They are both right. The
trick is to take advantage of the superior service offered by mortgage
brokers in scouring the market on your behalf, while protecting yourself
against being overcharged. This column will tell you how to protect
yourself.
Mortgage brokers are
independent contractors who are free to charge whatever they wish for
their services. When problems arise, it is because borrowers usually do
not realize what they are paying the mortgage broker until they get to the
closing table.
Mortgage brokers make their
money by adding a markup to the price quoted by the lender. 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 a
"retail" price to the customer of 7% and 1 point. (1 point is an
amount equal to 1% of the loan amount). But if the broker adds a 2 point
markup, the customer would pay 7% and 2 points.
In general, mortgage brokers
set the largest markup they can get away with in each deal. 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. The largest markups are earned on unsophisticated
customers who will accept relatively high interest rates. Wholesale
lenders will usually offer brokers a side payment, called a "yield
spread premium" for high-rate loans.
There are two way to protect
yourself against being overcharged. One way is to shop multiple
sources. This is the method proposed in Protecting
Against Mortgage Broker Tricks. The
problem is that shopping is both difficult and time-consuming.
The second approach is to
hire a mortgage broker to shop for you, charging a fee specified in
advance. This obliges the mortgage broker to do what every other
tradesman does -- set the price for the service in advance. The price
should be specified in dollars rather than as a percent of the loan, since
the mortgage broker has to do as much work to deliver a small loan as a
large loan. The following will do the trick:
I [Mortgage Broker]
herewith agree that the total compensation for my services in
obtaining a mortgage for John Doe, including all amounts paid me by
Doe and by the lender who provides the loan to Doe, will be $X. If the
lender pays me more than $X for the loan, the difference will be used
to reduce Doe's other settlement costs.
What is a
reasonable charge for a mortgage broker's services? I would expect to pay
about $1,500, but I am an easy case for a broker because my credit is
perfect, I qualify easily and I know just what I want. As a
case increases in complexity and its demands on the mortgage broker's
time, you should expect to pay more. I have seen cases where a
mortgage broker worked with a customer over a number of months to raise
the customer's credit score, resulting in a significant interest rate
reduction. In a case of this sort, you should expect the fee to be
closer to $4,000 than to $1,500.
Many mortgage
brokers will resist this kind of arrangement. A small number prefer
to do business in this way, they are called Upfront Mortgage Brokers, and
they can be found by clicking here.
Copyright Jack Guttentag
2002
