From mid 2005 to late 2007 I worked as a mortgage banker for Quicken Loans. I started at the end of the refi boom and got a taste of the money being made. I also saw first hand the housing market collapse. It was crazy. It was as if somebody turned the lights off one day and that was that.
I really liked working for Quicken Loans. The culture was great. They gave you everything you needed to be successful. It was up to you to make it happen.
I’ll go into more of my experience later but for now I want to talk about what I learned. And to see if what I learned is still true today. I am not in the mortgage banking game anymore but my brother works at Quicken Loans (call him if you want to refinance or buy a home), as does Andrea, and a number of my friends.
So even though its been over a decade since I worked there I am still around it. Its kind of like I’m still on the sales floor when I get around my brother and a couple of our friends who we play softball with that work as mortgage bankers too.
And since I have been a homeowner with a mortgage for 5+ years I’m going to see if I am practicing what I learned. Lets get into it.
I learned more about someones personal finances in 8 minutes on the phone than their entire family knows about them. When applying for a mortgage the banker has to know your income, assets, and credit score.
When was the last time you told your family members how much you made, or how much you have saved, or what your credit report looks like? Probably close to never, right?
Don’t Judge A Book By Its Cover
I talked to people from all over the country who did all sorts of jobs. I spoke to a man who said him and his wife were both Drs in their early 50s whose combined income was over $400k a year but only had $50k in savings. I had more than that saved at 26 years old.
And then I had a couple in their early 50s who worked for their city making a combined income of $75k a year but had over $500k in investments.
This was not the norm and the Drs lived in a very upscale area. You just never knew who you were going to talk to.
Most People Should Rent
When I say “most” I mean like 51% of the American population would be better off renting versus owning a home. Close to half of the people I spoke to were one missed paycheck away from financial disaster. The house was killing them. They had nothing in savings. Credit card debt everywhere. Car loans, etc.
How on Earth are you going to pay for a new roof or to hire an appliance repair person to come out when you have no money?
If they were to rent, all they would have to worry about was paying rent and utilities. Everything else would be taken care of by the landlord.
Owning a home is not some glamorous thing. Even in the best situations it can still be a pain in the ass. Your dream home is not in the suburbs. Its probably not in the city either. Its probably so far away from where you work that it basically doesn’t exist to you anyways.
When there are many homes available to buy in the same neighborhood at any time it discredits the whole “dream home” saying. Its a house. With many like it probably for sale down the street.
Unless the house you’re buying is on a lake or mountain top where houses never come up for sale then maybe it would be worth trying to rent your dream home before buying.
Tying in with “most people should rent” is most people I talked to back in the day and even today are very close to being house poor.
They buy into the “I need a bigger house” syndrome but fail to understand how much its going to cost to furnish a larger house along with paying utilities for it.
We would all be surprised how much house you really need if we took into consideration how much junk we have laying around and how much we spend on utilities.
Always Put 20% Down
If you are buying a home than put a 20% downpayment. Most people know if you don’t put 20% down than you will be paying Private Mortgage Insurance (PMI) which in most cases adds $25 to $100 a month to your payment depending on your credit and loan to value.
Why are you buying the home again? Because you don’t want to throw money away renting? What do you think PMI is? It’s money you are throwing away.
Can’t put 20% down? Don’t buy a home. Rent.
Can put 20% down but than will have no money? Don’t buy a home. Rent. Save.
Can put 20% down but can’t fully fund your 401k every year? Don’t buy a home. Rent. Save.
Can put 20% down and can fully fund your 401k every year? Buy if it makes more sense than renting.
Can put 20% down and can fully fund your 401k every year and have money to invest? Do whatever you want.
If you’re going to buy a home, then buy a home. Put some skin in the game. Get rid of the PMI. Make that monthly mortgage payment lower than a rent payment. Make it so that if you do have to move in less than 3 years the option of keeping the house and renting it is there.
I spoke to too many people who were trying to buy a home with nothing down. Typically they didn’t have money to pay for closing costs so I could not approve them. From what I hear, people are still buying homes with as little as 3.5% down via FHA loans.
If you’re putting less than 20% down (assuming you can’t put 20% down) I’d make the argument you are renting your own house without the benefits of renting (not having to worry about stuff breaking, etc.)
