July 10, 2000
"In one
of your columns you said that you were working on a self-enforcing code of
ethical conduct for mortgage brokers that would allow borrowers to
distinguish between them and the rogues.
Have you made any progress?�
Yes,
but I could not have done it without the help of several ethical brokers,
who wanted to conduct their business in
an upfront and fully transparent way.
They are Catherine Coy out of the Los Angeles area, Jeff Jaye from
the San Francisco Bay area, and Kevin Iverson from Denver.
I call these brokers Upfront Mortgage Brokerstm �
UMBs for short.
Here's how
they work. At a customer�s
request, UMBs disclose their fees to customers in writing and in advance.
UMBs also disclose the wholesale prices (rates and points) they
receive from lenders. Customers
of UMBs pay the broker's fee plus wholesale loan prices.
Lenders
offer wholesale prices to brokers because brokers perform costly services
that lenders would otherwise be forced to provide themselves.
The most important is finding, counseling and qualifying b
orrowers.
Lenders who
operate through both wholesale and retail distribution channels quote
wholesale rates on fixed-rate mortgages from .25% to .50% lower than
retail rates. The
average is about .375%, worth approximately 1.5 points.
Points are an upfront credit charge expressed as a percent of the
loan amount. On an average
loan of $130,000, 1.5 points amounts to $1,950.
While UMB
customers pay a disclosed broker's fee and the disclosed wholesale loan
price, conventional mortgage brokers (CMBs) add a markup to the wholesale
prices, and quote only the resulting �retail prices� to customers.
Their fee is the markup, plus any payments that they receive from
lenders. Most CMBs don�t
reveal their fees until required by law -- after an application has been
submitted.
Because
of the way they price their services, the UMBs interests are fully aligned
with those of customers. In
contrast, CMBs are often in a conflict situation with customers.
Since
the UMB's fee is stipulated in advance, customers are automatically
credited with any rebates received from lenders that would increase the
UMB�s fee beyond what was agreed upon.
CMBs may or may not credit customers for such rebates.
When
directed by the customer, UMBs will lock the terms (rate and points) of
the loan, and will provide a copy of the written confirmation of the rate
lock as soon as it has been received from the lender.
In
contrast, some CMBs will inform the customer that a loan has been locked,
but not lock with the lender. This
is often a source of extra profit to the broker but it exposes the
customer to the risk of being left without a loan if interest rates
explode during the lock period.
If
a customer elects not to lock until shortly before closing, the UMB
commits to provide the best wholesale price available on the day the loan
is locked. CMBs often
increase their markup on such customers, who lose their bargaining power
as they near closing.
By far the
most important benefit consumers receive from dealing with a UMB is
confidence that the broker is shopping the market in the consumer�s
behalf rather than in the broker�s behalf.
Mortgage
brokers can shop lenders much more effectively than consumers.
Brokers are in the market every day, where consumers are in the
market a few times during their lives.
Brokers receive price information from lenders daily as a matter of
course. They know the
features of transactions that affect price.
They have relationships with multiple lenders, and are therefore
well positioned to find and shop among the lenders offering particular
features.
The
potential savings from expert shopping are particularly large for
borrowers with poor credit. This
reflects the much greater price differences among lenders serving this
market segment than among lenders serving �prime� borrowers.
UMBs also
counsel borrowers on the loan programs that best meet their needs, and on
methods of overcoming potential barriers to loan qualification.
UMBs will
set themselves apart by maintaining web sites on which their commitment to
customers is prominently displayed. I
will list them on my site, with links to theirs.
Currently, the list is limited to the three brokers who helped
develop the concept plus a few others.
But
you need not wait to take advantage of this program.
Copy the �UMB Commitment� from
