How are you compensated?
Mortgage brokers get paid two main ways: fees and yield spread premiums. The broker's fee often comes in the form of points, in which one point equals 1 percent of the loan amount. On the loan documents, you might find it listed as the lender's origination fee or mortgage broker commission. You also might find application, funding, processing, document preparation and other fees.
The yield spread premium is a controversial way to compensate brokers. Here's how it works: Let's say you qualify for a loan at 6 percent interest. The broker persuades you to take a loan at 7.5 percent. The lender pays the broker several thousand dollars for signing you up for the higher-rate loan. That payment is a yield spread premium. Theoretically, yield spread premiums aren't necessarily harmful to borrowers. If you don't have the money to pay closing costs, the broker can get you a loan at a slightly higher rate and apply the yield spread premium toward closing costs. Banks do the same sort of thing -- underwrite no-cost loans for slightly higher rates than borrowers otherwise would qualify to pay. A study published in 2002 by Harvard Law professor Howell E. Jackson concluded that yield spread premiums "are not a good deal for borrowers, but serve primarily to increase compensation paid to mortgage brokers." Jackson conducted his research while preparing to serve as an expert witness on behalf of borrowers who were suing a bank that gave yield spread premiums to brokers. When you get your good-faith estimate of closing costs, and later when you get your HUD-1 statement of final closing costs, scrutinize the items in the 800 section, near the top of Page 1. Ask the broker to explain the numbers. Any yield spread premium should be listed there, possibly with the notation that it's "paid outside of closing" or "POC." How do you handle rate locks?
Some brokers gamble with rate locks. You tell the broker to lock a certain rate on a certain date, and the broker tells you over the phone that your rate is locked. Secretly, the broker doesn't lock the rate, hoping that rates will drop before your closing day.
If rates drop -- even if they dip for just a day -- the broker can lock at that lower rate. You pay the higher rate that you locked at. The broker can make a little profit on the difference. If rates don't drop, and instead they rise, the broker might tell you that there was a glitch in your paperwork, or that the loan process was otherwise delayed, and that it's impossible to close your loan before your rate lock expires. Or the broker might tell you that you are mistaken, and that you never really did lock your rate. The safest way to go is to ask your broker for a loan commitment letter from the lender. It should have the lender's name and specify the interest rate, the date the rate was locked, and when the lock expires. |