Tell a friendCould you be at risk
Mortgage lenders are not always what they appear to be. Imagine losing everything because you thought you arranged your loan with an award winning mortgage lender, but they turned out to be a middleman who got things horribly wrong.
Kathryn and John* were at breaking point when they made contact with Mates Rates for a solution to their financial problems, in 2007. A bad experience with a mortgage originator had left the couple on the brink of default, and in danger of losing their investment properties as well as their family home. They were in need of expert help, fast.
The couple had not used Mates Rates to arrange their mortgages, although they came to us when they heard about our pro-borrower stance.
Kathryn is a top lawyer and John is an experienced sales representative. Both of them were deeply shocked and embarrassed by what happened to them.
The couple were happily paying off their owner occupied home when they decided to purchase investment property. They used equity in their home as deposit and arranged their finance with a mortgage originator under the mistaken belief the company was a mortgage lender.
John and Kathryn thought their originator was a lender because the web site, loan application and documentation (such as approval letters and statements) were branded with the originators logo. Their originator was also responsible for checking their credit history, employment information, capacity to repay as well as arranging the property valuations. On top of this, the originator also called themselves a lender.
Magazines and newspapers also promoted the originator as a lender and had given them mortgage lender awards in categories such as Money Magazines Best Line of Credit, Best Low Documentation Home Loan and Best Five-Year Fixed Rate Home Loan. It's no wonder why, with so much clever advertising that originators are so often passed off as mortgage lenders.
Unfortunately, Kathryn and John had never heard of a mortgage originator, so they had no idea what they were dealing with and what the true risks were.
What went wrong
It might be a bit of a surprise, but it was a simple series of clerical errors that brought Kathryn and John undone. Although the courts will be left to decide whether it was the mortgage originator, manager or the actual mortgage lender that made the mistakes, there are four important facts that put Kathryn and John in this stressful situation.
- Kathryn and John's repayments were being debited from a nominated account correctly.
- The originator had taken responsibility for collection of repayments.
- The full payment did not make it to their actual lender.
- The mortgage lender and/or the manager had the wrong postal address.
Not surprisingly, mortgage lenders like loans to be repaid. As Kathryn and John’s lender was not receiving their repayments (it's important to remember that repayment responsibility was assigned to the originator and the repayments were in fact, being debited from Kathryn and John’s nominated account.), the originator, or manager sent warning letters to Kathryn and John.
Unfortunately, these letters were mailed to their investment property and were not on forwarded by their tenant. As the loan fell further into arrears, the mortgage lender applied defaulting interest rates, penalty charges and costs. The problem grew out of control fast. After several months, the loan had ballooned out of control and the mortgage lender commenced legal proceedings.
Astoundingly, Kathryn and John first became aware of the problem when the sheriff attempted to serve papers on the couple at their investment property. Although the tenant had not on forwarded mail, they were pretty quick to let the agent know when the sheriff turned up on the doorstep.
Even though the mortgage lender had not received any payments, the originator (that the couple thought was the lender) had ensured they were being debited from Kathryn and John’s bank account.
The couple could see the repayments leaving their account and had no clue that their investment loan was exploding out of control – taking their owner occupied home with it.
By the time legal instructions are issued by your true mortgage lender, it is usually too late to avoid costly outcomes. Due to Kathryn and John’s mortgage arrangement with an originator, their true mortgage lender did not have the facilities to handle direct enquiries with the couple.
Their originator suddenly stopped claiming to be the lender and explained to Kathryn that they were just and intermediary and the legal action has been taken by the lender. As a result, the originator claimed, there was nothing they could do.
The story isn't finished yet. Kathryn and John are tangled in a legal tussle to save their home and were forced to list their investment properties at a significant financial loss.
