One of my biggest gripes for a long time has been that mortgage originators are not properly educated in finance. Those who have taken the initiative to educate themselves, either through a degree in finance or college-level finance courses are an exception. Very few companies – if any – actually provide their originators with any consequential education in this regard. My gripe is that a mortgage loan is the largest debt you will ever have and likely represents the most money you will spend on any one thing in your lifetime. And your loan officer has been taught how to sell the products that the lender wants to push, but isn’t fluent in finance. Doesn’t that make you feel all warm and fuzzy?
Well, someone in the industry was listening! I wrote an op-ed piece about this, and it was published as the feature article in this month’s Scotsman Guide, the largest mortgage-industry magazine in the country,. This should reach about 50,000 to 100,000 folks in the industry. Maybe it will start a trend? We can only hope. Here’s the article: (Reprinted with my permission…)
Huge but Overlooked: Financial Training
Originators’ lack of education in financial analysis remains the elephant in the room
By Casey Fleming, mortgage adviser, C2 Financial Corp. | bio
When first entering the mortgage business, brokers and bankers typically receive training in assembling a loan package, loan-program options, underwriting guidelines, business development and professional selling. Once they feel confident in their competence, many of these originators may focus their business-development efforts on financial planners, a group that’s easy for originators to feel akin to. After all, if you’re a mortgage broker or banker, you’re surely competent with financial analysis, right?
It’s often the case, however, that originators find themselves downright humbled in their first experience working with a client’s financial planner. Why are many new originators so far behind on understanding how financial planners look at the particulars of a deal?
The answer is simple: Because many originators aren’t educated enough in financial analysis, even if they are well-versed in underwriting guidelines and product offerings. Is your bank or brokerage adequately addressing this problem, or is your company still looking the other way?
Examine any bank or brokerage’s employee-training program, and you’ll likely find a program that stresses underwriting guidelines and business development, among other topics. These issues may relate to financial analysis in certain ways, but they’re not an ends in themselves. When it comes to originators’ training, that’s the industry’s elephant in the room: We don’t educate our originators in financial analysis.
Some companies may think that they’re training their new employees in this regard, but the fact of the matter is often entirely different. If you think teaching a loan officer how to do a payback analysis is enough, suffice it to say that your financial training isn’t adequate. If your organization has fallen behind in this area, which aspects of employee education should you emphasize to catch up?
Quality financial training
A competent financial analysis must include at least all of the following elements:
- Plan. Originators should know how to account for how long the borrower intends to keep the property and any potential plans that would impact financing down the road (i.e., starting a business, having a child, expanding or remodeling the home, etc.). This should dictate a holding period.
- Options. There is almost always more than one solution. Your client deserves to see and understand them all. Of course, many clients may tell you that they only want to consider 30-year fixed-rate mortgages at zero points, but that’s because they are frustrated and want to be able to compare apples to apples. Originators should give their clients what they want as one option, but provide them with other options, too. You’d be surprised at how many folks choose something different than what they initially thought they wanted.
- Cost, benefit and risk. Originators love to underscore the benefits of the options they present, and they have to present the costs. The trouble is that mortgage professionals often present the upfront costs as one package and the monthly payment as another as if they aren’t related. Originators know enough to realize that the monthly payment does not represent the entirety of a loan’s cost, but brokers and bankers frequently gloss over or completely omit the third part of the equation — the holding period.
- Lifetime-cost comparison. This is where it all comes together. Using your estimated holding period, what are the actual costs of each loan option — including origination and interest — over the holding period? Better yet, for the sake of relevant comparison, what is the net present cost of each option?
If you ask certain originators why they don’t calculate a deal’s lifetime-cost comparison, you may find that many professionals simply don’t know how to do it. Worse yet, many may do it incorrectly and give their clients inaccurate information. Almost every originator knows that — all things being equal — the lower the interest rate, the faster the principal is paid down. Very few professionals, however, can calculate what the principal balance will be after a few years.
The closest thing to a reasonable argument that you may hear for not educating originators in financial analysis is that many clients don’t want and can’t understand these complex financial matters. They just want the “bottom line,” this thinking goes. In truth, however, even the most unsophisticated clients can understand the subject of lifetime costs, and you’d be surprised at how many understand something even as esoteric as a net-present-cost analysis. Perhaps, then, the issue lies not with the clients, but with their advisers.
Again, this is the veritable elephant in the room for the mortgage industry. Many competent originators are good at underwriting guidelines, loan-program options and sales techniques, but many are also functionally incapable of advising a client about the long-term financial impact of their decisions.
This is not only wrong, it’s bad business. It can lead clients into making a poor decision about their financing and can result in a negative long-term experience, destroying the possibility of referral business. At worst, it could lead to a destroyed reputation, bad will and, in today’s environment, even a lawsuit. Poor financial training also prevents originators from building successful relationships with financial planners, financial advisers, accountants and attorneys. After all, these professionals want to work with someone who understands their points of view.
Finally, when you are financially literate, it is obvious to well-educated clients. These clients tend to turn loyal for life, and they also tend to be outstanding referral sources. In this way, becoming competent at in-depth financial analysis can open up certain markets that are currently closed off.
In thoroughly educating their employees, some cost-conscientious companies may object by asking, “What if I educate my originators, and they leave?” These organizations should consider another question: “What if you don’t educate them, and they stay?” Saving money by requiring only enough education to pass a licensing test is an unwise move. “Good enough” is mediocre at best and dangerous at worst, because originators advise their clients on the biggest financial decision of their lives.
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Management everywhere should invest in educating their originators in financial literacy. Make sure that your originators are competent in theory so that they know how to take a long-term view of the impact loan options can have on their clients. Mortgage originators don’t have to be able to build spreadsheets to calculate a net-present-cost comparison of two different loan options, but they should have the technical skills to at least understand this analysis, what it means and how it impacts their clients’ lifetime costs.
If your company doesn’t wish to invest directly in education, at the very least it should require every one of its originators to complete the first year of college-level finance classes at a local community college. Would you go to a doctor who was bad at biology? Would you drive over a bridge that was designed by a civil engineer who flunked a physics course? Then why should originators expect clients to trust them with their business if they have little or no understanding of those clients’ long-term financial pictures? Originators are salespeople, of course, but they are expected to be financial experts, as well.
And that’s the end of my rant. What do you believe? Should your mortgage advisor be an expert in finance? I’d love to hear from you.
Casey Fleming, Author, The Loan Guide: How to Get the Best Possible Mortgage (One Amazon)
Mortgage Advisor, C2 Financial Corp.
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