Always Get A 30 Year Fixed Mortgage
In just about every scenario it makes sense for you to get a 30 year fixed. And its because your life changes. Its also because you remove yourself from playing the interest rate game with adjustable rate mortgages. Is saving $12 a month in interest worth it when the payment could go up $50+ a month in a couple of years. If it is, than put more money down.
It also gives you control of your finances as it gives you the lowest mortgage payment. Fund the 401k, save money for a kitchen remodel, throw extra money on it to pay it down, and then scale back to pay for daycare if you become a parent.
Interest Rates Are Interest Rates
Don’t buy a home because interest rates are low. Buy a home because you want to buy a home.
Refinancing your mortgage and your mortgage banker has a loan that makes sense? Move forward that day. Don’t play the whole “what if interest rates go down tomorrow” game. What if they do? What if they don’t?
Mortgage bankers hate that. I hated it. Its true that interest rates move on a day to day basis but in most cases its only .125%. We’re talking about a couple of dollars either way on a monthly mortgage payment. Historically speaking, interest rates for mortgages keep bouncing off all time lows.
Predicting what mortgage rates are going to do is a waste of time. From time to time I’d have to use the “Let’s not go tripping over pennies when we are saving you dollars” line to get the client re-focused and to move forward on a refinance.
Government Makes Things Worse
Where to start? Lets go with Federal Housing Administration (FHA) and Veterans Affairs (VA). They both need to go away.
FHA – The sole reason the FHA was put together was to “encourage” homeownership. To do so the Government passed some bills creating the Housing and Urban Development Department (HUD) which manages the FHA. To “encourage” home ownership the FHA insures the loan by charging the borrower insurance as either a lump sum or into their payment. If the borrower defaults, the FHA pays the lender back the remaining balance.
If the borrower defaults the lender still gets paid. So theres no risk on them. The FHA says they are “the only government agency that operates entirely from its self-generated income and costs the taxpayers nothing.” So then how did the FHA get its seed money to start?
The main reason the FHA was created was because of the Great Depression. And because people did not have money, the banks were not offering favorable loan types. Most home mortgages were three to five years, with no amortization, balloon payments, and loan-to-value (LTV) ratios below sixty percent. Refinancing wasn’t even an option then. Homes went into foreclosure but the homes were not worth much so the banks didn’t get much back.
My perspective says all of those loan terms sound about right for what was going on. If I’m the bank and know that nobody will pay me back then why would I risk lending my money without terms that cover my ass?
Fast forward to today and what makes FHA loans popular is most only require 3.5% downpayment and you can have crappy credit (580+).
Thing is, most mortgage companies today have conventional loans (not FHA) which allow borrowers to put as little as 5% down to buy a home. Thats 1.5% more than the FHA. Yes, they will probably need to have credit scores over 680 to get approved on that loan. But isn’t that what we want? The market is showing it can handle this situation.
And if you can’t come up with 1.5% more for a downpayment and you have 580 credit scores YOU SHOULD NOT BE BUYING A HOUSE! Clean up your credit report. Save some more money.
VA – 100% financing with no credit score requirement. There is no mortgage insurance like FHA but the Veterans Administration charges funding fees up to 2% of the loan amount (lets call that insurance).
If there’s a group of people who should strongly lean towards renting versus buying a home its active duty military. Whats an average assignment, 3 years? You know how many people who are not in the military think about buying a house and staying in it for less than 3 years? Close to zero.
And again, if you could come up with a 5% downpayment with average credit scores you could get approved on a conventional mortgage. Just 5%.
I saw this play out recently. My Mom sold one of her rental properties to a single guy who was a retired Veteran and was collecting disability.
At the closing table were my Mom (who is a retired Vet), me, our realtor, his realtor, his mortgage broker, and the notary from the title company. He began telling us about his living situation and how he didn’t like the apartment complex where he was living as people kept stealing his plastic patio furniture.
A friend suggested he look into buying with his VA benefit and that his mortgage payment might be less than his rent payment. Which it was. And it didn’t matter that he did not have any money to put down as the VA didn’t require any. He asked for sellers concessions which my Mom said yes to.
As soon as I heard that I kind of felt bad for the guy. For one, his situation wasn’t great. I could tell he was hobbling around a little. And two, he was no match for the mortgage broker and realtor telling him “How great homeownership was going to be. And how it was going to save him money.”
