Cover of Risky Business
Risky Business was a movie about relationships and their manipulation for profit. Real life risky business repeats art in the financial services industry. And how very quickly history can repeat itself! If you are a loan originator, act now to protect yourself from the risky business of mortgage lending. How? Treat relationships like a long-term investment. Take the long view. A steady business relationship is a lasting asset; a one-time transaction is a poor investment.
In an industry that thrives on business partnering; where loans need several entities for birthing; in a climate of necessary trust – the following mortgage story teaches a severe lesson:
To protect against loss know with whom you are doing business.
The Voluntary Petition, a public record, of a failed wholesale lender reads like an account of a ‘dog eat dog world’. The summary of schedules in the Chapter 7 bankruptcy of this company we shall call Lender X (names changed to protect the not so innocent) reveals a cycle of mutual punishment and abuse where no one wins. The bankruptcy’s liabilities total $8,600,200.00. The list of creditors and claimants reads like a ‘who’s who’ of mortgage lending. Four warehouse banks are left standing empty handed to the tune of $3,400,000.00. How did these major players miss judge their client relationship?
There are software companies listed on the “will never get paid schedule”, a document company, a paging service, a telephone company, the list goes on.
How did this happen? The assets, totaling $3,910,00.00, are mainly listed on the schedule that is headed “The debtor has un-liquidated claims for offset and/or reimbursement from the following mortgage brokers for loans which were sold to lenders by the debtor, and for which loan repurchase demands were received by the debtor based upon false and fraudulent information contained in the loan portfolio”.
Lender X wholesaler contends that these loans are an asset because they have asked the ten mortgage brokers involved to repurchase. There was no way repurchase could have happened and the wholesaler knew that.
If these loans were indeed fraudulent what measures did Lender X miss in their broker approval processes? Or in their loan quality control procedures? Who is ultimately responsible? Who is injured by the lack of operational excellence?
This story does not end here. Mortgage originators not involved in the list of bad loans were also hurt. Lender X was in business for a relatively short time. Originators choosing to do business with them did so for various reasons. If it was reasoning on one loan transaction to get a cheaper rate or more fee income the investment from that short-term viewpoint was lost.
Businessmen in Japan have long studied the famous warrior Miyamoto Musashi for tips on survival strategy. In A Book of Five Rings that he wrote in 1645, he says “Rat’s head and ox’s neck means just that, when we are fighting with the enemy and both he and we have become occupied with the small points in an entangled spirit, we must always think of the way of strategy as being both a rat’s head and an ox’s neck. Whenever we have become preoccupied with small details we must suddenly change into a larger spirit, interchanging with small.” To wit, one transaction with an unknown for the sake of easy profit vs. the right relationship for long term gain. Mortgage originators must strive to look at the small details like profit on each loan but intermix that into the business plan at hand. That plan should always include a list of tried and true business partners that give the maximum percentage of survival. Conversely, the wholesale lender must never loose sight of the value of the client that submits one loan a quarter while keeping in mind the larger picture of solid, honest professionals submitting clean and valid loan files. The quality control processes that have developed over years have helped augment the risk in both of these business decisions.
How can we know exactly who we are doing business with early on in the relationship to protect against loss? Who among the broker community can afford to be stiffed for even one loan fee? Very few. The warnings here are clear. However, people are basically decent and when a new wholesaler comes to town one must not run in the other direction out of fear.
Instead, cooperate conditionally.
Ask for a list of who else is submitting loans to this wholesaler.
Call several companies from this list and verify the type of turn around not only on loans but also on broker checks. When do they pay their brokers?
Get references and check them out yourself.
When calling references the idea is to find out the financial strength and honesty of the wholesaler.
Ask who the principals are and ask to see resumes.
Mortgaging is a tight industry. Those who have harmed others before are sure to reappear. An even greater danger is not having the skills to keep the mortgage company viable. Have they ever been mortgage bankers before or are they new to the industry and perhaps not in touch with its risk.
Ask about the wholesaler’s loan quality control procedures.
As in the example above, bad loans that are funded and sold can take a company down. Ask what steps the wholesaler takes to avoid this from happening.
Ask when they pay their broker fees and how.
Do not be embarrassed to ask how and when you will be paid. If they have a stated policy mark your calendar for each loan and follow up to see that your check is delivered as promised. If they do not have a stated policy ask that they write one for you.
Seek to control the relationship
Using the power of getting others to do useful and honest things for you assists you in risk management.
Mortgage industry leaders do not neglect their duty to their business partners. Instead they add value to their relationships by tightening performance standards, reengineering work processes and upgrading competencies. A good business partner is a long-term asset, which holds value and endures.
Integrity Today 