As published in Scotsman Guide's Residential Edition, February 2009.
As goes the famous quote from George Santayana, “Those who cannot learn from history are doomed to repeat it.”
By forgetting its financial past, society has tripped over many of the same mistakes. The only way to get back on track is to learn from that past and correct the industry accordingly.
Subscribe to e-newsletter ___________________________
Want to stay up-to-date on news and notes from Scotsman Guide? Subscribe to our free, monthly e-newsletter.
Lenders must continue to tighten their practices and make sound lending decisions. Consumers must receive education on the terms, commitment and cost of loans, even when interest rates are low.
Most important, brokers must realize how we got here and what we can do to help solve today’s problems.
How we got here
U.S. home mortgages have been around almost as long as homes themselves.
Before the Great Depression, lenders offered loans on all kinds of purchases. Margin purchases, where consumers could buy shares of stock by putting down just a portion of the costs and paying up if the stock dropped below the purchase price, were common until the stock market crashed. This took many margin-purchasers with it.
Lenders soon tightened their guidelines, with mortgages only available if taken out against a husband’s income -- only 25 percent of which could go toward the monthly payment. When World War II soldiers returned with no credit history or employment, the federal government stepped in to guarantee their high-risk loans for lenders, loosening requirements again.
This move increased loan applications, with terms growing from seven to 30 years, and allowed people to afford larger homes. Thus, housing prices increased dramatically -- and homeownership became a lifetime commitment.
From then on, whenever the market hit a lull, the lending industry would create new products to serve consumers who had “fallen through the cracks.” Loans came on for people with bad credit, no downpayments and questionable credit history, ushering in the era of balloon payments, variable interest rates and interest-only payments. Loan terms grew to 60 years, and homeowners could borrow against their home equity.
But as the cycles turned, people again were unable to pay off their loans. Home values dropped. And again, we now see the federal government speaking up about stepping in to fix the situation.
What to do
To survive today, brokers must change the way they do business to increase trust and to protect consumers and lenders. Here’s how:
* * *
Spend more time educating consumers about different loan programs before making any recommendations.
Identify consumers’ goals and match a program to their needs, not wants.
Turn away business and be honest with consumers who want to purchase or refinance when it’s not in their best interests. Explain to them why they should wait.
Host educational seminars in your area to teach consumers the steps of purchasing and refinancing a home. Solicit and answer their questions.
Align yourself with key referral partners -- Realtors, accountants, etc. -- who can help educate consumers and boost your referral base.
Keep in touch with your clients and prospects at least monthly. This helps keep them updated on current affairs and never lets them forget you are there for future business needs. This creates referrals for life.
There is still some good news in the mortgage industry. Interest rates are still at record lows. Buyers are still eager and able to enter the market. It’s just that everyone must proceed with some common sense, a sense of history and a lot of caution.
Brad Cooper is a nationally recognized mortgage expert, coach and trainer with Loan Officer Publicity and manager of Leader One Financial in Farmington, Mo. He has more than 16 years’ mortgage experience. His blend of customer care, financial expertise and experience is the driving force behind his success.
For more information and to receive a complimentary CD titled, “How to Receive $1,000,000 Worth of Free Publicity,” visit www.loanofficerpublicity.com/freecd or e-mail Cooper at email@example.com.