Seriously, I heard his realtor say that. And his mortgage broker walked in and gave him an American flag to fly from the front porch. That was a nice touch.
Three months go by and my Mom gets an email from our realtor who forwarded an email he received from the buyers realtor saying there was water leaking into the house and they were “going to take legal action” against my Mom.
Our realtor told the other realtor he should know better. There were 3 inspections done on the house. Three! None of which found any prior water damage. Nor had we ever seen water coming in before.
Hey man – you bought a house. This stuff happens. It sucks. That $150 he was saving in his mortgage payment versus renting is now gone.
I wonder if the realtor and mortgage broker helped him out?
Fannie Mae & Freddie Mac – These two organizations were created during the Great Depression. Both are Government Sponsored Enterprises. Basically, they are quasi Government agencies that receive the best parts of working with the Government (money) and the private sector (private money).
Fannie Mae and Freddie Mac make the rules for just about every mortgage lender assuming you want to sell the loan on the secondary market. Both have had scandals. Both were bailed out by the taxpayers. Both don’t make things better.
Federal Reserve – This privately held organization controls the U.S Dollar. There is nothing Federal or Reserve about it. Every time money is exchanged the Federal Reserve knows about it. Whats amazing is they are responsible for the ups and downs of the housing market and mortgage rates. Not 100% responsible. Closer to 80%.
As a mortgage banker you had to at least be familiar with what the Federal Reserve was doing. When they raised or lowered the Federal Funds Rate (aka – Prime Rate) it affected Home Equity Lines of Credit and Adjustable Rate Mortgages. Typically, fixed rate mortgages would move too. I recommend reading End The Fed to get a better understanding about it.
Summary – Im sure there are more Government agencies out there to talk about but it really comes down to three things. Loan terms, downpayment, and credit.
Banks and mortgage companies are more than likely going to have a 30 year mortgage available moving forward. One of the reasons why the FHA was created was because there were only short term loans available. Thats not the case anymore. Knowing that, there’s one less reason for the FHA to exist.
VA requires nothing down and FHA requires 3.5%. If borrowers could come up with 5% down they could get a conventional loan from just about any bank or mortgage company in the U.S. Just 5%. For 1.5% more we could eliminate at least the FHA. A huge Government agency.
And lending to anyone with 580 credit scores. Come on. You are not doing them any favors.
It makes me wonder why we need so many Government agencies. Isn’t it interesting how all of them were created during the Great Depression?
Because of all of this Government involvement we get housing bubbles which create swings in the market. And then the Government has to step in and write blank checks to these organizations and does its best to lower interest rates for everyone.
Even going so far as offering modified mortgage programs like HARP (Home Affordable Refinance Program) to help people who are severely underwater on their mortgage. Yes – programs like HARP do help people stay in their home and keep payments rolling in. But what HARP also does is it admits the Government made a mistake in the beginning.
I doubt anything changes even though the market is showing it can handle all of the “problems” it couldn’t handle during the Great Depression which caused these agencies to be created.
Lets see how I did with what I can grade myself on.
We rented a small bungalow in Royal Oak for two years before buying. It allowed us to save quite a bit of money.
When we bought our house we put 20% down and took out a 30 year mortgage. The mortgage payment was $200 less than what we were renting for not including taxes and insurance. We ended up paying $250 more if you include those.
We were ready to buy a house and it just so happened to be 2012 which was the last dip in home prices. It didn’t hurt our 30 year mortgage was at 3.99%.
After being in the house for a year we refinanced to a 15 year mortgage at 2.75% which was awesome. Right up until the point when we welcomed two kids into the world some thirteen months apart. Daycare costs soaked up the extra money.
So we looked into refinancing back into a 30 year and the 3.99% we originally took out was available. Since we put down the 20% and paid off so much on the 15 year loan in 4 years our mortgage payment was under $600 a month (not including taxes and insurance).
We got lucky with interest rates there. If they would have been 4.5%+ I don’t think I could have done it.
Saying all that, sadly, the math works out that we should have been renting. If I showed you the Excel spreadsheet showing how much money we have put into the home (20% downpayment, remodels/repair, roof, electrical upgrade, appliances, painting, carpeting, dozens of $80 to $200 trips to Home Depot) and instead rented something exactly like what we are in and invested that money in the same investments we have over the last five years we would be $175k wealthier. It makes me want to puke.
