What is really wrong with mortgage lending or why is it so hard to close on a mortgage?

[Note, this Blog post is my answer today to an actual client’s email regarding a nearly 10 day delay on confirming the client’s identity.  In answering it, I detail the real problems in the mortgage industry.  The email trail (with identifying information removed) is attached below for context.]

Dear Borrower (“B”):

The name of the lender is _______   Here is the Wikepedia link about them.  They are a huge financial institution headquartered in the Midwest with over $100B in deposits.  We have done many loans with them and once they close have not had any complaints from clients.

There should not be any problem with the closing or the documents.  There will be a bank attorney who attends who will go over all the documents with you.  He is someone we have selected and worked with many times.   I understand your frustration. But, it is endemic throughout the entire mortgage lending system right now and is not specific to this bank.  We have the same or worse issues with every lender we work with including, but not limited to [names of 3 of the largest banks in the country.].

The origination system [in the US}is broken due to all the failures of the past few years and the federal government’s response to these failures.  The Federal government, and Congress specifically, has created a “solution which is looking for a problem” in attacking the origination end of the mortgage business.  They have done this because (i) it is the “lowest hanging fruit” with the least resistance, sympathy or money to defend and (ii) it is the “face” of the mortgage brokerage industry and what the public believes is the cause of the collapse (e.g. “my mortgage broker put me into a  loan that I could not afford”).

What they have not dealt with are (i) the real estate brokerage industry which promoted and, often “puffed” up prices for properties (especially new developments in the coastal areas ) without regard for a purchasers needs or ability to pay (ii) the securitization of the mortgages in the secondary market which (unkown to most people) is the driving force behind the mortgage industry where the loan products are created and where the profits dwarf those made by mortgage brokers and bankers and (iii) the need to stimulate the purchase market by making it (a) easier to obtain financing and (b) incentizing the banks to lend and the purchasers to borrow not the other way around .

As a result of all of the above, the banks are afraid of the federal regulators so they are engaged in an excessive amount of caution. They are also unsure of how to even deal with all these new rules and regulations which are increasing every day and not allowing the mortgage market to absorb the blows, heal and move on.   Think of a fighter who is knocked out and lying on the canvas.  He will not heal from his wounds if he is continually punched and kicked.  He must be allowed to get up, patch himself and regroup before fighting again.

Finally, banks are concerned about their buyback obligations to the investors in the secondary market in defaulted loans (which are still increasing due to the poor economy) where the real power and money is concentrated in the industry.  So, all of this results in a culture from the top down of overly cautious lending.   In addition, employees of these institutions either become paralyzed by fear or are unable or unwilling to use “common sense” to resolve issues.   They understand (and properly so) that nobody will get in trouble for “not” making a loan.  While they will have a big problem if they approve a loan or waive a condition that later is either re-purchased or is a cause for a government violation.  In this tight job market, nobody wants to risk their job by putting themselves”on the line” (like they would have in the past).  And, this is a perfectly rational decision!

So, all that said, your exasperation is real but your outlet is not.  The banks are doing what they can do deal with the new lending environment.  They certainly could be doing better,  a lot better, but they are taking 100% of the blame for the failures in the mortgage market while bearing maybe 30% of the fault.   This is not to excuse them, just to give you a better understanding of the current environment.

Let me know if you have any questions.

Daniel M. Shlufman, FCMC Mortgage Corp.


From: Borrower (“B”)

Sent: Thursday, February 02, 2012 9:26 AM
To: Dan Shlufman
Subject: Re: your loan

I am very concerned about professionalism of this lender. What is their legal name, address and state they operate in? What is its standing with state banking authorities? How is it rated?

May I ask you to review all contractual documents that we are supposed to sign at closing to make sure there are no inconsistencies, deviation from standard agreements, like the one we currently have with ____ Bank, etc.  We do not want to be in position of discovering any surprises after closing.

As experience teaches, the stupid hurt others before they hurt themselves.



On Feb 2, 2012, at 12:06 AM, the FCMC loan processor, LP (“LP”) wrote:

I have sent a request again to contact you directly tomorrow. Please let me know when they contact you and I will follow up with them.


On Feb 1, 2012 8:24 PM, B wrote:


This is ridiculous and the lender obviously wasn’t behaving professional. If they wanted to verify my identity why they called my wife, not me?  While calling my wife’s cell number they didn’t tell her this call was about the refinancing. Of course, my wife thought this is a sales call from another lender (like what already happened with Quicken Loan’s calls) who monitors our credit inquiries. So, she said she wasn’t interested, of course.

Have they call me directly and we will straighten things out. Thanks,

On Feb 1, 2012, at 6:51 PM, LP wrote:

> Borrower (“B”)
> J called you from the Bank today to verify your identity. Your wife told her you weren’t interested in a mortgage loan. She is going to call you back tomorrow. Can you please verify the information she needs to finish your loan? Thanks.
> Sincerely,
>FCMC Loan Processor (“LP”)
> >

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