When refinancing booms, so do scams and screw-ups
rates are low, people flock to lenders to refinance their mortgages.
But for inexperienced shoppers who don't watch their backs, the
refi boom can turn into a bust.
Busy periods make it easier for sly mortgage
lenders and brokers to mislead and take advantage of naive consumers
by using any number of tricks, from quoting bogus rates over the
telephone to slipping gratuitous costs into their loans. To avoid
these problems -- as well as other trip-ups posed by the confusing
mortgage process itself -- consumers have to brush up on their shopping
Market is ripe for tricks and trip-ups
"In a refinance market, you have to be careful because a lot of
people come into the industry at those times, a lot of companies
come into the market, a lot of rookie originators come into the
market that may not have the experience level you're comfortable
with," says Chuck Johnson, vice president of production for Prism
Mortgage Co. in Chicago.
"People know there's volume and there's money
to be made in this business right now," he adds. "Refinancing or
purchasing a home is usually the largest transaction a person is
going to make in their lives and you don't want to be the guinea
All lenders and brokers aren't out to fleece
customers and the complexity of the home loan process -- rather
than anyone's malfeasance -- takes the blame for some of the obstacles
consumers face. Many trip-ups don't rise to the level of "predatory
lending," either. Nevertheless, they can cost borrowers serious
time and money, and guarding against them becomes even more important
during the boom times.
"There's kind of a range of games that get played
and they're pretty broad, from fairly benign stuff to outright fraud,"
says Richard Powers, president of the mortgage company at Cleveland-based
Charter One Financial Inc.
Problems can pop up long before a borrower fills
out any paperwork. Indeed, just finding out how much a mortgage
costs can be confusing.
Be as specific as possible
Many potential customers simply call lenders up and ask, "What's
your rate?" But they fail to indicate what kind of loan they need,
how long of a lock period they want, how many discount points they're
willing to pay, how long the rate is good for or anything else.
Consumers have to specify all of these things or lenders can pretty
much say whatever they want, then provide different figures when
the customers come in and blame the lack of specificity.
A loan with a lock period of just 15 days, for
instance, usually has a lower rate than one that a consumer can
lock in for 60 days. Most consumers opt for loans with longer locks
because they need more than two weeks to close. But loan officers
sometimes quote rates on their shortest-lock loans over the phone
or in print just to sound cheap, knowing full well that many callers
will never be able to obtain those loans. Companies can provide
rates that include several points to look better, even though many
customers either can't or don't want to put down several thousand
extra dollars at closing.
"Most of the papers, once a week or more, they'll
have a list of rates by lender. But frequently you'll find the rates
they put in the paper were rates that were really never available.
They kind of low ball their rate," Powers says. When you come in,
he adds, "they'll tell you the market has moved and the rates are
Figure in the fees
Borrowers often forget to ask about fees, and don't compare lenders
based on those costs. That allows companies to pad their bottom
lines by adding "document preparation fees," "underwriting fees"
and other miscellaneous charges to the loan at closing. Lenders
don't control certain fees for services provided by third parties,
such as title searches and appraisals. But they can adjust their
own fees, so consumers who know to do so will negotiate.
"It's a competitive business," says Rick Harper,
director of housing for the Consumer Credit Counseling Service of
San Francisco. "But if they go to one-stop shopping and let somebody
else handle it for them without them doing homework themselves,
they could end up paying more than they need to."
Don't believe everything you read
Consumers need to watch out for advertising tricks, too. Companies
have been plugging "no cost" refinance loans lately, but the tagline
really means "no out-of-pocket costs at closing." Borrowers pay
higher rates on these mortgages and lenders use the extra money
to pay the costs themselves.
The annual percentage rate, or APR, found in
advertisements can be misleading as well. Mortgage lenders don't
always include all the fees they charge in the calculation that
determines APR, so customers who use that figure to shop rather
than an itemized breakdown of rates, points and fees may end up
comparing apples to oranges.
Of course, it's difficult for borrowers to compare
fees when they don't know what they are. By law, lenders and brokers
don't have to give what's called the Good Faith Estimate document
to customers until three days after they apply. But there's nothing
preventing shoppers from asking for it before committing to anything.
Reputable lenders and brokers will provide one.
Know the score
After customers apply and have their credit scores pulled by their
lenders, they should ask for those too. Companies have no obligation
to share them, but those scores often dictate whether borrowers
get loans and how much they have to pay for them. Customers who
obtain their scores can get rate quotes tailored to them, rather
than receive quotes that may apply only to borrowers with better
or worse credit.
"If I would say at the application stage to
my broker, 'Hey, when you pull my credit report, will you tell me
what my scores are?' and he said no, I think I would go somewhere
else," Harper says. "Why not go with somebody who is willing to
tell you? You need to know."
Closer to closing, borrowers also have to watch out for counteroffers
from their current mortgage servicers or lenders. When borrowers
refinance their loans, their new lenders request "payoff letters"
from their old lenders. These letters spell out exactly how much
the old lenders are entitled to at closing and are often the only
indication that a borrower is refinancing.
To avoid losing customers, lenders who are about
to get the boot sometimes swoop in and offer to lower their borrowers'
rates or refinance them into new loans themselves. While the offers
can be competitive, they aren't always so. Plus, they usually come
very late in the process. Borrowers who accept them can end up having
to forfeit application fees or other monies to the lenders they
planned on using.
By learning about all of these miscellaneous
traps, consumers can take advantage of today's lower rates and refinance
without worrying about being taken for a ride. After all, experts
say, preparation is the best defense against shady lending practices.
"It comes back to education," says Harper. "If
I've made five calls or I've gone to Web sites and looked and know
the rates that are there, it's going to be pretty easy for me to
know whether they're pulling the wool over my eyes."
-- Updated: March 26, 2003