I’m giving myself a B+ in applying what I learned.
It is true that I was let go. My weakness as a mortgage banker is I would turn into a financial advisor. Giving good financial advice is not the way to make money.
As an example. A potential clients goal was to lower payments as money was tight. They had a 30 year fixed rate mortgage at 5.5%. In 2006 that was a very good rate and was .25% higher than the 30 year rate on that day.
On their credit report I noticed a $640 monthly payment to GMAC. I asked them what that was. It was their Chevy Tahoe payment. It wasn’t their mortgage killing them. It was their car.
I told them basically word for word what they should do is “sell the Tahoe and buy a Ford Focus instead. You’ll save $300 on the monthly payment alone. Insurance has to be half. And you’ll probably save $100 a month on gas. That’s $400 a month.”
I’m thinking thats great advice. Because it is. They did not like that idea. Neither did my director.
I didn’t even present a mortgage to them as in my mind getting rid of the Tahoe was the only logical thing to do. For them to save $50 on their mortgage payment they would have had to pay $3,000 in closing costs plus another $1,500 in points to buy down the rate on a new 30 year fixed mortgage. Why on Earth would anybody do that?
My director reminded me that giving financial advice is not what we do. We sell loans. If we had a loan that saved them $1 a month than I had to present it. Its up to them to decide if it makes sense.
He also reminded me I could have presented them an interest only mortgage at the same 5.5% interest rate they had with $3,000 in closing costs which would have saved them $100 a month due to not paying down the principal balance.
You can only stay a mortgage banker for so long when you’re not presenting ideas like my director mentioned. Moving forward I would present ideas like that but never sold them as its something I would not do. If they liked it then I’d write it. If not, than ok.
When home values started dropping it caused appraisals to come in low which killed deals. It was only a matter of time before I’d be let go. For two years I did enough loans that made sense to me and the borrower. I even made it to Senior Mortgage Banker.
The last three months of employment I no longer could write enough deals to keep my job. And that was that. The difference between an unemployed mortgage banker and a “great” mortgage banker in an environment with low appraisals and rising interest rates is you really have to sell those hard to sell loans. Which I was not comfortable in doing.
I enjoyed my time working at Quicken Loans. Learned a lot about the financial world, sales, and people. Who knows what would have happened if I would of made it two more years to be there for the next refi boom of 2011 – 2015. A couple of my friends who did are now making $200k+ a year. But I would not have heard about the Beachbody Coach business and would not have experienced everything that I did.
My attitude towards the job would be a little different if I was to give another go at mortgage banking. Maybe because I’m a little older and know what its like to be a homeowner paying a mortgage now.
Because I can tell you that less than 20% of the people I worked with at the time owned a home. Mostly because we were all under 28 just getting started in a career. There was little real life experience to owning what we were selling.
And those that did well spent like it too. I remember seeing people not that much older than me buying Corvettes, Mercedes, and BMW’s who still lived at home with their parents. I didn’t get it.
There was little training at that time too. Maybe a month or two in a classroom before getting on the floor. And licensing wasn’t as big of an issue then as it is now. Outside of a handful of states you could write loans anywhere.
Not so now according to people I know. Almost every state has a test you have to take and many companies have three to six month training programs.
To be honest, I’m kind of surprised that the mortgage banking job I had back in the day is very similar to the one available today. I wonder how much longer it will be before mortgage companies eliminate the mortgage banking job completely.
An online application process would provide you with a dropdown of choices (Buy/Refinance) and with loan options to choose from with costs involved. And the system would tell you that maybe you need to pay off debt to get approved. Something like that.
Its really close to being the last financial product where you need to call somebody to get approved on something. Every time I’ve applied for a car loan (lease), a credit card, insurance, etc., I was able to do so without talking to a person. Time will tell.
The long hours didn’t bother me all that much because I knew it was a sales job and that it takes about three years to build up a client base. The environment was upbeat on most days and had just the right amount of energy to make those long days go by quickly.
It wasn’t a job for every one though. There was a lot of turnover and nearly everybody who did that job did not have kids. Seeing how I have kids now I don’t know how somebody could or would want to do that job. It is time consuming.
All in all I had a great experience working as a mortgage banker. Nearly everything I learned I was able to transfer over to what I’ve been doing for the past decade.