We have seen countless posts inside industry discussion boards, and in some industry publications about the abrupt closure of what some call a huge operation this past week. It has been reported they had in excess of 600 branches and up to 1,200 Brokers & LO's, and that defaulted loan buy-backs and fraud compliance issues were the core of their problems.

It is widely understood, the business model they had, signup any number of originators, let them work from their homes unsupervised, and trust they won't cut any compliance corners to keep the lights on is highly favored by commissioned people, but not necessarily the correct strategy for producing high quality production. Big production numbers yes, but first-rate quality - nope ... all too common among that type of an organization. That leaves the the originators free to do just about anything to make a living, including putting the home offices' licenses in jeopardy daily - and all for a small fee at that!

The biggest flaw I see in that, aside for the obvious ones stated above, is the issue of 'negative selection.' The originators are free to do their own thing with their local customers. As they stumble over an out-of-State applicant now and then, those few far-away loans get run through the home office's procedures. Therefore the rarer and weaker credits are loaded up in the name of the net branch operation. In the long run, that can add up to a major problem.

However, due to the lay-out of the wholesalers and their funding sources, it's difficult for them to do much policing from their side. Problems developing inside one pool of loans frequently are not easily highlighted as to product type or originator - there's loads of bean-counters who don't have the DNA of true loan people involved at that level. It's that independence, which is the 21st Century way the industry operates these days, is in and of itself, one hurtle that contributes to failures like this one. With this wake-up call, hopefully more attention will be focused on those people as well.

Even with these inherent flaws and others, in this type of a business plan, it is difficult to avoid pointing out that it was the LO's that killed that company. Admittedly, there are net branch operations which are well run; however those left standing need to tighten the screws on their associates. Simply put, more control and much less autonomy for originators is long overdue. Discuss this article on our Discussion Board - CLICK HERE







So what's a Broker & LO to do?
If you're one of the good guys, and you find the net branch concept perfect for your career goals, then we recommend you do considerable due diligence on your current net branch home office or any future one you may consider applying to for your acceptance.

You need to be sure, they have considerable compliance safe guards in place to protect them from unscrupulous brokers and loan officers who could do them serious harm, and subsequently ruin your own operation as well.

It may sound silly to you right now, but it is in your own self-interest to be a straight-arrow and to operate in such a way that you are above reproach. You have an obligation to the industry, to your net branch home office, and to your own future to promote high ethical and integrity standards within the ranks of your own peers. Don't quietly sit there and say to yourself 'it's not my job.' Give us your 2 cents on our Discussion Board - CLICK HERE

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Even those these exotic loan products were originally designed for the more sophisticated applicants with stellar credit scores, it's been widely reported that in Orange County California, 75% and in the San Diego, CA area, 50% of mortgage loans issued between 2003 and 2005 were either interest only or pay-option adjustable-rate loans, which pose a major risk of increasing default rates.

It's been the big commissioned AE & retail originators who have taken advantage of these type loans; it looks like the results will be fat incomes for them, and significant foreclosure numbers for the public.

Flowing from that, will come more restrictions on who and how people can operate in the industry in the future. All those short term income gains will be lost by many through buy-backs, fines, etc. and will play out for many years as a disaster for the customers.

One such effect is playing out in Washington right now.
Proposed regulatory guidance on interest-only and payment-option ARMs may be tougher than a lot of people realize, according to the deputy comptroller of the currency. Deputy Comptroller Barry Wides told a consumer group that federal banking regulators expect lenders to make "conservative assumptions" in their underwriting of these nontraditional adjustable-rate mortgage products. First, lenders should qualify borrowers at the current fully indexed interest rate, not the teaser or introductory rate. Second, the lender should calculate the monthly payment as if the loan were fully amortizing on day one. When it comes to an option ARM, lenders should assume that the borrower will make the minimum payment, calculate the potential negative amortization, and add it to the loan amount. So a $400,000 option ARM with potential negative amortization of $44,000 should be underwritten as if it were a $444,000 mortgage, he said. "We are telling lenders to make conservative assumptions about the borrower making minimum payment and how much they can end up owing, and then amortize that at the current rate," Mr. Wides told the National Community Reinvestment Coalition.

What can you do about this? Simple, merely because a wholesaler comes out with a new loan product, that doesn't means it's a good idea. Just like brokers and LO, (although admittedly not as frequently), but wholesalers go out of business also. To make your job a career, YOU need to be able to stay in business over time. Focusing your own operation mostly on new exotic loan products (like those over used in this article) is a sure fire way to shoot yourself in the foot. Give us your thoughts on our Discussion Board - CLICK HERE








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