The Mortgage Brokers You’ve Never Heard Of

Whenever I need to finance or refinance a property I call up my friendly mortgage  broker and about three weeks later the deal is done.

My mortgage broker is a good example of the best you can find in his profession,  a profession which is now on the verge of extinction. I know when I deal with  him that I’ll walk away with the best available financing I can get and that  I won’t pay a dime to close.

Not everyone is so lucky.

For mortgage brokers, recent events have been especially grim, a hint of things  to come. Increasingly, mortgage brokers are seen as a central cause of the  mortgage meltdown, an excessive cost to lenders and as grossly unreliable by  both borrowers and investors. Just recently a court threw  out efforts by the mortgage brokerage industry to hide yield-spread premiums — a  kind of back-door payment to lenders — on good faith estimate forms HUD  will require after Jan. 1.

The Middlemen
 The mortgage process today is essentially a distribution system which moves    money from investors to borrowers. While it happens that local lenders provide    loans for local borrowers, such quaint transactions are a small part of the    lending system. For more    than half of all borrowers the lending system is different: A mortgage    broker takes the loan application, pulls together a loan file to prove that    the loan meets the requirements of the lender and mortgage insurer and then    submits the application to a lender.

So what is it, exactly, that the mortgage broker does for borrowers? According  to the National  Association of Mortgage Brokers (NAMB): 

  • “The consumer receives a knowledgeable professional throughout the    complex mortgage lending process. The broker offers the consumer a variety    of home loans.”

  • “By offering superior market knowledge and direct access to many    different loan programs, a mortgage broker provides the consumer the most    efficient and cost-effective method of obtaining a mortgage that fits the    consumer’s financial goals and circumstances.”

So why would a lucid borrower pick mortgage broker Smith over mortgage broker    Jones? Because one claims to offer the best rates and terms.

This seems logical except for one huge problem: While the borrower “receives  a knowledgeable professional” and is introduced to many loan programs,  the mortgage broker does not work for the borrower.

“Simply put,” says Harry  Dinham, a former NAMB president, “a mortgage broker should not, and cannot,  owe a fiduciary duty to a borrower. The consumer is the decision maker, not  the mortgage broker.”
The conflict here is obvious: A borrower with limited mortgage knowledge relies  on the advice and product offerings of a trained, experienced professional  who can maximize his income by selling the most expensive loan possible to  the borrower.

You think this doesn’t happen?

In 2005 the Wall Street Journal found that 55 percent of all subprime borrowers  actually qualified for conventional — and cheaper — mortgages.  The rate rose to 61 percent in 2006. (See: Subprime  Debacle Traps Even Very Credit-Worthy, The Wall Street Journal, Dec. 3,  2007.)
In other words, the majority of high-cost subprime loans were sold to people  who could have enjoyed lower rates and better terms based on their credit profile — some  of whom may now be facing foreclosure because of the costly toxic loans they  received.

And who originates more than half of all loans? Mortgage brokers.

They Can Get It For You Wholesale
Mortgage brokers don’t have cash to make loans, instead they rely on wholesale    credit lines from those who do have cash such as banks, insurance companies    and pensions.

This means that part of the mortgage broker’s income is derived from the difference  between the wholesale cost of a loan and the retail price paid by the borrower.  The bigger the gap, the bigger the broker’s profit.

Now you might think, aha, so the mortgage broker must be working for the wholesalers  and seeking to maximize their profits. Nope, that’s not right either.

“Mortgage brokers,” says NAMB  President, Marc Savitt, “do not create loan products, do not determine  the automated underwriting systems used to qualify borrowers, do not underwrite  the loans, and do not approve borrowers for those loans.”
So what benefit do mortgage brokers provide for lenders?

