The profession that took the greatest hit to its reputation during the mortgage implosion that started in 2007 was mortgage brokering. Callous agents who had no interests at heart but their own pursuit of a paycheck became poster boys (most of them were men) for the excesses of the home financing catastrophe. In retribution, the mortgage broker industry was cut off by most major lenders, and thousands of agents left the business.
The truth, of course, was more nuanced. Brokers took a lot of the blame that should reasonably have been shared between all players, from borrowers themselves to the Wall Street “chop shops” that minced loans into assorted bits in a vain attempt to do away with risk. The problem today is that the baby has been thrown out with the financial bathwater. Mortgage brokers had a very important role to play in the home financing marketplace in keeping lenders honest by having them compete for the broker’s business, and giving smaller lenders access to the whole marketplace without having to invest in a sales force. In short, the good mortgage brokers gave consumers more choice and better prices than they could get on their own. Lenders have begun to realize this, and are selectively inviting reputable brokers to represent them again. With this positive development, it is time to take a fresh look at the value borrowers gain by working with a broker.
Hire a Smart Person to Help You
The key benefits offered by a mortgage broker are:
- -A shopping service: Borrowers let the broker/agent do the work sifting through all the possible loan options to find those that best fit the borrower’s particular needs.
- -Expertise: Good brokers keep themselves highly educated on marketplace developments. At a time when the U.S. Government is rolling out a myriad of incentives and special programs to either save homeowners from foreclosure or get them into a new home, it helps to have a pro guiding you through the research process.
- -A representative: Brokers represent you in dealing with the lender, and have counterparts at each one that is dedicated to keeping their business. They can run interference between you and the lender when pushing your application through the approval process. In short, they handle the grunt work for you, doing what they do best so that you can focus on what you do best (which is usually not applying for a home loan.)
The key cost is, of course, the broker fee. You will pay a percent or two to have the broker shop for you, do the paperwork for you and represent you in dealing with the lender.
What is your time worth?
People can make silly decisions about money, and thinking a 1-2% broker fee is a rip-off is a classic example. On the surface, paying a broker multiple thousands of dollars to help you fund a loan seems like a lot. Let’s break it down, however:
| Broker fee | $3,000 |
| Hours worked (average loan) | 40 |
| Hourly rate | $75 |
Remember, too, that broker agents only fund an average of three loans a month. And as independent contractors, they pay their staff, operating expenses and marketing costs out of that fee.
Now consider the value of your own time:
| Hours researching | 10-20 |
| Hours spent interviewing lenders | 10-20 |
| Hours spent on paperwork | 10-20 |
| Hours spent working with your chosen lender | Unknown! In today’s tough underwriting climate, expect to spend hours in conversation and follow-up |
| Extra interest paid because you didn’t find the best deal | Unknown! But, a 0.25% higher rate on a $200,000 loan equals $5,000 in extra interest paid in the first ten years |
As you are not a home financing expert, you will spend more time than the broker would getting all the work done. Given the above analysis, it will not surprise you that people with lower incomes tend to try to find their own financing directly with lenders, and higher-income folk tend to use brokers, because they value their time more highly.
You do not have to agree with them
The final benefit to working with brokers is one they hate: You don’t pay them until you sign on the bottom line. In fact, you could have them do all that work for you, and also approach some lenders directly (carefully selected, I hope), and place your business with the broker’s choice or the lender you found, and only be out a few hundred dollars in application fees either way.
Bottom line: You are in charge. You don’t have to accept their recommendation, but it’s a good bet that a seasoned mortgage broker will pay for him or herself at least two times over in time saved, interest saved, and headaches saved. I encourage you to include some reputable ones on your list when you shop for home loans.
Comments
While the author seems to have good intention to analyze the benefit of using a broker, the last paragraph seems to be encouraging borrowers to Unethically waste the broker's time without any compensation by canceling the loan AND use the broker's choice.
I am rather shocked by the author's total disregard for broker's time and efforts. I would not waste anyone's time, whether be a mortgage/stock broker, insurance/travel agent, or attorneys..etc..
I hope readers recognize all the time and efforts service professionals put in for each potential transactions or appointments and extend the common courtesy to others.
Thank you for recognizing the value of the mortgage broker.
While the author partially recognizes the value of a good mortgage broker in this article, he fails to recognize one fundamental point that makes it a no-brainer for the borrower to use a mortgage broker rather than a retail branch. The broker receives wholesale pricing from the lender, then adds the mortgage broker fee (typically 1 point) and for the vast majority of cases, equals the best pricing a borrower would get if they went to the retail branch directly, often better.
In fact, a correspondent lender (one who sells closed loans directly to investors) is often in a position to offer even better pricing than any retail branch can offer.
I also agree with Kathy in objecting to the author's suggestion that the borrower act in an unethical manner. This results in lock fallout and higher rates for all.
While the author partially recognizes the value of a good mortgage broker in this article, he fails to recognize one fundamental point that makes it a no-brainer for the borrower to use a mortgage broker rather than a retail branch. The broker receives wholesale pricing from the lender, then adds the mortgage broker fee (typically 1 point) and for the vast majority of cases, equals the best pricing a borrower would get if they went to the retail branch directly, often better.
In fact, a correspondent lender (one who sells closed loans directly to investors) is often in a position to offer even better pricing than any retail branch can offer.
I also agree with Kathy in objecting to the author's suggestion that the borrower act in an unethical manner. This results in lock fallout and higher rates for all.
