The Mortgage Guy Blog

You may have heard the commercials “we’re the lender, we write the checks”. Lenders like to make a big deal out of the fact that they are lenders and not brokers. Why? I don’t know, as it makes little or no difference from the borrower’s perspective.

Both can rip you off and both can give you the best interest rate and closing costs. Both can make the financing experience fruitful and pleasant or resemble a root canal. Neither has a distinct advantage in providing a loan for you. How do I know? My company is licensed as both a broker and a lender.

So what are the differences between lenders and brokers?

Technically a broker doesn’t lend the borrower the money. Only a lender can make a loan. They do so through brokers or direct borrower solicitation. A loan never closes in the broker’s name. The broker will not be mentioned on the mortgage note and mortgage or first trust deed. The lender executes those documents. The primary difference between broker and lender is whose name the loan closes in.

This is why brokers cannot issue a commitment letter. They are not lending the money, therefore they cannot commit to making a loan. A broker can however, obtain a commitment letter from a lender and pass it on to the borrower.

The same holds true for interest rate locks. A broker cannot issue a rate lock, not verbally or in writing. The money lent doesn’t belong to the broker, they cannot rate lock someone else’s money. The proper way to handle a rate lock is for the broker to request a rate lock from the wholesale lender and pass it on to the borrower.

Tip:

Broker issued, as opposed to lender issued, commitment letters and rate locks have no value at all. If you ever receive a commitment letter or interest rate lock issued by a mortgage broker, you probably don,t want to do business with that company.

The company is breaking the law. Consider reporting them to the appropriate regulatory bodies. In Connecticut, that would the Banking Department. A report can also be filed on the federal level by contacting the Department of Housing and Urban Development, HUD.

I cannot tell you how many times clients, potential clients and wholesale reps have told me about brokers issuing commitment letters and/or rate locks. As a consumer, you want both in writing. You have nothing unless it is in writing.

Underwriting the Loan

When it comes to underwriting (validating the borrower’s loan file) there are no discernible differences between mortgage broker and lender. If we are brokering a loan we underwrite according to the lender’s guidelines. If we close the loan in our name and act as a lender, the same guidelines apply. Even the largest of lenders have to answer to underwriting guidelines. The only difference is who dictates the guidelines.

The lender makes the rules for the broker and the investors make the rules for the lender. Lenders can sell loans to other lenders for subsequent resale or they can sell the loans directly to investors, either one at a time or in “bulk”. Brokers only “sell” their loans to lenders and one at a time. The consumer gains no advantage dealing with a broker or a lender in the context of underwriting the loan.

Loan Pricing

Whether a loan is brokered or a loan is made, the product is the same as is the pricing (interest rate). Selling loans in bulk can garner a pricing advantage for the lender but that advantage is rarely passed on to the borrower. The consumer doesn’t gain a pricing advantage dealing with either entity.

Consumer Disclosure

Disclosure requirements differ among lender and broker. Lenders are required to make certain written disclosures to borrowers that brokers are not required to make. The same is true for brokers. Again, from the consumer’s perspective, there is no advantage here for the broker or lender. The borrower will still sign a bunch of forms and be afforded certain consumer protections.

Yield Spread Premium

There is a distinct difference in disclosure requirements when it comes to yield spread premium. Yield spread premium is much like selling a bond at a premium. Both mortgages and bonds generate revenue by being sold at a rate higher than the “going” or par rate at the time of the sale. This is how no point loans and no cost loans are offered.

Instead of requiring the borrower to pay points for loan at a given interest rate, for accepting a higher interest rate, the borrower can have the fees covered by yield spread premium. Brokers must disclose this premium to the borrower. Lenders do not have to disclose their premium to the borrower.

I bring this up because there has been a lot press about yield spread premium. Certain politicians who are attempting to demonize brokers and the lending industry, are labeling this premium as a kick-back. Nothing can be further from the truth. Premium is a natural occurrence in the debt markets. If it’s a kick back to brokers, it’s a kick back for lenders and investors as well.

However, it’s not a kick-back.

kick-back: noun

1. a percentage of income given to a person in a position of power or influence as payment for having made the income possible: usually considered improper or unethical.
2. a rebate, usually given secretively by a seller to a buyer or to one who influenced the buyer.
3. the practice of an employer or a person in a supervisory position of taking back a portion of the wages due workers.

from dictionary dot com.

It’s capital gain on the instrument being sold, a profit if you will. Premium is an integral part of pricing debt obligations. Furthermore, in the case of the broker, it is fully disclosed on the settlement statement. A kick back is done without the knowledge of the consumer.

As with the other aspects of securing a mortage, there is no advantage going to the broker or lender.

Summary

In obtaining a mortgage, there is little or no difference working with a broker or lender considering the mechanics of the transaction, loan underwriting, pricing, product design, regulatory protections and yield spread premium.

Both can be upstanding and competent entities to work with or inept ripoffs. From the borrower’s point of view, what else is there? There is no consumer advantage to working with either a lender or a broker. Keep the focus on choosing the right product at a good price from people with a track record of competency and trustworthiness.