“Essentially, mortgage brokers are independent contractors who supplement  the lender’s own sales force,” says Jim Saccacio, Chairman and CEO at,  the leading online marketplace for foreclosure properties. “This holds  down lender costs because banks, insurance companies and pension funds get  an army of sales people who are only paid when they deliver loans.
“The looming question is whether lenders really want an outside sales  force,” continues Saccacio. “Some lenders are beginning to reconsider  the issue, thinking that perhaps smaller wholesale operations or no wholesale  operations would actually be a better option.”
Jamie Dimon, Chairman and Chief Executive Officer of JPMorgan Chase, put it  this way to a Chamber of Commerce meeting in March: “If I had to point  out my biggest mistake, probably of my whole career, was not closing down our  mortgage broker business sooner. Okay? It, a mortgage broker product, that  was not our own salesperson from the client, has two or three times the loss  rates of all our product.”
Chase and a number of other lenders have now closed down or reduced their wholesale  mortgage operations. The failure of Colonial  Bank —  a $25 billion bank with 346 branches and a major source of  wholesale funding —  substantially reduces the funding available to many  mortgage brokers, meaning that many mortgage bankers have been left with less  to sell and in some cases with no products to offer.
Not only are lenders closing down wholesale pipelines, the related issue is  that investors — the folks who buy mortgage-backed securities and pump  cash into the system — also want less risk, something they can get with  better deals for borrowers.

Who Benefits?
So far it would seem that mortgage brokers as a group have pretty much gotten    the recognition they deserve. But remember, there are good mortgage brokers    out there. Just think about the guy I use.
Let’s say for a moment that a very large number of wholesale credit lines are  cut off or reduced and that the world suddenly has fewer mortgage brokers.  Who comes out ahead?

If you’re a bank you want to make loans because piles of cash in a vault don’t  produce any returns. One way to make more money is to dump high-cost outside  marketers and instead use lower-cost, salaried staff.

This could be a good deal for both borrowers and banks if the result was mortgages  with lower consumer costs. Then again, that’s a fat  “if” — consider  how credit card customers have been treated, the costs of using ATMs and the  fees for bouncing a check.

The Twist
Lenders and borrowers are not buddies. They’re adversaries in the financial    marketplace. Lenders want to maximize profits and borrowers want to minimize    costs. Not since gladiators fought with lions has there been a more obvious    clash.

All of which brings us back to mortgage brokers. Basically, this is a profession  which needs to make a decision: Either keep representing no one and go the  way of the ox cart or start providing a professional service in the sense of  lawyers, real estate brokers or doctors.

Imagine this scenario: You need a mortgage. You hire a mortgage broker to  represent you. The mortgage broker is paid a set fee negotiated in advance.  There are no ups, extras or add-ons. You can rely on the mortgage broker because  he’s your agent.

You benefit because the mortgage broker is a professional, someone who knows  which loan best meets your circumstances. As to which loan you chose, the fee-only  mortgage broker has your best interests at heart. Why? Because he gets paid  the same no matter which mortgage you choose —  but if you get a really  good loan you’ll recommend him to other borrowers and other borrowers mean  more fees.

NAMB says it has more than 25,000 members, but there’s another association  of mortgage brokers out there, one you need to know about.

The Upfront Mortgage Brokers  Association (UMBA) has just 80 individual members and 10 company members.  Based on the ideas of Jack Guttentag, aka “The Mortgage Professor,” a  nationally syndicated real estate columnist and a Professor of Finance Emeritus  at Wharton, the group has a code of ethics that actually means something.

For instance, members pledge that “the broker will endeavor to act in  the best interests of the customer.” Nothing fuzzy about this, it creates  a fiduciary obligation to represent borrowers.
  Members also promise to “establish a price for services upfront, in writing,  based on information provided by the customer.”

“The price,” says the UMBA code, “may be a fixed dollar  amount, a percent of the loan, an hourly charge for the broker’s time, or a  combination of these. The price or prices will cover all the services provided  by the broker. If the broker charges a loan processing fee, the amount will  be disclosed to the customer, regardless of whether it is paid directly to  the broker or to a third party.”
  Lastly, with UMBA members hidden yield-spread premiums are out. Not only are  such premiums disclosed, they’re credited to borrowers.

“If the broker’s fee is 1 point, for example,” says UMBA, “and  the broker collects 1 point from the lender as a ‘yield spread premium’, the  broker either charges the customer 1 point and credits the customer with the  yield spread premium, or charges the customer nothing and retains the yield  spread premium.”
You can see the benefit of the UMBA approach. If it makes sense to have a buyer  broker representing you as a real estate purchaser, why would it not make sense  to have a mortgage broker protect your interests when you get a loan?

UMBA is small and not well known, but the way things are going it’s the future  of mortgage brokerage. Members pledged to its standards are listed on its website,
Peter G. Miller is syndicated in more than 100 newspapers and operates the  consumer real estate site,

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