Buying a home is an exciting experience. In fact, it's kind of giddy, because for a lot of people it represents something of a fulfillment of a dream. That's how deep the belief in home ownership is in America and the rest of world.
But as exciting as the experience is for the homebuyer, it's extra exciting for the members real estate industrial complex, especially the realtors, the loan officers and the appraisers
You see, because the minute that a prospective homeowner decides to buy a house, all of these characters are more than ready to help them. In fact, they are more than eager and they will practically fall over themselves to grab themselves a seat at the settlement table.
But it's not because they are all kind wonderful and generous people-although many are- it's because they stand to make a hefty profit by helping you get that dream of yours. And dreams, contrary to what politicians promise, cost money.
And believe me, we're talking serious money. In fact, for many of these folks it's a high six figure income. That's how profitable the real estate game can be.
Given that, is it any wonder that there were so many new agents and loan officers minted during the run up in housing?
It's the reason your phone rings off the hook at dinner time. It's the reason your mailbox is jammed with junk mail. And it's the reason your fax machine is low on toner.
Because it's all about finding a borrower or a buyer that can ring the register with a big payday at settlement.
It's just that simple.
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And while it is certainly no crime to work hard and earn a payday, it is certainly helpful to understand what the various players in the transaction have at stake.
In fact, it's not just helpful. It's more than that. It's critical, because in truth these characters often form an unholy alliance. And believe me it's an alliance that's not always good for the consumers they supposedly represent.
At the top of this sometimes questionable alliance, of course, sits the realtors. In it they hold the most power because they are the first ones that are usually able to latch themselves onto the buyers.
And needless to say, it's a profitable position to be in. That's because realtors all work for commissions….really big commissions.
In fact, most realtors walk away from the settlement table with 3% of the purchase price. Or if they are really lucky and sell their own listing, they walk away with the full 6% depending on their listing agreement.
So don't feel sorry for those folks amidst all of this bubble bursting, because these people-the good ones -at least made a ton of dough.
Take a look at your average deal. It likely involved a purchase price of around $350,000.
At the peak of the bubble this deal practically sold itself and netted the agent a commission of nearly $10,500 at 3% of the deal.
As you can see its pretty good money if you can get it. In fact, if you can just do that 1.5 times per month those deals would deliver a yearly income of $189,000 which makes for a pretty good living.
I think it's why they are all so friendly, cheery, and warm and why they drive such nice cars.
But because these agents have so much at stake in any given deal they are very careful about the loan officers they send their borrowers to for their financing.
You see, not just any old loan officer will do. It has to be the sure thing.
After all, huge commissions are at stake and it has to be a loan officer that can deliver two crucial things. Namely, to get the borrower approved for a loan and deliver that loan to the settlement table on time.
Naturally, without either of these two things, the deal falls apart and a fat commission is potentially lost. And in this case busted deals are not an option.
The mantra here, of course, is simple. It's get it done no matter what it takes.
And its unwritten rule is this: Do it well and get more deals…do it badly and get none.
This is where the second leg of the conspiracy comes in, because not only do the agents make big money at this gig, the mortgage guys ring the register pretty hard also.
In fact, on that same $350,000 home that the agent referred to the loan officer, the payday to the loan officer at settlement is a minimum of $3500.00. In fact it's probably higher.
Of course, even then, using those figures it would generate a handsome income.
In fact, just one deal a month from 3 or 4 realtors would deliver a nearly $168,000 yearly payday. And that's not even counting the refinances a loan officer could generate on his own.
Needless to say, it's the reason why your loan officer sounded so happy when you called.
Why wouldn't he be? After all in the brave new world of mortgage finance he knows that all he needs is a warm body with a need for money to close a deal and ring the register
But because the loan officer is so beholden to the agent that referred the buyer to him, he takes no chances either.
Some-not all- simply steer their borrowers into loans that are easy to do and that they know will to close on time. In this regard, it's all about the slam dunk.
Of course, while the slam dunk might not be the best option for the borrower, the alternatives are often undersold because they may end up slowing the train down.
Needless to say it's dishonest.
But they do so because if they know that if they don't, their loan may not fund on time and that would be a disaster. It may even cost them their treasured relationshipwith their realtor and that is simply not an option.
The buyers naturally go along with it all because usually they have to. The mortgage guys not only charge them fees but they also string them along to the point where it is nearly impossible to change lenders even if they wanted to.
Besides, their loan officers also wrongly tell them that if they don't like the loan they have signed up for that they can refinance later and get out of it!
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Gee, wonder which loan officer wants to do that refi?
It is these unscrupulous types that give the profession a bad name. But for good reason.
Because the truth is that some loan officers could care less what they sell you just as long as it's easy, is done by closing, and earns them a big payday.
It is the seamy underbelly of the business that nobody wants to talk about.
But even then it gets worse, because standing in the way of both of these big paydays is one guy-the appraiser. He stands in the middle this road with the 18 wheeler bearing down on him.
He's hired by the loan officer and in some ways he is the most important person in the trinity.
Because without his blessing on the sales price, the deal falls apart entirely. And with so many commission checks at stake, the loan officers know exactly who to call.
In fact, they even give the appraiser the sales price and tacitly expect them to deliver the valuation that meets it.
And it is here that another unwritten rule is followed. And of course, it's really simple also
It's get me the valuation I need to close my deal or I won't ever hire you again.
As such the bulk of the appraisers fall in line. They have to. They have kids too.
And as can be expected, the appraisers that deliver those valuations are the ones that get the business from the loan officers.
You see, the loan officers don't care about real appraisals, they care about one thing-the number they need to close the deal.
Naturally, in this system, honest appraisers are hard to come by and even shunned because if they do deliver an honest valuation based on the facts and it does not meet the number they will be scratched off the list of go-to guys permanently.
It's just that simple.
In fact, even if a loan officer does receive a lowball appraisal, he'll simply throw it away and shop his deal until he can find an appraiser that will sign off on the sales price!
Because of this the typical appraisal is usually nothing more than a dog and pony show.
Its outcome was predetermined and rubber stamped well in advance of the camera shots.
It had to be…there was simply too much at stake for too many people.
All of the banks know this, of course. But guess what? They don't care either.
They need that appraisal too to throw in their file. It's what they call CYA.
There is no risk to them because they are just bundling up those loans into one big pile and selling them at a profit on the secondary market anyway. So if that appraisal is fraudulent, it's not really their problem.
It's why they let the loan officers order them. Doing so their hands are clean even though they know full well what's going on.
In the end of all of this madness sits the consumer at the settlement table. He has no idea that all of this has been going on because it all happens amid the smiles and the small talk.
Besides he just wants to know when he's closing…he can't be bother with the complicated details no matter how gory they maybe.
So in the end, in the tension of the moment at settlement table, the buyers just sign the documents. In fact, they rarely ever even bother to read them even though the devil is in the details.
And of course, once the docs have been signed it's all smiles and giggles again because the register rings. The commission checks are cut and everybody involved gets paid.
And for the moment there is a sudden sense of relief. But it doesn't last long.
After all, there are more deals to close. And so it goes on and on and on.
It's an unholy alliance. It fosters dishonesty and fraud. And it helped to create the bubble.
It needs to stop.