The refinance boom is long over. Mortgage brokers are looking for every piece of business they can find. Many are contacting customers with whom they have already done business. Others are looking at different relationships with real estate agents as a source of referrals. After all, in many purchase transactions, the buyers’ real estate agents help their clients find a mortgage by recommending a lender or a mortgage broker that they have worked successfully with. Can a mortgage broker hire a real estate agent to act as a loan officer?
It depends. In many states, this relationship is not prohibited by the banking department or the real estate commission (or whatever the agency that regulates real estate agents is called in your state). No matter what relationship you have with a real estate agent, you must make sure the arrangement is compliant with the U.S. Department of Housing and Urban Development's RESPA (Real Estate Settlement Procedures Act) in regard to fee splitting. What’s key to staying in compliance is that the real estate agents do more than just make a referral to the mortgage company. Among other things, they must be made an employee of the mortgage broker (even if only a part-time employee). Indeed, even if the real estate agent performs actual loan officer functions so that there is no question of whether all fees are properly earned, the customer must sign a disclosure statement so that your company is protected against RESPA violations and the customer understands that the real estate agent is wearing two hats. Texas even has a form on its website for mortgage brokers who are also acting as real estate agents or as an attorney in the transaction.
An important RESPA guideline is that all parties involved with the transaction must actually earn the fees that will be charged to the buyer/borrower. Many real estate agents do some of the work involved in the mortgage transaction to ensure that their transactions close, including tracking the loan. By hiring a real estate agent as a loan officer, you can offer them the loan origination commission on top of the real estate agency fee they have contracted for with their customers and clients. But you will now be assured of getting the referral that might have gone to another mortgage broker with whom they also had some sort of relationship.
In some states, you will have to license the office where the real estate agent is originating loans as a branch location of your company. Additionally, if the real estate agent is not an employee of your company, he or she must have a mortgage broker license or be exempt from the licensing requirements. Finally, because there are potential confidentiality and conflict of interest issues, it is best to address how you will handle those situations before they come up.
Monday, November 26, 2007
Wednesday, November 14, 2007
Staying Alive
Much of the advice that I am seeing in the different publications for mortgage professionals pertains to marketing. After all, without clients, you have no income and will soon be contemplating your next career. But, there is probably nothing more frustrating than getting a loan application in (finally!) and not having a loan program to match it with. During these slow times, you should be doing as much marketing as you can afford but you should also be thinking about the other end of the application process. You must have relationships with lenders with different types of loan programs that you can utilize for your borrowers. Now is a good time to find those programs.
Having new products to offer borrowers means that you will rarely have to turn away business. There are a lot of adjustable mortgages out there that need refinancing. You can get that business if you have loan programs that are more stable for borrowers than the exotic mortgages that were in vogue a few years ago. Borrowers like to know what their expenses will be for the foreseeable future so if you can find a lender with a program that meets this particular need, you’ve got a valuable tool for marketing to a certain segment of the buying/refinance population. Also, if you can find lenders who have programs for borrowers with no documentation or lower FICO scores, that’s another weapon in your marketing arsenal. And make sure you let all of your existing, former and potential clients and referral sources know that you have many ways to get a loan application to closing.
If you are a wholesale lender with innovative programs, make sure you get the word out to mortgage brokers that you can help them close their loans. That is a win-win situation for the lender, the mortgage broker and the borrower.
The days of thinking that a new loan application equals income are gone. You need to use different ways of thinking and marketing to keep yourself in business.
Having new products to offer borrowers means that you will rarely have to turn away business. There are a lot of adjustable mortgages out there that need refinancing. You can get that business if you have loan programs that are more stable for borrowers than the exotic mortgages that were in vogue a few years ago. Borrowers like to know what their expenses will be for the foreseeable future so if you can find a lender with a program that meets this particular need, you’ve got a valuable tool for marketing to a certain segment of the buying/refinance population. Also, if you can find lenders who have programs for borrowers with no documentation or lower FICO scores, that’s another weapon in your marketing arsenal. And make sure you let all of your existing, former and potential clients and referral sources know that you have many ways to get a loan application to closing.
If you are a wholesale lender with innovative programs, make sure you get the word out to mortgage brokers that you can help them close their loans. That is a win-win situation for the lender, the mortgage broker and the borrower.
The days of thinking that a new loan application equals income are gone. You need to use different ways of thinking and marketing to keep yourself in business.
