Why is the Lending Process so Difficult?
If I had a dime for every time I am asked this question, I probably wouldn’t be writing this article. I would most likely be on a beach somewhere. This is a tricky question to answer as there are several issues that contribute to the complexity of the lending process, but essentially it comes down to three primary areas: risk, regulation and salability.
What is the risk? Well there are several layers of the risk but ultimately when dealing with a potential borrower, I always ask people the same question. If you had the means, would you lend this person your money? If the answer is yes, great. If it is no then my question becomes, “Why should I as a lender?” Believe it or not, if a borrower goes into default there is a potential that a lender would have to buy that loan back and having a bad asset does not help anyone.
The second is regulation. Most people think the worst thing that can happen is a hand slap of a fine from a regulator. This is true; however, there is a lot more damage done. There is reputational risk, financial risk and obviously getting in trouble with a regulator could affect your ability to do business in the future. There are also the little know pitfalls. For example, fines are not just sought out from lenders. Individual loan officers, title agents, and realtors have been involved in personal fines. There is also the fact that most of the lending laws can influence the foreclosure of a property. If a lender fails to check a box or present a borrower with a single piece of paper, it can wind up being a defense against foreclosure or entitle a borrower to a refund of all interest paid over a certain period.
The last item is salability. What does this mean? Simply put, can we sell this loan into the secondary market? Why is this important? Most lenders and even banks do not have enough assets to fund all the loans they make in any given year. After several stops along the way, they are sold into the secondary market as a Mortgage Backed Security (MBS). These MBS are a popular investment for not only mutual fund holders, but 401K and other investors as well. I would be willing to bet that if you looked at your portfolio or your retirement plan you probably own some. Which brings me back to my initial question about would you lend your money, because ultimately, it may be your money. Along with the impact to investments, it frees up capital for us to lend to more customers, which helps us all.
As you can see, these major areas of risk, regulation and salability are very important to the day to day operations of a lending institution, but as an agent, you need to be aware of these as well. Why? It ultimately affects your clients and your bottom line. That is why choosing a partner that will help you navigate through these issues and give you straight, accurate and timely answers is so important. If you are frustrated with this process and need a hand, don’t hesitate to reach out to one of your United Mortgage representatives and we will be happy to help you out.
By David Pearson | Chief Operating Officer at United Mortgage with over 25 years experience in the Mortgage Industry