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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U.S. Representative Barney Frank (D-Mass) is proposing legislation that will decimate the mortgage industry. If he is successful, it will no doubt negatively impact millions of Americans who own homes and who plan on buying homes. The public will see their mortgage choices cut in half, if not more, and has the potential of exacerbating the current mortgage and real estate crisis. Consider the excerpt from an October 29th bizjournals article…

The bill, introduced by House Financial Services Chairman Barney Frank, would require all mortgage originators to be licensed. It also would require lenders to determine that borrowers have a reasonable chance to repay the loan and ban incentives for mortgage originators to make certain types of loans.

First let me address the obvious. Originators and mortgage companies are already required to be licensed. They are required by the states that they operate in. Requiring Federal licensing will only add another layer of red tape to an industry already plagued with it.

He then wants mortgage companies to ensure a borrowers ability to repay a given loan. Only God can do that. There is no way any money making entity would take the risk of originating loans if they can be called to the carpet for not foreseeing a borrower not being able to repay. Yet that is what Barney Frank is requiring of mortgage companies.

The incentives he wants to ban are an integral part of mortgage pricing. The incentives he speaks of is called Yield Spread Premium in the mortgage industry. Originators get paid for providing a mortgage through front end fees or points and yield spread premium. Sometimes it’s one or the other and sometimes compensation comes from a combination of both.

Yield spread premiums provide compensation to the originator in exchange for delivering a mortgage with a rate that is higher than the “par” rate on any given day. The par rate is the rate that the originator can offer without yield spread premium being paid or without cost to the originator and or borrower.

It is through yield spread premium that no point and no cost mortgages are offered. When a lending institution offers a no point loan, they aren’t doing it for free. Someone is paying and that someone is the secondary market. The consumer benefits because they are able to get a loan without having to pay points. Eliminating yield spread premium would eliminate no point and no cost mortgages. How can this benefit the consumer?

The American Bankers Association also is concerned the bill would increase the regulatory burden for banks and restrict their “ability to provide products and services — all of which would increase costs and decrease choices for consumers,” said Floyd Stoner, the association’s executive director of congressional relations and public policy.

The National Association of Mortgage Brokers contended consumers would be hurt by the legislation’s elimination of the yield spread premium, a rebate paid to brokers if borrowers accept a higher interest rate in return for lower fees on the loan.

It is interesting to note that none of the measures in Frank’s legislation would have headed off the current mortgage crisis. However it is plain for everyone to see that the current crisis sets a nice stage for his grand standing.

Not only would his legislation not prevent the crisis, it will make the current crisis more painful and has the potential of thrusting this country into a 1930’s style depression by drying up liquidity in the mortgage market. This will lead to fewer homes being sold and more homes going into foreclosure. All of which will continue the steep downward spiral of housing prices.

Let’s remember one thing about politicians. Their number one goal is not help anyone in particular, but to get re-elected. Many are re-elected on ideas that sound good but are harmful in reality. This is one of those instances.

Tags: Mortgages by The Mortgage Guy
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