Monday, November 5, 2007
HUD Approval for FHA loans – becoming a Loan Correspondent
With loan programs disappearing each day, many mortgage brokers and lenders are starting to look at FHA loans as a way to get borrowers to a closing. Nothing has been more frustrating in the past few months than getting an application and not being able to close the loan.
Mortgage brokers can only get approval from the Department of Housing and Urban Development (HUD) as a Loan Correspondent (also known as a “mini-eagle”). The requirements are a bit onerous for new companies but not as difficult if you have been in business for a while. The first requirement is that the applicant be an entity, either a corporation, limited liability company or a partnership. No sole proprietorships are allowed. Your company must be licensed in your home state and every state where you maintain a branch office. Part of the application is your company’s certified, audited financial statement showing at least $63,000 in net worth for one office and an additional $25,000 in net worth for each branch office (up to a maximum of $250,000 in net worth). At least 20% of your assets must be liquid (cash or securities that can easily be converted to cash). The financial statement cannot be more than one year old. The owner that is designated to supervise all FHA loan activity must have at least 3 years of mortgage origination experience. Your company cannot share office space with anyone else (you will submit photos of the inside and outside of your offices, including a photo of signage showing your company name). The offices must be staffed by at least 2 employees and must be furnished with typical office furniture and furnishings (chairs, desks, computers, phones, fax machines, etc.). You must have a sponsor who will send a certification letter that it will fund all FHA loans originated by your company. Your company and its principals must have satisfactory credit histories and you will be submitting credit reports as part of the application package. You must also certify on the application that neither the company nor its principals have been restricted, suspended, or otherwise sanctioned by any state or federal licensing department and HUD conducts background checks. And you must send in a HUD-approved Quality Control Plan. The application fee is $1,000.00 which is non-refundable.
FHA loans are more useful in certain parts of the country than others because of their restrictions but you should investigate whether you want to offer FHA loans to your customers and whether you meet the approval requirements.
Mortgage brokers can only get approval from the Department of Housing and Urban Development (HUD) as a Loan Correspondent (also known as a “mini-eagle”). The requirements are a bit onerous for new companies but not as difficult if you have been in business for a while. The first requirement is that the applicant be an entity, either a corporation, limited liability company or a partnership. No sole proprietorships are allowed. Your company must be licensed in your home state and every state where you maintain a branch office. Part of the application is your company’s certified, audited financial statement showing at least $63,000 in net worth for one office and an additional $25,000 in net worth for each branch office (up to a maximum of $250,000 in net worth). At least 20% of your assets must be liquid (cash or securities that can easily be converted to cash). The financial statement cannot be more than one year old. The owner that is designated to supervise all FHA loan activity must have at least 3 years of mortgage origination experience. Your company cannot share office space with anyone else (you will submit photos of the inside and outside of your offices, including a photo of signage showing your company name). The offices must be staffed by at least 2 employees and must be furnished with typical office furniture and furnishings (chairs, desks, computers, phones, fax machines, etc.). You must have a sponsor who will send a certification letter that it will fund all FHA loans originated by your company. Your company and its principals must have satisfactory credit histories and you will be submitting credit reports as part of the application package. You must also certify on the application that neither the company nor its principals have been restricted, suspended, or otherwise sanctioned by any state or federal licensing department and HUD conducts background checks. And you must send in a HUD-approved Quality Control Plan. The application fee is $1,000.00 which is non-refundable.
FHA loans are more useful in certain parts of the country than others because of their restrictions but you should investigate whether you want to offer FHA loans to your customers and whether you meet the approval requirements.
Thursday, October 25, 2007
File Your Undertaking of Accountability in New York
Many mortgage companies hire their loan officers as independent contractors and not as W-2 employees. Some states require that all persons that work for you be paid as W-2 employees (such as Virginia) and others do not (such as California). New York does not require that you pay everyone as a W-2 employee but it has a requirement that you notify the Banking Department of everyone who is an independent contractor by filing an Undertaking of Accountability. Through this filing, you agree to be responsible for the actions of all of the listed persons even though they are not your employees. When such listed persons are no longer doing work for you, you must notify the New York Banking Department of that fact as well.
What are the repercussions of not filing an Undertaking of Accountability? Since it is a Banking Department regulation, you are in violation if the Undertaking is not filed. This can lead to penalties and fines when the Banking Department finds out about it. The usual circumstances under which the Banking Department discover the omission is during an examination or when the independent contractor applies for his own license.
What are the repercussions of not filing an Undertaking of Accountability? Since it is a Banking Department regulation, you are in violation if the Undertaking is not filed. This can lead to penalties and fines when the Banking Department finds out about it. The usual circumstances under which the Banking Department discover the omission is during an examination or when the independent contractor applies for his own license.