Tags: Mortgages, Tips & Tricks by The Mortgage Guy
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Savvy mortgage professionals have been offering no closing cost refinances for years. It isn’t marketed heavily because the interest rates involved are not the lowest one could seek out. So to allocate a big part of a marketing budget to spread the word that your rates are higher than everyone else’s isn’t an attractive idea. So while no cost refinances exist, it’s a pretty well kept secret.

It’s important to understand that the refinance isn’t really free. There are lender fees, appraisal fees, title fees and closing agent fees incurred just like any other mortgage transaction. The difference is all of these costs are being paid by the originator while the borrower pays nothing. The originator can be a lender or broker, either can offer this type of loan transaction.

In order for a free refinance to work, the borrower needs to meet some basic criteria. First the borrower should have a good credit score. At least good enough to meet fannie mae’s or freddie mac’s guidelines. A credit score in the mid six
hundreds usually does the trick.

The borrower will usually have to be able to document employment and income although, in the past, no cost refinances could be done on a stated income (income is stated on the application but not verified) or no ratio basis (income is not disclosed at all on the applicaiton). Additionally, the size of the refinanced loan has to be large enough to cover the fixed and variable costs paid by the originator.

The biggest consideration in any refinance is the length of time it takes to recover the closing costs. This is a non issue with the no closing cost refinance. If you lower your rate by just a quarter percent and it cost you nothing to do so, you don’t have a break even point. The benefits of the transaction are immediate. This aspect of the free refinance makes it both unique and a no brainer.

Who Benefits From The No Closing Costs Refinance?

• All homeowners with rates .25% above the current market rate
• All homeowners with adjustable rate mortgages that want the security of a fixed rate.
• All homeowners with second mortgages.
• All homeowners with a fixed term mortgage that would like to switch to a different term.
  (ie. 30 year to 15 year etc.)

How To Be Sure It’s a No Closing Cost Refinance Mortgage

It’s important to know the difference between a no closing cost refinance mortgage and a no points refinance mortgage. With a no points mortgage, you will still pay all of the other closing costs associated with the refinance. With a no points loan, the only costs waived are the points (origination or discount) or the origination fee. With a no closing costs refinance, none of these fees are paid by the borrower.

One way to tell if your mortgage company is providing you with a true no closing costs loan is to examine the Good Faith Estimate and the Truth in Lending disclosures. These disclosures are required to be sent to you within three business days of the mortgage company receiving your application.

If you are truly getting a no closing costs refinance, your Truth In Lending disclosure will have an APR (Annual Percentage Rate) that is the same as the interest rate being offered. When APR and Interest Rate are the same, that reflects there are no up front costs in obtaining the loan.

The Good Faith Estimate will list the usual closing costs but all of them will be paid by the originator and designated as such. There should be absolutely no costs payable by the borrower.

Another tip is to look at the loan amount on the disclosure forms. The loan amount should be within a thousand dollars or so of the original loan amount being refinanced. Having a big difference between existing loan balance and the new loan amount should raise a red flag. If additional cash wasn’t requested by the borrower, the amount over the existing loan amount may represent fees not disclosed by the lender.

Other Considerations

There are items that mortgage companies never cover in the no closing cost refinance. Generally speaking they are pre-paid items and the initial appraisal cost.

Pre-paid items are not closing costs per se. They are an outlay of items that need to be paid in order to complete the refinance transaction. Typically pre-paid items not covered by the mortgage company are “odd days interest” and escrows for taxes and insurance.

If the borrower cannot front the monies needed for these items, the new loan amount can be increased to cover the layout. If a loan being paid off currently has an escrow account, the unused monies will be reimbursed to the home owner usually within three weeks or those monies are applied to the final payoff. The most common method is a reimbursement after three weeks.

So even though some cash has to be laid out up front by the borrower, these monies are recouped after the old loan is paid off.

In order to protect the mortgage company from ordering and paying for needless appraisals, many mortgage companies will require the borrower to pay for the appraisal up front. If the borrower doesn’t complete the transaction, the appraisal fee becomes the responsibility of the applicant. When the loan closes however, the mortgage company reimburses the borrower.

How The Originating Mortgage Company Gets Paid

This brings up the subject of Yield Spread Premium or Premium (for lenders). A premium is paid to either a mortgage broker or lender for delivering a mortgage to the secondary market that is above the par rate. The par rate is the interest rate that costs an originator nothing and pays an originator nothing.

By delivering a rate higher than par, the mortgage originator is covering the borrowers costs for the transaction and anything left over represents the originator’s profit on the transaction. This is why no closing costs refinances always have rates higher than traditionally priced mortgages.

As long as the rate being delivered is lower than the borrower’s current rate, who cares? The rate reduction, no matter how small or large, was provided free, without any costs what so ever.

The free refinance mortgage can be done over and over again as the interest rate environment allows. It is a no cost way to lower housing and interest costs without risk. The no closing costs refinance should be in every frugal home owners arsenal of money saving techniques.

Tags: Mortgages, Tips & Tricks by The Mortgage Guy
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