August 21, 2000
�I
am talking to two mortgage brokers, but they don�t know it.
I plan to submit applications through both.
After the applications have been approved and I have decided to
lock the loan terms, I will disclose what I have done and have them
compete for the loan. I am doing this to protect myself against mortgage
broker tricks described in your column.
What do you think of this strategy?"
If I was a
mortgage broker and you �double-apped� me, I would be furious.
By the time
your loan application has been approved, half or more of my work has been
done, but I'd have to cut
my margin to the bone or lose the loan.
It�s like
hiring two house painters and putting them to work on different sides of
the house where they can�t see each other.
When they have each finished about half of their side, you
introduce them and say, �Nice job fellas, now the one who gives me the
lower price can finish it and get paid.�
As an
economist, I am offended by the waste double-apping causes in triggering
two sets of costs. Since
broker fees must be large enough to cover all their costs, including those
associated with aborted applications, double-apping raises the general
level of fees for all borrowers.
To you, the
argument for double-apping may appear compelling.
When the
lender approves your application, you don't have a binding loan-price
commitment from the broker. Until
the price is locked, it remains open and subject to gamesmanship by the
broker using tricks I�ve described in other columns.
If you don�t have enough time before closing to start again with
another loan provider, your bargaining position is weak.
Double-apping prevents the broker from taking advantage of this in
negotiating the lock price.
It is not
complete protection, however, because the lock price does not finalize the
settlement costs other than points. When
the application has been approved, the settlement costs provided you are
merely �estimates�. If
you double-app, a resentful broker will play every game he knows to
augment your fees as you move to closing.
Run into a major road-block, furthermore, and a resentful broker
may not be willing to go the extra mile to remove it.
There is an
alternative to double-apping that protects you better, is fair to the
broker, and avoids wasted effort. Demand
to know the price before the work begins.
While the
price of the mortgage cannot be set in advance, the price of the broker's
services can. The most
important of these services is determining the type of mortgage that best
meets your needs, and shopping lenders for the best available price.
The
standard practice of mortgage brokers is to load the price of their
services into the price of the loan.
This pricing method allows brokers to practice gamesmanship to
raise their compensation, and encourages double-apping by borrowers as a
defense. Separating the price
of the broker�s services from the price of the mortgage eliminates
gamesmanship by the broker and the need for double-apping.
There is
now a group of brokers, called Upfront Mortgage Brokers�
(UMBs), who quote a fee for their services upfront.
Since the fee is fixed, the
borrower is protected against all the tricks of the mortgage broker trade.
UMBs are listed here.
UMBs act as
the borrower�s representative in shopping for a loan.
Where other brokers add a markup to the wholesale prices they
receive from lenders before quoting prices to consumers, UMBs pass through
the prices without a markup. Other
brokers keep the prices they receive from lenders under wraps, but UMBs
disclose these prices at the customer�s request.
With a UMB, you probably will save
not only money, but aggravation and heart burn.
Copyright
Jack Guttentag 2002