Some thoughts from the front line
The Consumer Action Law Centre (Melbourne) made submissions to the Productivity Commission raising concerns over this type of problem when they stated:
"... often we are not talking about one intermediary standing between the seller and the consumer - we may be talking about two or three or even more - and this can create a number of difficulties for the consumer in the event that things go wrong during the transaction. It can make it more difficult to enforce rights, because the ultimate lender, the person to whom a consumer owes a debt... may rightly claim a lack of knowledge of particular circumstances that may render a contract, or the circumstances into which it was entered, unjust."
The question for Kathryn and John is whether they have the financial and moral strength to see this case through. The truth of the matter is that a few borrowers have this strength, although it is usually damaged by embarrassment and emotions of being completely overwhelmed. If you are unfortunate enough to find yourself in this position, check whether your originator is a member of the Credit Ombudsman Service. If they are, pursue a claim as soon as possible.
The difference between an originator and a broker
Although originators and mortgage brokers are both middlemen, a mortgage broker adds to the relationship that you have with your lender. This means your broker picks up the slack when your lender falls short. Similarly, if there is a problem with your broker, you can go directly to the lender, or reappoint a better broker instead.
Mortgage brokers have a defined role and payment structure. In most states and territories any payment a broker is likely to receive must be disclosed to you. It is expected that mortgage brokers will be regulated by 2009 with work on this process taking place over the last four years.
An originator on the other hand, takes on many but not all of the functions of your lender. Unlike a broker, you cannot go to your lender directly if you have a problem with your originator. Similarly, you cannot reappoint a new originator without refinancing your loan. The degree of responsibility that an originator takes on (of the true mortgage lender’s responsibility) is individual to each originator. An originator gets in the middle and stays in the middle for better or worse.
The originator’s earnings, as a result of 'originating' your loan, varies wildly and there is no legal requirement for the originator to disclose this to you. Originators are not subject to any regulation and there is no work in place to introduce regulation to protect you.
Aren't they still a non-bank lender
Without wanting to state the obvious, a non-bank lender is a lender that is not a bank. Although sections of the media continue to refer to originators as mortgage lenders, they are not.
A lender is the person or business to whom you owe money. The lender has ultimate ability to repossess your home, vary your loan terms and collect repayments. Your mortgage lender will be noted as the mortgagee on the mortgage that is registered against your property.
Non-bank lenders include credit unions. building societies and any other organisation or individual who is putting up the money to fund your loan and registering themselves as mortgagee on property you are using as security.
Why deal with an originator
Originator products often scream cheap rates, claims of a no frills operations and the backing of big lenders. Because of these messages, they are thought to be cheaper, but they usually aren't. In fact various commission sharing models available through mortgage brokers mean you can deal with real mortgage lenders for the same cost and often less than dealing with an originator.
Sorting pretenders from real mortgage lenders
The signs may not be obvious, although not all of them can be spotted in advertisements or over the phone. Lender pretenders claim to be a lender, however are not listed as mortgagee. Early warning signs can also include:
- Have Pty Limited at the end of their name
- Are not regulated by APRA
- Use claims such as "funded by XYZ Bank" in their advertising
- Make statements about how their loan is the same a an XYZ Bank loan only cheaper
A good way to sort the lenders from the originators is to ask the above questions before signing any contracts with them. This way they know you are making a serious and educated decision about who you use as your mortgage provider.
Conclusion
Although lender pretenders make some wild claims, the reality is that it is you that carries all the risk. When an originator can't even be up front about not being your mortgage lender, you have to ask yourself what else they aren't being straight about.
While the clerical problems that happened to Kathryn and John could also have happened if your broker recommended a real lender, legal responsibility to fix the entire situation would clearly rest with the lender instead of falling through the cracks of several companies.
Dealing with originators, mortgage managers or lender pretenders is not the same as using a mortgage broker. Your broker can check a range of mortgage lenders you can deal with directly once your mortgage is established. Perhaps more importantly, there are various commission sharing models available from brokers so you can deal with real mortgage lenders for about the same cost and often less than dealing with a lender pretender.
*Characters names have been changed to Kathryn and John for confidentiality reasons.
