Salesmen without Scruples: My Observations as a Loan Officer -- Part II
Whatever the product, a salesman has three objectives.
2. Build trust.
The mortgage business perfectly illustrated this truth. A credit check required the borrower’s social security number to determine if they qualified for a loan.
Though it’s hard to find faith in someone over the phone, this part of the process was scripted to sound hyper-professional and short circuit common sense. Basically it boils down to this: if you want something, ask for it.
A good, honest salesman deserves respect. It’s an art that can be mastered, but like pure athleticism or artistic ability it requires innate talent.
Example: Loan officer standing with a phone clutched in his fist like he is about to punch himself with it. The buckle on his Gucci belt matches the clasps on his Gucci loafers. He is talking to an apprehensive customer of mine from Sarasota, Florida named Mike Perez.
— This is Christian, I’m a senior loan officer. Yes, that’s right. Like your religion. Mr. Perez, let me ask you a question. What do you do for a living?
— I own a landscaping business.
— Do I tell you how to clip hedges, Mr. Perez? No? Good, because I don’t know anything about it and I bet you know even less about mortgages. So let’s stick with what we know. Ok?
— Mr. Perez, what’s you social security number?
With the social security number secured, the loan officer always told the customer not to let anyone else check their credit because it would decrease their score and drive up their interest rate. In truth it would take a bombardment of inquiries to make a difference. Shopping around is still standard practice.
Preliminary interest rates from the bank were based on the credit score and the loan to value ratio (LTV): the amount of the loan as a percentage of the total value of the property.
With an $80,000 loan on a home worth $100,000, the LTV is 80%. The lower the better. It means the borrower owns more of the house; this is known as equity. In this case, $20,000.
Once the figures were finessed and the customer hard-sold on the loan officer’s services, final approval by the bank required a ream of documentation: three years of tax returns, two years’ record of mortgage payments, one year of bank statements, pay stubs, and explanation of any delinquencies. Then, an appointment to appraise the property was scheduled.
For a lot of customers these steps presented a major obstacle. If their life was in order, so would their credit score.
With documentation complete the loan was submitted for approval, and the commission calculated. In most shops the commission was the only source of a loan officer’s income. But there was a lot of money to be made.
On one loan Danny made $24,000. A good-size haul, and a textbook example.
Loan officers made commission on the front and back of a loan. The front side is generally 1% - 2% of the loan’s value and disclosed to the borrower (if they bothered to read the Good Faith Estimate). The more complicated the mortgage, the higher the percentage.
Danny’s client, a gas station owner, took out a $600,000 loan to buy a second home in Boca Raton. He charged them 2%, not because the loan was particularly difficult, but because he could get away with it. Two points on the front made him $12,000.
He also charged 2 % on the back end. Here it got sneaky. Danny locked down a 6.5% interest rate on the loan. The real market rate, the truly best rate available was 6.0%. The spread between the rates was called the yield spread premium. Interest rate sheets provided by the banks listed the spreads for every loan. An extra quarter percentage point might earn a 1% commission, or one point.
An increase from 6 to 6.5%, earned Danny two points on the back of the loan for an additional $12,000. This was never disclosed to the customer; shopping around provided their only protection.
Danny’s made $24,000 with two points on the front and two points on the back loan. He never met the customer; the entire transaction took place by phone.
But, how was this legal?
The yield spread premium was created to provide cash back for the borrower to cover all fees and closing costs. Someone could own a home with no money down, financing the entire cost of the house, plus closing costs and attorney fees. Renting an apartment with first, last month’s rent, and security deposit would require a greater cash outlay.
The folks we sold loans to weren’t that crafty. The yield spread premium lined the loan officer pockets instead of theirs. It didn’t matter to the banks since they benefited either way. An extra half a percent over the life of a loan can bring in tens of thousands of dollars in additional interest.
I learned these ins and outs at Global Home Loans, but after one month I transferred to the mortgage company where Tara’s friend with benefits worked. She was happy to get me the job so she could keep track of him.
I wasn’t the first to make the move. The month before, a female loan officer had blazed the same path to escape the sexual advances of the boss.
The mortgage industry experienced job turnover like a meat packing plant, a revolving door of recruits. It was not uncommon for people to quit after one day.
I started my second gig with a class of eight loan officers at First American Financial downtown near Battery Park. Though the place was a little more professional, their big screen TV in the conference room was stolen the weekend before I started and presumed to be an inside job.
Management told us to see the movie Boiler Room. After watching it I realized I had one up on Hollywood. I would make hundreds of calls a day working with two telephones, clenching a receiver in each fist.
The new crew consisted of Rocco, an actor short-listed for a part on the Sopranos; Ed, a Russian kid fresh out of City College; a Black guy with a Jewish surname—something like Sidney Greenstein—that I thought would be better suited for a line of men’s haberdashery. Stan, the 40-something guy from Queens who lived with his mom. “No, my mom lives with me.” Norman, the former art gallery owner, who at 70 supplemented his social security in a fly-by-night free-for-all.
First American held classes for the new recruits. A know-nothing know-it-all who tended bar for ten years answered all the questions while I kept my mouth shut, smirking at the cheap black suit he wore everyday with white socks.
Our instructor was an English guy with a posh accent. Two weeks later, with classes over, they sacked him but kept his voice on the phone recording for the British air of legitimacy it offered.
During our many breaks, I smoked cigarettes with Ed in front of the building. Most everyone smoked in the mortgage business. Ed’s favorite subject was Russian mobsters and Meyer Lansky, who he regarded as a folk-hero, a Jewish representation of America’s tough-guy tradition.
Standing there smoking, I fixed on the Statue of Liberty across New York Harbor, my family’s first sight of America when they arrived at Ellis Island almost 100 years prior. Ed’s family immigrated on an Airbus via JFK—three generations for me; the first for him.
Neither of us considered our jobs to be the better life our families envisioned for us, nor did we believe the mortgages we were peddling paved the way toward the dream of home ownership. We were commodities selling commodities.