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September 4, 2000
�When
I called numerous lenders and mortgage brokers asking for rates and
points, I received quotes that varied widely.
My wife suspects some of these quotes are phony.
What�s the point of phony quotes, and how can they get away with
it?�
Your
wife is right. The more
attractive the quote, the more likely it is phony -- meaning that the
lender or broker has no intention of honoring it.
What�s
the point? To rope you in.
If
you are purchasing a house, the cost of terminating the process with one
loan provider and starting again with another becomes increasingly high as
you move toward your home closing date.
As your bargaining power recedes with the passage of time, you
become increasingly vulnerable to various tricks for increasing the price.
Loan
providers who offer phony quotes figure once you are in the application
process, they have a good chance of landing you as a borrower.
I
know a mortgage broker who aims to make a 1.5 point markup on all loans
(each point is 1% of the loan amount), but includes only a 0.5 point
markup on prices he quotes over the telephone.
For example, if this broker has a quote from a wholesale lender of
8.25% and 1 point, he quotes you 8.25% and 1.5 points -- a markup of only
0.5 points. If he lands you
as a customer, he finds a way to recover the point (or more) before the
loan terms are locked.
Brokers
who practice this deceit are called �sunshine blowers� by those that
don�t.
How
do they get away with it? Loan
providers legally can�t be held to a price quote.
Since the market is volatile, yesterday�s price may not apply
today. All loan providers,
including the sunshine blowers, warn borrowers that price quotes aren�t
firm until they are locked.
For
example, suppose market interest rates rise after the initial quote, with
the original wholesale quote of 8.25% and 1 point now 8.25% and 1.5
points. The broker tells you
�Sorry, the market has gone against us, the loan you want is now at
8.25% and 3 points.� The
broker makes an extra point by pretending that the increase in market
rates was larger than it was.
Conversely,
if the wholesale quote falls to 8.25% and zero points, the broker can make
his 1.5 point markup by providing you with the terms originally quoted.
The broker merely ignores the decline in market rates.
You
can attempt to forestall this trickery by monitoring changes in the
market after you get a price quote, but probably you won't get far.
The
broker will point out that your market information is general and does not
accurately describe the specific segment of the market relevant to your
loan. Only the broker has that
information. You will
probably lose this argument because you�re fighting on the broker�s
turf, and you have a closing date on the near horizon.
It would
be a different story if the broker agreed initially to share his market
information with you. If the
broker in my example revealed the wholesale lenders� price quotes, you
would know exactly how the market relevant to you had changed.
But then the broker would not be able to modify his low-ball
markup, which is why most brokers keep wholesale prices to themselves.
"I shopped numerous
lenders by telephone on the same day, mindful of your warning that price
quotes on Tuesday were not comparable to quotes on Monday. I submitted an
application to the lender who offered the best deal. Two weeks later the
lender said the price quoted previously no longer applied. Because I will
rent the property 9 months each year, I fall into a different category and
the rate will be 9.25% rather than 8.25%. I�m too near closing to back
out. Am I getting a fast shuffle?"
Yes. Loans on properties rented
out most of the year may carry a higher rate than loans on the borrower�s
primary residence, but the difference should be no more than .375%, not
1%.
In response
to the first question above, I warned that until the loan terms were
locked, price quotations could not be relied on. Day-to-day market
fluctuations provide a convenient cloak behind which loan providers can
retract low-ball offers without the knowledge of borrowers.
Your experience illustrates a
second cloak -- "market nichification" -- used for the same
purpose. Lenders vary the terms they offer borrowers based on numerous
loan, borrower and property characteristics they believe affect the risk
or cost of the loan to them. Using the property as a second home rather
than your primary residence is one of those characteristics.
When you shop, unless you inform
the loan provider otherwise, he generally assumes:
*The loan is below $322,700
(the maximum for purchase by Federal secondary market agencies in 2003),
and above some minimum-- usually around $50,000.
*There will not be a second
mortgage on the property when the deal closes.
*The property is single-family,
detached and constructed on site.
*You and all co-borrowers intend
to occupy the house as your permanent residence.
*Your credit rating and that of
your co-borrowers is good.
*You have enough cash to pay the
required down payment and settlement costs.
*Your income is high enough to
meet maximum ratios of housing expense to income and total expense
(including monthly payments on existing debt) to income required for the
loan program you select.
*You can fully document your
income and financial assets.
*You are a US citizen or a
permanent resident alien.
If you don�t meet all
these specifications, you are subject to a price increase.
When you are shopping for a loan,
it is always best to reveal how your case differs from these standards. In
dealing with shoppers, loan providers will raise the rate by no more than
necessary. If you don�t reveal the information until it is too late to
back out, and if you are unfortunate enough to have fallen into the hands
of a rogue, you will pay dearly for your mistake.
The risk of phony price quotes is
lower when you shop on the internet at a site that adjusts prices for
deviations from the standard deal. You can tell whether the prices have
been adjusted by the questions the site wants answered before providing
you with prices. In general, the more questions asked, the more confident
you can be about the quotes.
On the internet, you are also less
vulnerable to low-ball offers that disappear under the cloud of
"market change adjustments". Loan providers who quote prices on
the internet can�t tell you market rates rose by �% between the day you
applied and the day you locked unless they did, because their rates are
posted for you to see on both days.
An attractive alternative is to
hire an honest expert to shop rates for you. That�s what Upfront
Mortgage Brokers do. Acting as your representative, they can shop the
market a lot better than you can.
A list of them can be found by
clicking here.
Copyright
Jack Guttentag 2002
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