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April 9, 2001
"You have written a lot
about how borrowers need to protect themselves against hidden charges by
mortgage brokers, but you haven�t indicated how much is too much. Do you
have any information on how much brokers actually charge?"
A survey taken in 1998 of about
1,000 broker firms found that the average income per loan was $2443, which
was 2.02% of the average loan amount of $120,744. This is gross income �
none of the brokers� expenses are deducted.
The broker income reported in this
survey comes from the payment of points by borrowers, and rebates to
brokers by lenders. Since lenders pay rebates only on higher rate loans,
the borrower pays them indirectly in the rate. Hence, broker income
measures the cost of broker services to the borrower.
A database I recently acquired
covering 774 loans brokered in December 2000 and January 2001 provides
more detailed information on factors affecting mortgage broker income. The
brokers covered are larger firms employing multiple loan officers, and
they operate in relatively upscale markets. Their average income per loan
was $3191, which was 2.10% of the average loan of $152,031.
Differences in Loan Size
Brokers make more money on large
loans than on small ones. I divided the loans into 6 groups sorted by loan
amount, and calculated average income per loan for each group. Income rose
consistently from one group to the next. For loans of $80,000 and less,
the brokers averaged $1600 per loan. For loans greater than $225,000, they
averaged $5453 per loan.
While income in dollars rises with
loan size, as a percent of the loan it declines. The ratio of profit to
loan amount was 2.53% among the smallest loans, and 1.86% among the
largest.
The higher income on large loans
is not explained by a greater workload. If anything, smaller loans take
more of the broker�s time than larger loans. The database shows the
number of days taken to process each loan, which is a rough measure of
workload. Loans in the smallest size group took 14.07 days on average to
process whereas loans in the largest size group took only 8.86 days.
Conventional versus FHA
Income per loan was consistently
higher on FHA loans than on conventional loans. For example, on loans
between $80,000 and $110,000, brokers averaged $3234 on FHAs and $2093 on
conventionals.
The greater workload on
FHAs is one factor underlying the higher charge. For example, the average
processing time on FHAs between $80,000 and $110,000 was 21.22 days,
compared to 12.27 days for conventionals. In addition, the brokers
tell me that FHA borrowers do not bargain as aggressively as conventional
borrowers.
Overages and Underages
As a way of motivating their loan
officer employees, all the brokers record overages and underages on every
loan. An overage is income higher than the target income and an underage
is income below the target. The loan officer shares overages and underages
with the firm, usually 50-50.
For example, if the target income
is 1.625% and the loan officer collects 2%, there is an overage of 0.375%.
The broker would make the normal commission of 0.5% + half the overage, or
0.6875%. If the loan officer only manages to collect 1.25%, there would be
an underage of 0.375% and the loan officer would make only 0.3125%.
Among the 774 loans in the data
base, 516 (about two thirds) carried an overage. Only 123 loans, or less
than one sixth, carried an underage. The remaining 135 loans came in at
the target.
Firms cap the underages that their
loan officers can offer, but they may not cap overages. Among the 774
loans, underages ranged up to 1% and overages to 3%. But most were much
smaller.
The Moral
A major reason there are so many
more overages than underages is that many borrowers are awed by the
process and accept what they are offered.
Overages and underages arise out
of a negotiation process. The borrower who doesn�t understand that will
almost certainly pay an overage. The borrower who views getting a mortgage
as similar to buying a car has the best shot at negotiating a good deal.
If you want neither to haggle or
be taken, find an Upfront Mortgage Broker who will set a firm price going
in.
Copyright Jack Guttentag
2002
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