Pyramid Lending = Death of Mortgage Banks

$1.2 Million Asking – For A 2-Bedroom

This is unrelated to this blog topic, but it is so interesting I had to share it.

We have a Bay Area purchase in contract for well over $2 million.

What makes it so interesting is that it is a small 2-bedroom home, and that it sold for $1.2 million more than the listing price.

The appraisal came in several hundred thousand low, but I was amazed that it came in as high as it did (almost $800,000 over the listing price).

This illustrates just how hot the market remains in many areas, and it is a reminder that appraisals are very difficult when offers are so much higher than the listing price.

Pyramid Lending – No Room For “Uplines”

We have friends at mortgage banks who are stuck charging 1/4% to 1/2% higher rates than we charge because they have to cover their “upline.”

The “uplines” consist of all the people collecting a small commission against every loan our friends fund.

These people consist of recruiters, and sales, branch, regional, and corporate managers.

If those people actually did anything to improve borrower experiences or to expand production, our friends would be OK with the higher rates.

But, unfortunately, many of those people do nothing to improve anything – and are simply dead weight.

The setup is very similar to the old pyramid schemes like Amway that we used to see everywhere in the 1990s (when strangers would approach you in the grocery store and randomly strike up long conversations – which wasn’t creepy at all 😊).

During boom times, when there is excess business and margins are fat, “pyramid lending” can work.

But – when business slows and margins compress like what has been happening this year – pyramid lending not only does not work, it will kill off many mortgage banks.

This is because borrowers can shop for rates and apply for loans more easily than ever now (something I repeat often), and because those mortgage banks are losing loan officers in droves right now.

Our friends, for example, are all shopping for new mortgage banking homes and will likely leave soon.

Many prominent loan officer coaching programs teach their clients that “rates do not matter” and should never matter.

But – unfortunately, they do – more than ever.

So yes, speed, skill and relationships are very important still, but so are rates.

Every agent should wonder if their loan officer is subsidizing an upline – because if their loan officers are, their clients will be doing so too.

Jay Voorhees
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167

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