As usual, “The Simpsons” offers the perfect summation.I was watching an old episode the other day, the one where Marge Simpson is struggling to earn a “red blazer” at a local real estate agency—struggling because she’s just too darned honest with customers, unwilling to call a cramped dwelling “cozy,” for example.
“Well, you know what we say: the right house for the right person,” Marge says, citing Red Blazer Realty’s slogan.
“I’m going to let you in on a little secret,” replies manager Lionel Hutz, the show’s resident sleazeball. “The right house is the house that’s for sale. And the right person is anyone.”
As they say, it’s funny because it’s true, at least far too often. And it’s also true of the related mortgage industry, something I can attest to from personal experience.
As with “the right house for the right person,” it seems that the mortgage industry is about finding the right mortgage for every person, or family. That’s certainly the sales pitch. But the reality can be a little more … Red Blazer.
In 2015—and I say that because the entire process took nearly nine months to complete—my wife and I decided to take advantage of the bottoming interest rates to refinance our 30-year fixed mortgage. It was meant to be a part of a larger package of transactions that also involved a line of credit to get rid of some nagging high-interest balances. It wasn’t a typical mortgage transaction, but neither was it rocket science. It was just about finding what a lender could do to match with our circumstances.
Which isn’t easy. So much of the conversation became about what they can’t do. It felt like buying a car from a lot: here’s the colors, here’s the features, pick one that fits best or move along.
But I had a bit of an edge: a good friend, Jamie, who is in the mortgage industry. He’s a bit of a maverick, a bit of a prophet. After a long career in the industry, he’s spent a great deal of his energy evangelizing that the emphasis should be back on service—that a real mortgage professional should combine Marge Simpson honesty with a diligence and creativity to find solutions for each customer that might not be immediately clear. Sometimes that might mean a less attractive option for the lender, but in the long run a customer will appreciate an honest effort to find what fits, and will come back again and again.
I was wary about approaching Jamie, who works for a lender and deals with much larger mortgages, and I didn’t want to put him on the spot as a buddy. But, to my great relief, he became a pro bono adviser for me through the process. Our first stop, naturally, was his own firm, but our situation varied a little too far from their typical offerings, so no easy solutions were available there. So—and this is the crucial point—he widened the search on my behalf.
He found that, even with a solid credit rating, the few options offered, even the ones that took advantage of reasonable rates, were simply kicking the can down the road, without structurally improving our debt burden. Good for the lender, not so good for us.
I quickly learned the difference between service and sales. Sales is them telling you what you don’t know. But service is you telling them what they need to know. There were so many questions that weren’t asked initially until Jamie asked them: What are you trying to achieve, and why? Which option will let you sleep better at night? What are your financial priorities now? In five years? In 10?
It turned out that our situation was more complicated than I thought—and there was an entirely new level of option that we hadn’t even considered, until Jamie suggested it. The questions were crucial in coordinating an effort that materially improved our circumstances.
In the end, despite the length of time it took, we landed in a far better place than we started. Did we lower our rate? Absolutely—we were lucky enough to time it so that we hit pretty much rock-bottom of the mortgage rates, 3.75 percent for a 30-year fixed, which was more than a full percentage point below our earlier mortgage. But even more important, thanks to Jamie’s creativity, by temporarily using other resources and taking advantage of a few insider maneuvers that we would never have known about (such as closing on the mortgage first, the line of credit second, saving thousands of dollars in subordination fees), we were able to eliminate expensive debt, improve our credit standing/scores, and put in motion what has saved, and will save, us thousands of dollars every year in lower balances and interest costs savings.
I am quite certain I would not have been aware of these solutions had I not known someone with the skills and the approach of my friend. Who would?
Jamie’s help came with a lesson. He explained that the absence of service in the industry had a lot to do with mortgage providers’ compensation structure, particularly when the mortgage is a more typical size, $417,000 or less. Long story short, if an individual mortgage originator is compensated solely on a commission basis, sales efficiency and the number of transactions dictates how financially successful he or she can be. If they’re salaried, there’s only so much they can do to improve their earnings based on mortgage placement. It’s a catch-22, and the client is caught in the trap.
It’s an oversimplification, but a commission-based lending agent must spend less time on a loan to earn more, because volume is important. A salaried professional earns no gold stars for creative and thoughtful analysis. It should be no surprise, then, that in the absence of a profitable “consumer service” product for those of us shopping for mortgages, or refinancing existing ones, the lenders will focus their resources on sales-building and efficiency, rather than cultivating “customer service.” It’s simply better for the bottom line.
But not for my bottom line, and not for yours. What we don’t know is how to use a mortgage as a tool in the pursuit of what we want and need to achieve. The stakes are high, since it’s also a tool that happens to be one of the biggest financial transactions of our lives, for most of us, anyway. It’s not just about a lower rate, as much as that’s always the focus.
So, for those without an insider to help guide you through the process, I urge you to learn as much as possible about options, and find a provider who is willing to explore them with you. Anyone with a cookie-cutter mentality does not have your best interests in mind.
And to lenders and banks: Listen to Jamie. No industry survives long when it’s short-sighted. Provide valuable service for your clients as well as your firm, and realize that the 99-percenters need help managing debt just as much as the 1-percenters. I got that help, for free, but I would pay for it.
Joseph Shaw, Executive Editor on Feb 5, 2016