Wednesday, October 17, 2007
Should You Renew All of Your Licenses?
The mortgage business is still very quiet and predicted to stay that way for at least another year. Those mortgage companies that hold licenses in multiple states may be wondering whether it is economically feasible to maintain all of the licenses it holds.
I recommend that every license should undergo an analysis of whether the costs of keeping the license are justified by the fees and commissions earned in each state. How much do you earn in each state? Then you must calculate how much the renewal fee for each license is, add in the fees to file the company annual report with the Secretary of State, the premiums for surety bonds, whether you must maintain a certain minimum net worth that is greater than you would normally retain in your business account, and the cost of any brick and mortar offices and employees in each state. Don’t forget to subtract any taxes you must pay on the income that you earn from each state. The resulting number should determine whether you want to renew that state’s license.
If the income you earn from any state is outweighed by the costs of sustaining the license, you must determine whether there are other factors that could tip the scales in favor of renewing the license. Do you have a great referral source for that state that you do not want to lose? Do your customers have second homes in that state and use you for the mortgages on both homes?
Maybe there is no good reason to keep the license. In that case, you may want to inquire as to whether the license can be made inactive. Some of the states that permit inactive status are Arizona, Florida, Montana, New Jersey, New York, Oklahoma, Texas, and Washington. When a license is inactive, you cannot broker or originate mortgages in that state. However, you do not have to go through the licensing process again when the market turns and you want to go back into business in that state. All that you must typically do is apply for re-activation and pay a re-activation fee. It is quicker and much less difficult than re-applying for a new license even if you had perfect examinations in years past.
If your marketing plan has drastically changed for the next few years and the state in which you don’t want to be licensed does not have inactive status, then it makes sense to surrender the license.
I recommend that every license should undergo an analysis of whether the costs of keeping the license are justified by the fees and commissions earned in each state. How much do you earn in each state? Then you must calculate how much the renewal fee for each license is, add in the fees to file the company annual report with the Secretary of State, the premiums for surety bonds, whether you must maintain a certain minimum net worth that is greater than you would normally retain in your business account, and the cost of any brick and mortar offices and employees in each state. Don’t forget to subtract any taxes you must pay on the income that you earn from each state. The resulting number should determine whether you want to renew that state’s license.
If the income you earn from any state is outweighed by the costs of sustaining the license, you must determine whether there are other factors that could tip the scales in favor of renewing the license. Do you have a great referral source for that state that you do not want to lose? Do your customers have second homes in that state and use you for the mortgages on both homes?
Maybe there is no good reason to keep the license. In that case, you may want to inquire as to whether the license can be made inactive. Some of the states that permit inactive status are Arizona, Florida, Montana, New Jersey, New York, Oklahoma, Texas, and Washington. When a license is inactive, you cannot broker or originate mortgages in that state. However, you do not have to go through the licensing process again when the market turns and you want to go back into business in that state. All that you must typically do is apply for re-activation and pay a re-activation fee. It is quicker and much less difficult than re-applying for a new license even if you had perfect examinations in years past.
If your marketing plan has drastically changed for the next few years and the state in which you don’t want to be licensed does not have inactive status, then it makes sense to surrender the license.
Thursday, October 11, 2007
Starting Your New Business (Part II)
Before you even open your doors, you must have a marketing plan in place. This requires you to sit down and assess your competition and decide how you will be different from your competitors. Are you going to specialize in one segment of the population? Are you going to specialize in only a few products? How will you find your customers? What will be the budget for your marketing and how will it be spent? The more you write down about the research you have done and the specific plans you have for the first year, first three year and first five years of operations, the more likely your chances are that you will succeed. The climate for new mortgage companies is very difficult right now. All over the country existing mortgage businesses are shutting down. You must have a strategy for getting new business.
You must also plan for how loans will be processed and closed once you or your loan officers bring the new business in the door. Will this function be done in-house or will it be outsourced? Do you have the knowledge to do everything yourself in order to keep costs down? Do you know which software to buy? Do you have a source for credit reports, appraisers, relationships with title companies, and real estate lawyers? It is imperative that you do your research before you start your business. Otherwise, you will be throwing your money away as you learn on the fly.
When you have done your research, set up your systems and your license has been approved, you are ready to open for business. Good luck and I hope you reach your goals.
