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May 4, 1998
"What do mortgage
brokers do?"
A mortgage broker is an
independent contractor who offers the loan products of multiple lenders
who are called "wholesalers." A mortgage broker counsels you on
the loans available from different wholesalers, takes your application,
and usually processes the loan which involves putting together the
complete file of information about your transaction including the credit
report, appraisal, verification of your employment and assets, and so on.
When the file is complete, but sometimes sooner, the lender
"underwrites" the loan which means deciding whether or not you
are an acceptable risk. And it is the lender who shows up at the closing
table with the money, not the mortgage broker.
"How do mortgage
brokers make money?"
The lenders that mortgage brokers deal with
quote a "wholesale" price to the broker, leaving it to the
broker to derive the "retail" price offered the consumer
by adding
a markup. For example, the wholesale price on a particular program might
be 7% and 0 points, to which the broker adds a markup of 1 point,
resulting in an offer to the customer of 7% and 1 point. (Each point is
equal to one percent of the loan amount). But if the broker adds a 2 point
markup, the customer would pay 7% and 2 points.
"How do mortgage
brokers set their markups?"
The general rule is that they
set them in each case as high as they can get away with. An
unsophisticated customer who shows no inclination to shop the competition
will be charged more than a sophisticated customer who makes clear an
intention to shop. Indeed, mortgage brokers often rationalize the high
markups they charge some customers on the grounds that these are needed to
offset the excessively small markups they are forced to accept on other
deals. Some borrowers do turn the tables on mortgage brokers by
threatening to bail out of a deal after most of the work has been
completed unless the mortgage broker agrees to cut the price.
"Won�t I save
money by going directly to the lender?"
Probably not . In fact, if
you are a reasonably astute shopper, you will probably do better dealing
with a mortgage broker. Mortgage brokers do not add any net cost to the
lending process, because they perform functions that would otherwise have
to be done by employees of the lender. Furthermore, because mortgage
brokers deal with multiple lenders -- in a typical case, 25 to 30,
sometimes more -- they can shop for the best terms available on any given
day. In addition, they can find the lenders who specialize in various
market niches that many other lenders avoid, such as loans to applicants
with poor credit ratings, loans to borrowers who do not intend to occupy
the property, loans with minimal or no down payment, and so on.
Bear in mind, though, that
the income of mortgage brokers consists of the spread between the price
they are quoted by the lender, and the price they can get the customer to
pay. While they are motivated to get the lowest possible price from
wholesale lenders, they are also motivated to get the highest possible
price from you. Like other retail merchants, mortgage brokers prefer not
to reveal their markups, which can vary all over the lot. Expressed as a
percent of the loan, they can be as low as 3/4 of 1% and as high as 4 or
5%. If you are a sheep who swallows everything the mortgage broker tells
you without question and without checking price quotes with other mortgage
brokers, you are likely to suffer a sheep's fate -- you will be sheared.
Copyright Jack Guttentag
2002
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