An advertisement I heard a few minutes ago on XM satellite radio by a mortgage company infuriated me to no end. I literally had to pull into a local library and write this blog. The company is Quicken Loans and the subject buying power.
The purpose of the ad was to demonstrate how today’s ultra low interest rates increase the buying power of a potential homeowner. Here is a rough outline of what was said during the commercial.
The narrator stated with an interest rate of 3.6% (the number given was precise as well as the APR), a principle and interest payment of about $1350 would support a loan of about $285,000. I did not write the exact numbers down as I was driving, but I am in the ballpark. The next statement was if interest rates go back to over 6% the loan amount will shrink down to $220,000. Thus, the buying power of one of their potential clients would shrink by roughly $60,000.
For the love of God, will the mortgage industry ever learn from the past? This commercial is morally wrong on many levels. For the time being, let’s leave the potential homeowner out of the equation. Rest assured I will return to discuss the implications on that front too.
Let’s start by drilling down. Ok, imagine you work at Fannie Mae or Freddie Mac in Capital Markets. Employees hear the commercial and think, Quicken Loans wants me to guarantee their paper after encouraging consumers to get the biggest loan possible? Investors on Wall Street that buy the securitized note from Fannie or Freddie also wonder what they are getting. Are you starting to see a problem here Quicken Loans?
Counter arguments likely to be made by Quicken, or any company for that matter, are that their customers will have only the best credit scores and all applications are fully documented. Anyone who has originated loans knows that the family income is the most important not interest rates. Even fully documented incomes do not matter if the home is too expensive.
Homes are either affordable or they are not. There really is no such thing as “creative financing.” It is bad enough that one and only one risk analysis of a borrower’s finances is taken at application. But to use the lure of buying power to encourage bigger loans is a disgrace.
Now, let’s get back to the potential homeowner. Mortgage lenders need to look out for consumers and make sure they get the house that is right for them. A professional mortgage banker will strive to achieve that goal, but the culture of the industry, where originators are compensated largely through commission on a per loan basis, still heavily promotes loan amount. Plus, realtors swoop in and often make sure to pre-qualify their clients at the highest loan amount possible. The mortgage banker wanting to please their realtor partner is only too happy to oblige.
I am sure Quicken Loans will argue that the ad never stated that a potential home buyer should get the biggest loan possible. The excuse will be further amplified by saying the company only meant to show how low interest rates can make owning a home easier.
As one who as worked with many clients in the market to buy a new home, I know first hand exactly what happens. The vast majority of consumers will go for the bigger home as the urge to over reach is strong. There is just as much fantasy as there is reason when it comes to purchasing a home.
My first meeting with clients always assessed how much home they could buy as well as review all their financial records. I sometimes had to read potential clients the riot act about not buying too much house. Were some deals lost to other, less scruplous lenders? You bet! But first and foremost I wanted to protect my clients and increase the value of the referring realtor. And let me add that there are many realtors who feel the same as me. But again institutional pressures influence their thinking too.
Quicken Loans should change the commercial ASAP! Put the emphasis on how super low interest rates can help a potential home buyer get the house of their dreams that is the most affordable. Wouldn’t that be a more positive message for your company’s brand?
Nothing will please me more than to hear Quicken Loans advertise the following message: Our company works hard to get its customers the lowest possible rates; we have the fastest application turn around times in the industry; and first and foremost, we look out for our clients to make sure they buy only the house they can afford.
Come on, Quicken you are a pioneer in mortgage banking. Isn’t it time to take the next step? Your clients, as well as Fannie, Freddie, and capital markets will surely love it.