You must also plan for how loans will be processed and closed once you or your loan officers bring the new business in the door. Will this function be done in-house or will it be outsourced? Do you have the knowledge to do everything yourself in order to keep costs down? Do you know which software to buy? Do you have a source for credit reports, appraisers, relationships with title companies, and real estate lawyers? It is imperative that you do your research before you start your business. Otherwise, you will be throwing your money away as you learn on the fly.
When you have done your research, set up your systems and your license has been approved, you are ready to open for business. Good luck and I hope you reach your goals.
Thursday, October 4, 2007
Starting Your New Business (Part I)
Although there are plenty of companies out there that are shutting down, I am still getting phone calls from people wanting to start their own company. What should the owner of a new company do to ensure a successful beginning?
First, create a corporation or limited liability company because of the liability protection it provides. You will run into lawsuit-happy clients or unknown amounts of fines levied by the banking department. You do not want to put your personal assets at risk. Consult a lawyer and accountant for advice on the best entity to create for your personal circumstances. After you have the entity created, you must get a federal taxpayer identification number for your company.
You must decide whether you need office space. Some states allow home-based mortgage companies. If you have no employees, this can be a great way to cut your overhead significantly. If your state requires an office, then concentrate on finding the cheapest office space that will work for your business plan. If you do not intend to have clients come to your office, you do not need to pay top dollar for rent and furnish your space expensively. Find out if your town or county require a business license or permit.
Make sure you have enough cash in the bank to run the business for several months even if you do not show a profit. Some states require a certain minimum net worth to ensure that you properly capitalize your business. Even if your state does not have a minimum, you should have a good-sized balance in your company’s checking account.
If you are a mortgage broker, find lenders to whom you will broker your loans. If you are a mortgage banker, know to whom you will sell your closed loans. Get your broker or banker license from your home state and any other states where you think you can find borrowers. Create a marketing plan.
Buy insurance. Every business needs several types of insurance. Even if you are a home-based business, you will need separate insurance from your homeowners’ insurance (which will typically exclude coverage for business activities in the home). You will need property and casualty insurance, business interruption insurance, workers’ compensation, if you have employees, and errors and omissions insurance. Error and omissions insurance covers your company in the event a client holds your company liable for something you did or did not do that you were supposed to do. It will cover you when you get sued for something a loan officer said or did that he wasn’t supposed to say or do, or when the outcome of a loan application displeased the borrower and he holds your company responsible for the bad outcome. Even if you win the lawsuit, the costs of defending your company will cost thousands of dollars. Errors and omissions insurance will pay for your defense and any judgment that your company is found liable for.
This is just the very start of what you should do before you open the doors to your new mortgae company. I will use my next few blog entries to outline the rest of the steps that need to be taken.
First, create a corporation or limited liability company because of the liability protection it provides. You will run into lawsuit-happy clients or unknown amounts of fines levied by the banking department. You do not want to put your personal assets at risk. Consult a lawyer and accountant for advice on the best entity to create for your personal circumstances. After you have the entity created, you must get a federal taxpayer identification number for your company.
You must decide whether you need office space. Some states allow home-based mortgage companies. If you have no employees, this can be a great way to cut your overhead significantly. If your state requires an office, then concentrate on finding the cheapest office space that will work for your business plan. If you do not intend to have clients come to your office, you do not need to pay top dollar for rent and furnish your space expensively. Find out if your town or county require a business license or permit.
Make sure you have enough cash in the bank to run the business for several months even if you do not show a profit. Some states require a certain minimum net worth to ensure that you properly capitalize your business. Even if your state does not have a minimum, you should have a good-sized balance in your company’s checking account.
If you are a mortgage broker, find lenders to whom you will broker your loans. If you are a mortgage banker, know to whom you will sell your closed loans. Get your broker or banker license from your home state and any other states where you think you can find borrowers. Create a marketing plan.
Buy insurance. Every business needs several types of insurance. Even if you are a home-based business, you will need separate insurance from your homeowners’ insurance (which will typically exclude coverage for business activities in the home). You will need property and casualty insurance, business interruption insurance, workers’ compensation, if you have employees, and errors and omissions insurance. Error and omissions insurance covers your company in the event a client holds your company liable for something you did or did not do that you were supposed to do. It will cover you when you get sued for something a loan officer said or did that he wasn’t supposed to say or do, or when the outcome of a loan application displeased the borrower and he holds your company responsible for the bad outcome. Even if you win the lawsuit, the costs of defending your company will cost thousands of dollars. Errors and omissions insurance will pay for your defense and any judgment that your company is found liable for.
This is just the very start of what you should do before you open the doors to your new mortgae company. I will use my next few blog entries to outline the rest of the steps that need to be taken.
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