As loan originators, you are trained in loan programs, how to pre-qualify, and how to complete a loan application and related forms, but are you trained to manage peoples' debts? You are not a financial planner, certified public accountant or licensed securities agent. You are a debt manager. You figure out the best adjustments and flow of peoples' debts.
You learn about mortgage interest being tax deductible, to consolidate consumer debt into the mortgage loan and to cash-out equity for the borrower to utilize. This is where most loan originators cease in service to their clients. Why not service your borrowers better?
You could study equity, how equity works and become familiar with appreciation percentages in various spots within your area. The town to the north may have less appreciation than the town to the west. You could track and record each area for its own appreciation history. Within cities, you could know each section growth percentile. This allows you to know the potential risk of security and liquidity.
The Santa Clara, Calif. area went through a slight slide five years ago and is now recovering. Before that, the 1998 earthquake impacted values through 2003. Two major potential housing bubbles popping in the Santa Clara area pulled through—and look at values today.
Knowing the security and liquidity of an area affords you understanding the concept of opportunity costs. Opportunity costs are not what it takes to get into the housing market in a specific area. Most originators rely on the real estate agent or their company's processing system to determine costs. You should know that this is not opportunity cost.
Utilizing $100,000 of equity can earn the borrower three percent a year, and could earn an additional 10 percent invested elsewhere, yielding the borrower 13 percent opportunity costs. This is referred to as "arbitraged" funds. As an originator, you may want to learn about arbitraged funds.
A sharp originator will also know the closing documents and what the escrow officer knows. He knows each loan document so that he can explain it to the borrowers at closing. There is a fantastic way to learn this while making money—go to each and every one of your loan closings.
If you were doing this over the past year, you would know that occupancy requirements have reverted back to intention to occupy, except home equity lines of credit. By going to the actual closing, you are learning the data and being updated on changes.
You should learn about inflation and what it does to impact appreciation. You should know that past inflation percentages will make $100,000 in equity worth $40,600 30 years from now, based on inflation history. In addition, you should be able to give borrowers real statistics on cashing out.
Leveraging and return on investment, defined as the amount of growth divided by the amount financed, can be tools for you to assist in managing borrower's debt. The cash divided by time divided by rate determines return on investment, which can help you formulate models that the borrowers can check on and use to make real choices.
Compounding interest and the time value of money both play important roles with opportunity costs, and are more important to a borrower than simply what the real estate agent or processor has documented at cost to close on a transaction. Originators can truly be great debt managers, if they want to be of added service to their borrowers.
Let me ask the originator reading this article what the four financial benefits to owning real estate are. If you can respond with appreciation, taxes, depreciation and cash flow, you are probably a fantastic originator.
If you knew two out of the four, you may need to re-read the article and learn to become a fantastic originator. Half is only a 50 percent score, and you have failed the test.
Joe Corno is president of Utah-based We Be Consulting and Seminars. He may be reached at (801) 836-2077 or e-mail firstname.lastname@example.org.