.
I have a different scenario about turning away a client. One of the last loans I didn’t originate came as I was competing against a so called mortgage planner. Not everyone deserves such a title.
Anyway, the LO had used some software to show my client how doing an interest only loan would free up their cash flow, let them invest in the market, and then use the profits to pay down the loan faster. It was all perfectly sound advice.
However, I took a look at the clients overall financial picture. He ran a high revolving credit balance. He had relatively little savings in the bank, but had a pretty healthy 401K. He spent most of what he made every month, even though his DTI was not out of whack. This is person with the financial ability to save, but not the will.
I asked him, “what’s the likely hood of you actually investing this freed up cash flow?” He was bewildered. Even a bit little bit insulted. But when we talked about his situation, I showed him how he simply didn’t have a record as a saver.
I explained to him that direct withdrawal 401K’s were designed for people like him. Like me as well. Like most people. Because most people do not have the will to save.
He finally saw my point, and thanked me. I always kind of wondered if he went back to that LO. I wouldn’t be surprised. But I can sleep at night because I know I never once closed a loan that I didn’t think was in the internist of the borrower.
Good post. The only thing I would add would be to show the couple who wanted to refi to the fixed rate how to watch the market, if they were willing, and how to calculate the ARM when the fixed period was over. That way, you’ve given them some education to boot which would solidify your position when the real right time to refi comes.
I completly agree with doing what\’s best for the client. This is a good representation of people that should be in the business. One question. How would you factor in a Declining Market if the clients time horizion is in the 3-5yr range? Just wondering your take.
Best-
That’s why you need to be an ARMs dealer
Todd - There are a lot of “mortgage planners” out there that are far from it in reality. Excellent work on that scenario.
Rich - You are right on target with the education aspect of our jobs. I would also add to that avenue the follow up required to ensure the timeliness of when they make the switch down the road (if at all).
Brian - Declining market issues are best addressed on a 1 by 1 basis as it depends on the overall picture. I would not want to throw generalizations in the mix. I know you mentioned a 3-5 year time frame, but there is a lot more to it than just time and what I mentioned above.
Brian - Glad to see the ARMs dealer is back.
Todd - There was one thing I failed to say in that scenario. I probably would have gone a little further and looked at taking equity out of the home to invest as a way of “forced savings”. Since I don’t know his entire situation, that may not be applicable, but by taking money out and getting into investments, he may be able to “save” since he seems to be able to pay the mortgage payment monthly and will not miss a payment.
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