In the interest of full disclosure, I have worked as an in-house lender owned by a large real estate company, I have worked for and owned part of a mortgage company where my partner also owned a real estate company in the same building, and I have also been a preferred lender in a subdivision on more than one occasion. I’m not saying that all such relationships are bad, but they can – and have – lead to situations where the interest of the borrower is not paramount.
There are three basic reasons why real estate companies and builders like to have in-house lending companies or preferred lenders.
The first one is simplicity. It is much easier to deal with one company when trying to manage any sales office. If there is a problem, the builder or real estate company can more effectively communicate with not only the loan officer, but the loan company’s management as well. They can exert leverage to make sure that their transactions move forward and their customers are taken care of.
The second one is power. When a builder or real estate company owns or has an exclusive arrangement with a lending company, they are the ones calling the shots. They can dictate when the loan officers will be there, how they will act, and how they will conduct business.
The third one is profit. Actually not all relationships between lenders and real estate agents or builders are based on making money off of the loan process itself. However, it is an undeniable fact that the only reason that such an arrangement exists is to enhance the profitability of the process for the builder or real estate company, and the lender.
So what does all of this have to do with the mortgage meltdown? The second reason: Power. When the builder or real estate company is calling the shots for the lender, they dictate the relationships. In simple terms, the lender answers to the builder or real estate agent 1st, and sometimes exclusively. Builders and real estate companies want to sell homes – that’s what they do. When a borrower is directed to the lender, the lender’s job is to get the borrower into the home the seller wants to sell them. Period! If a lender has the audacity to tell the borrower that they are not ready to buy, or that they should buy something less expensive, they are very quickly shown the door.
I’m not saying that this always happens every time, but it does happen – and it happened at an alarming rate in the middle of the insanity. It is far more likely to occur when the lender is actually owned by the builder or real estate company, and it is much, much more likely to happen in a builder situation. You can probably guess why this is most likely to occur when a builder owns a mortgage company. The reasons are simple: 1) if the lender is owned by the entity directing the business, that is obviously a stronger position, and 2) a real estate agent is usually more interested in getting the borrower into the right home for them, whereas the builder is only interested in selling the homes that they build.
Just how big a problem this is, or how big a role this played in the overall mortgage meltdown? I honestly don’t know. Personally I have never put the needs of any agent or builder ahead of those of my borrowers – and I can say that with a clear conscience. I believe the same can be said for most of the people I’ve worked for over the years as well. Unfortunately, I also know of several loan officers who had knots in their stomachs every time they went to work (for builder-owned mortgage companies) because they were forced to do what they knew was wrong in order to keep the money coming in for their families. Could this explain why there are subdivisions that are only a few years old with a huge percentage of vacant and vandalized homes?
The fact is these relationships have always existed to some extent, and I don’t see that changing anytime soon. It’s not just about the power. It is legitimate for a builder to not want to deal with a bunch of lenders that they don’t know – and perhaps can’t rely on – with their livelihood on the line. The profit motive is OK so long as it doesn’t violate any laws, and is not done at the borrower’s expense. I just wish in the mist of all of this “regulatory reform” this issue was at least addressed.
