brokers multiply, but
their deals are not always bargains
you need an "80% N/O/O Cash Out 1-4 Family FIV"? How about an "80%
NIV -- Purchase or Refinance; No Asset"? Or, like many borrowers,
do you have no idea what these words and numbers from a recent advertisement
in the New York Mortgage Press mean?
Chances are all three might apply. That's why
more consumers than ever before are going to mortgage brokers, rather
than community banks or online lenders, when looking for loans,
experts say. With brokers, they can shop among tens or even hundreds
of mortgages, with cryptic requirements such as those listed, to
find one that fits just right.
At the same time, consumers will want to take
extra care when they shop. Unlike banks or thrifts, mortgage brokers
aren't directly regulated by any federal agency. Because it doesn't
take much to get into the business either, the number of brokers
out there has soared in recent years, too. That means plenty of
unscrupulous or just plain incompetent people are out there right
now looking for business -- and unsuspecting shoppers -- in a strip
mall near you.
"Regulation is not very extensive. Some states,
they aren't regulated at all. In most states, the regulation is
weak," says Jack Guttentag, a lending industry consultant and syndicated
columnist who runs the Mortgage
Professor Web site. "But pretty much, mortgage brokers are allowed
to do their own thing."
Unfortunately, " 'Their own thing' often involves
a lot of questionable practices," he adds. "It's a very imperfect
market out there. The customer very often is very poorly informed
and doesn't understand what it is, exactly, he is buying. There
are all kinds of opportunities for mortgage brokers to rip them
|5 steps to finding a good broker
Get a description in writing of the exact
program being offered. Because many people who go to brokers
are getting specialized mortgages that may not be as straightforward
as 30-year fixed-rate loans, it's especially important
to know what you want and know if that's what you're being
offered. That way, you can compare rates, fees and points
on an apples-to-apples basis.
Make sure you get a detailed good-faith
estimate and check that against your final bill before
closing. Brokers are sometimes paid by both the lenders
who underwrite the mortgages and the consumers who get
them, and it's important to look at the documents to make
sure the broker isn't getting paid too much or double-charging
- Think referral, referral, referral when it's time to
find a broker. It's good to have a broker who's nice;
it's better to get rates and costs that are reasonable.
- Consider checking to see if your broker or mortgage
brokerage has faced state regulatory sanctions in the
past. Most states maintain some kind of list of people
and companies who have been fined or had their licenses
For years, consumers and companies alike have
lamented the complexity of mortgage transactions. The paperwork
involved ties up several days', or even weeks', worth of time and
the whole transaction can fall apart if everything doesn't come
together by closing.
At the same time, life can be even tougher for
customers who want someone they can reach on the phone quickly or
who need specialized purchase or refinancing assistance.
That's why brokers can be a big help -- and part of the reason
why they're so popular right now. In fact, a study released in June
estimates the number of independent mortgage brokerages soared to
about 36,000 at the end of 1998 from 7,000 a little more than a
decade ago. Those brokers, in turn, handled 70 percent of the estimated
$1.7 trillion worth of mortgages originated last year, up from 20
percent in 1987, according to the industry research firm Wholesale
Access of Columbia, Md.
What's the attraction? Brokers get money from
wholesale lenders, add a few hundred dollars for their work, and
"sell" it to home shoppers in much the same way Sears buys power
drills from Black & Decker, marks them up and sells them to
shoppers at the mall. Because they can choose from so many wholesale
lenders who, in turn, have several specialized programs each, they
can often find mortgages that match particular needs.
Say someone wanted to get a loan to buy a home
that would be for 80 percent (80%) of the property's value, but
didn't want to verify employment income (NIV) or brokerage and bank
account assets (No Asset). Then imagine there is another person
who wants to refinance an existing single-family (1-4 Family) home
mortgage and make it larger to get some equity out as cash (Cash
Out). The loan in this hypothetical example is against a house that
isn't the primary residence (N/O/O, or not owner-occupied), but
the borrower doesn't mind fully verifying income (FIV).
A bank might not be willing to loan any money.
That's because it couldn't prove the first person would be able
to pay that loan back and because it might be leery of allowing
the other borrower to take out a larger loan against a second home
because those mortgages are considered riskier. But a broker who
had seen the July ad and the two programs described in it would
know that American Brokers Conduit of New York was a lender that
had no problem with waiving those requirements. As a result, both
deals would most likely get done.
"If they go to a local bank, they're going to
be offered that bank's programs and that's it. If they come to me,
they're going to be offered a whole array of different institutions'
products," says Patty McGill, a broker who owns Money Marketing
Inc. in Frederick, Md. "It's amazing, the different scenarios these
programs offer and each individual is going to fit into one of them.
But if I only offered one, some people would fit, but some of them
Home buyers looking for construction/permanent hybrid mortgages
or those with credit problems make good broker candidates. The same
holds true for people who want to purchase second homes or property
they plan to rent out, as well as current mortgage holders who want
to refinance in order to take some equity out as cash at high loan-to-value
Still, shopping with a broker means accepting
the fact that Megabank USA isn't standing behind your mortgage.
In many cases, the broker doesn't even technically originate and
fund the loan; the wholesale lender does. That lender may sell the
loan to a separate company that services mortgages by collecting
payments and performing other tasks, which, in turn, may sell it
again. Though banks and thrifts do this as well, many are portfolio
lenders that keep the mortgages they originate on their books.
Banks sometimes cut deals with people who have
done a lot of business with them, too, so there are ancillary benefits
to going to one for a home loan. Community
Savings Bankshares Inc. of North Palm Beach, Fla., has a special
checking account called Mortgage
Plus, for example, that
features free online banking, special certificate of deposit rates
and other perks.
"You have two kinds of entities out there, in
a sense: mortgage brokers who offer products of multiple firms and
loan officers who offer products of one firm," says Guttentag. "The
loan officer's advantage is that he may have a recognizable identity
for the borrower.
"The advantage of the mortgage broker is that
he has contact with 30-plus lenders and he's in a position then
to scour the market for the best deal. He's also in a position to
get loans in market niches that single lenders might not cover,"
he adds. But "the weakness of a mortgage is that there's no identity.
People go to mortgage brokers at their hazard."
That means consumers who do so need to make sure they know who's
sitting across the table from them. Some states have no educational
or professional requirements to become a broker, while others mandate
that potential businessmen attend mortgage classes and pass written
tests proving their competence. Depending on where you live, that
can make it all the more important to seek out referrals from friends.
People who want to be extra cautious can check with their state
regulatory offices, because many keep blacklists of individuals
and businesses who have been censured in the past.
"The public is more vulnerable if the consumer
has not done his due diligence in selecting the broker with whom
he chooses to work," says McGill. "The very best way to get hooked
up with a broker who will provide an excellent service is to ask
your friends and colleagues, 'Have you worked with a broker? If
so, who was he or she?'
"If 70 percent of the people are getting their
loans through a broker today, then an awful lot of your friends
and mine have worked with a broker," she adds. "If they choose to,
they can always call the licensing bureau in the state."
As for other cautions, most of them fit the
bill whether a consumer chooses a lender, broker or mortgage company
Web site. Know the product inside and out, especially if it's a
niche loan that's more complicated than a standard 30-year fixed
mortgage. After selecting a mortgage, assiduously compare the rates,
points and costs that a couple of brokers charge for it.
"When people ask me, 'Should I go to a mortgage
broker or a lender?' the stock answer is, 'You can do a lot better
at a mortgage broker, but you can also do a lot worse,' " says Guttentag.
"What people have to be warned about, even the people with those
complicated problems, is that they need to shop."
-- Posted: Sept. 23,