Thank you to those who have commented on this article. I would like to respond to the comment about "encouraging unethical behavior." That is not my intent. When people are afraid of mortgage brokers because the industry has gained a reputation for its own unethical behavior, it is important to point out that including a mortgage broker on their mortgage shopping list is a good idea that will not put them at risk of being ripped off. Also, the unethical nature of borrowers' behavior is more caused by ignorance of the complicated home financing structure than it is by willful abuse of the broker's good services. It is incumbent on the broker to fully educate the borrower on what is going on BEFORE locking the loan, and getting them to agree (in writing?) that they have a financial responsibility once that step is taken.
interesting that the author make an argument why paying a broker it worth it... the reality is almost always that brokers can get it done for less that a bank or a branch, and many times, when the bank or branch issues a denial, Brokers can get it done. Then it is not even a matter of "paying a little more" it is getting the house or not, or being approved for the advantageous refi, or not!
author only touched on the fact that the Mortgage Brokerage industry was created by the banks as a means to grow their businesses cheaply without having to hire train, pay salaries, expenses and health benefits to employees, and instead offered to purchase loans that met THEIR underwriting criteria... from independants (non employee brokers) their underwriting criteria became more and more relaxed until the implosion.
No one ever guessed unemployment would drive to forfeitures & foreclosures or could forsee masses of foreclosures driving down property values, the DOUBLE WHAMMY!
"In retribution, the mortgage broker industry was cut off by most major lenders, and thousands of agents left the business" Not really. Brokers were never "cut off" but have undergone rediculous scrutiny, aka licensing... while bank loan officers are exempt (reportedly because banks lend their own money and take their own risk?) So what happened to so many of those brokers who couldn't get licensed as brokers due to felony convictions or fraud charges? They went to work for the banks who previously purchased their loan originations! for real!
As a former mortgage broker who was cut out, I agree with almost the entire article. I was cut out because I hate the Option Arm product, and that's all the borrowers wanted in 2006-2008.
When I tried to get back into the post Option Arm market, the few wholesale lenders who I had worked with that remained in business had said they didn't want my business since I hadn't sent them loans in the prior 2 years.
As for cost, I could usually beat BofA and Wells Fargo rates by about 1/2 to 1 point, so my clients actually saved money by using a mortgage broker (me).
As a former mortgage broker who was cut out, I agree with almost the entire article. I was cut out because I hate the Option Arm product, and that's all the borrowers wanted in 2006-2008.
When I tried to get back into the post Option Arm market, the few wholesale lenders who I had worked with that remained in business had said they didn't want my business since I hadn't sent them loans in the prior 2 years.
As for cost, I could usually beat BofA and Wells Fargo rates by about 1/2 to 1 point, so my clients actually saved money by using a mortgage broker (me).
Blaming the Broker for the mortgage mess is like Blaming the car salesman at Chevy for the cost of gasoline. The banks "made" these programs and asked the broker to please sell them and I will pay you a commission. Just like Ford and Chevy "made" SUV's and paid a good commission to the car salesperson for selling that product. The Banks own this...a knee jerk reaction was to blame the broker. Our legislators are idiots. But they got their VIP loans right!
Frank said: As a former mortgage broker who was cut out, I agree with almost the entire article. I was cut out because I hate the Option Arm product, and that's all the borrowers wanted in 2006-2008.
"When I tried to get back into the post Option Arm market, the few wholesale lenders who I had worked with that remained in business had said they didn't want my business since I hadn't sent them loans in the prior 2 years."
Not true dude. I also hated and only did about 8 option arms in 30 years. You were not cut out because you didnt do ARMs, as there were plenty of other loans and borrowers. You were slow as were most brokers, and the lenders started to cut out brokers who didnt send in lots of monthly business. Once off their lists it was almost impossible to return. We all lost many sources . Many of those dried up and died anyway. Of the remaining, most are retail/wholesale and do not want brokers to survive. They want ALL RETAIL BACK as they had in the 70s.
I am t
You said: "The key cost is, of course, the broker fee. You will pay a percent or two to have the broker shop for you, do the paperwork for you and represent you in dealing with the lender."
SO MISLEADING! You think the banks dont get paid when they do a loan? You think that broker fees are ABOVE what borrowers pay if they went straight to the bank? TOTALLY UNTRUE. The banks (becasue of a powerful lobby) dont have to 'disclose' their true profit as do mortgage brokers. Safeway doesnt have to tell us what they pay for the loaf of bread, do they? I can take you to Wells Fargod wholesale and BEAT their retail even after being paid. Pricing is LOWER to brokers so they can bring in loans, be paid for it, and stil be competitive. No bank would ever have received broker business if it were not that way. As far as richer people not wanting to spend the time so poorer borrowers will use banks--the borrowers will SUFFER from going straight to the banks. Thats not me trying to save my job.
Tom said: " Brokers were never "cut off" but have undergone rediculous scrutiny, aka licensing... " Bull horkey. Come on---this isnt playing with tinker toys. We SHOULD be licensed. Licensing has actually been too easy so far. It wasnt retribution for anything. It was most of them closing down, and the rest of them suddenly having more business than they could handle so they didnt need us. As Ive said, they dont want us anymore and dont need us at all. They started paring down to the best brokerages sending the lost business, and cutting out the dead wood. We small brokers who had BUILT THE INDUSTRY were suddenly without sources.
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