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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 (MBs) 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 MBs 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, MBs 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. MBs
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
MBs 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.
MBs 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. For the current
list, click here.
But
you need not wait to take advantage of this program.
Copy the Commitment of a UMB, and
ask brokers if they are willing to do business in that way.
They are unlikely to say �no�, especially if they realize you
understand the value that brokers provide.
Expect them to interview you, however, before quoting a price.
Copyright Jack
Guttentag 2002
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