Mortgage brokers - what you should know about them

2009-05-18T02:46:00.000-07:00

Mortgage lenders offer wholesale prices (rates and points) to mortgage brokers because mortgage brokers perform costly services that mortgage lenders would otherwise be forced to provide themselves. The most important is finding, counseling and qualifying borrowers.

Mortgage brokers work hard for their money, such as:

1) Find prospective borrowers

2) Advise you on appropriate loan programs and find one or more mortgage lenders who offer the desired programs for you

3) Qualify you against mortgage lenders' requirements, and take your applications

4) Have the selected mortgage lender lock (finalize) the loan prices for you

5) Get your property appraised and credit scores checked

6) Send letters to verify your employment and income

7) Provide legally required disclosures

8) Increasingly, use automated underwriting systems to get the borrower's application approved on the spot

9) Pull together the complete file of documents that will be handed off to the mortgage lender for final checking and funding

As pointed out above, mortgage lenders offer mortgage brokers wholesale prices (rates and points). Conventional mortgage brokers add a markup to the wholesale prices, and quote only the resulting “retail prices” to borrowers. Their fee is the markup, plus any payments that they receive from mortgage lenders. Thus, they are compensated by both mortgage lenders and borrowers. One may then ask: whose side are they on? Who are they loyal to, mortgage lenders or borrowers? Most conventional mortgage brokers don’t reveal their fees until required by law -- after an application has been submitted.

The conventional mortgage brokers act as if they were "loan merchants" (let's label them "loan merchant" brokers) while they are in fact service providers.

However, some non-conventional mortgage brokers do operate as service providers (let's label them "service provider" mortgage brokers) to their customers. They make it a practice to tell their customers upfront their fees that are, once agreed, fixed. At a customer’s request, these "service provider" mortgage brokers disclose their fees to the customer in writing and in advance. They also disclose the wholesale prices (rates and points) they receive from mortgage lenders. Their customers pay the broker's fixed fee plus wholesale loan prices.

"Service provider" mortgage broker does not receive monetary reward from mortgage lenders. Furthermore, they give their customers any rebates or payments they receive from mortgage lenders or other third parties connected with the customers' mortgage transactions. Since they get paid by only one party, ie by only their customers, they have no conflict of interest, and so it is easy and natural for them to be on their customers' side, loyal to their customers, and to look after their customers' best interest.

Between the "loan merchant" and "service provider" mentalities, the distinction is important: service providers tell their clients what their fee is before any services are rendered, but merchants don't.

** Please note that the labels "service provider" mortgage brokers and "loan merchant" brokers are used by us only for convenience in our articles on this site. These labels do not exist in the market. They all are brokers but have different practice and work ethics.

How do you find "service provider" mortgage brokers? In your shopping campaign for mortgage brokers, shop for as many as you can, especially online mortgage brokers. Look for their sources on this site.

Ask them how they charge their fees. If they can quote you their fees upfront, and undertake that their fees will remain fixed, you may want to shortlist them and evaluate them further against the criteria set out in our article

The Future for Mortgage Brokers

2009-05-18T01:33:00.000-07:00

The credit crunch and it's subsequent affect on the property market and mortgage industry has, at the very least, removed inefficiencies from these industries and exposed problems that were hidden by constantly rising property prices. While the mortgage broker industry has not faced total ruin it has take a fairly big hit. Not only has the number of practicing brokers declined but the reputation of the profession hasn't been done any favours by the recession.

However the future for mortgage brokers doesn't look bleak. Thousand of brokers remain in the profession and for the most part the credit crunch has been blamed on the greed of banks and large intuitions rather than the humble home loan broker. The reputation of the profession has also weathered the storm created by the few dishonest brokers who have subsequently been expelled by the FSA in the UK and other law enforcement bodies throughout the world.

In the short term, many brokers have diversified their businesses by offering advice and products in addition to mortgages. This has created additional revenue streams which have helped them stay in business until the property market makes a full recovery. It is this kind of resourceful and dedicated mortgage broker that the profession needs to stay in business. When times are tough they do not simply jump ship, but instead remain committed to helping their clients.

There is no doubt that industry regulation will increase as part of the fallout of the credit crunch. Regulation was soft in many parts of the USA - a situation that is slowly being rectified, state by state. Regulation is also being bolstered in Australia and is become more nationalised. Regulation in the UK was already stringent before the credit crunch, however the FSA will no doubt look to tighten the loopholes that clever minded criminals have previously exploited.

The impending stabilisation of property prices will lead lenders to release a greater number of mortgage products than is currently available that will be more favourable to first-time-buyers and those with little equity in their properties. This will result in their being a wider range of products available to mortgage brokers to offer their clients, and will in turn help brokers conduct more business.

While the path leading back to profits for mortgage brokers is long and arduous it does appear that the industry has set off down that path. The total collapse of the industry predicted by some has not occurred and history has shown that the property market will survive the recession. It has done so before and will do so again. Those mortgage brokers who battened down the hatches and remained in business will reap the rewards of their efforts once the dust settles from the credit crunch. While a return to the profits of the boom years is not expected, the future for mortgage brokers looks promising.