|
20 June 2005
Many borrowers are reluctant to
sign a contract with a mortgage broker that bars the borrower from working with
another loan provider. The following letter is typical.
�The
mortgage broker I contacted asked me to sign an "exclusive agency" agreement
that says I won't deal with other brokers or lenders. If I sign this, am I not
at the mercy of a single loan provider?"
This borrower's concern is
understandable, but it is based on an erroneous premise.
She is assuming that a
borrower can avoid being at the mercy of a single loan provider, which is not
the case. She can�t wait until the 12th hour before narrowing the
list of loan providers to one, because so much work has to be done after the
selection has been made. At the point where the selection is made, she is at the
mercy of one loan provider, whether she has agreed to an exclusive
contract or not.
No
matter how many loan providers a mortgage shopper canvasses before making a
selection, once that decision is made, the shopper has granted a de facto
exclusive. Once selected, unscrupulous loan providers have multiple tricks they
can play to adjust a deal in their favor. Many of the articles I have written
over the years fall under the heading of �tricks that loan providers can play
after you select them.�
Home
purchasers must grant an exclusive as they approach the �point of no return�.
Given a firm closing date, this is the point beyond which there is not enough
time to begin again with another loan provider. Once they pass that point, they
can�t back out of the mortgage without backing out of the purchase. My file is
clogged with letters from home buyers who realized they had been scammed by a
lender or broker when they got to closing, but went through with the deal
because they didn�t want to give up the house they were buying.
In
principle, those refinancing a mortgage don�t have to grant an exclusive because
they don�t have to close by a specific date. Furthermore, they have 3 business
days after they close to rescind the deal and get all their money back. In
practice, however, many refinancing borrowers focus on a specific closing date
and ignore the right of rescission. For all practical purposes, therefore, those
who behave this way have granted exclusivity to the loan provider they have
selected.
For
borrowers dealing with mortgage brokers, exclusivity does not necessarily make
the borrower vulnerable to abuse. Broker abuse consists of exorbitant fees,
usually paid by the lender for high-rate loans, often without the borrower�s
knowledge. Borrower�s dealing with Upfront Mortgage Brokers (UMBs) protect
themselves against such abuse by negotiating the broker�s total fee (including
that part of it paid by the lender) in advance. That fee is part of the
contract. The borrower dealing with an UMB pays the wholesale price quoted
by the lender, plus the UMB�s fee.
One
of the important services that brokers provide, which does not receive the
attention it deserves, is protecting the borrower against lender abuses. As an
example, wholesale lenders who operate through brokers don�t discover new junk
fees to load onto the borrower as deals move to closing, as some retail lenders
do. Brokers prevent that, since it hurts their clients without doing anything
for the brokers.
A
borrower dealing with a UMB has a contract with the UMB which stipulates the
fee, but it is not necessarily an exclusive contract. If the broker asks for
exclusivity, is it in the borrower�s interest to agree?
I
think it is. In exchange for exclusivity, the borrower receives the broker�s
full attention. In this market, that is no small matter. Brokers are bedeviled
by price shoppers and tire kickers, who eat up their time without becoming
paying clients. Brokers get paid only when they close loans. If you sign an
exclusive, the broker knows that you are prepared to go the distance with him,
which provides the maximum incentive for the broker to invest the time needed to
get the deal done.
Indeed, other things the same, I
would prefer a UMB who requires an exclusive. Such brokers generally depend on
referrals to overcome the aversion many borrower have to exclusive contracts.
Relative to other brokers, they spend less time hustling for clients, and more
time working with clients.
A
home purchaser loses nothing by providing an exclusive near the point of no
return, since there isn�t time to switch loan providers anyway. Refinancing
borrowers can actually have it both ways. They can provide an exclusive,
enjoying the broker�s full attention to their needs. And in the unlikely event
that they have a really bad experience, they
can rescind the deal and get their money back, including any monies they agreed
to pay in the contract. Federal law trumps the contract.
Copyright Jack
Guttentag 2005
| 
