Is Your Mortgage Advisor Biased?
If you've read the business section of your newspaper this past year, you know that the mortgage industry is in an uproar. The years of 'easy money' are long gone. More than 200 national and local mortgage lenders have ceased operations since 2006. Surviving mortgage companies are now adhering to the mantra of 'fiscal responsibility' and have tightened the requirements to get a mortgage loan.
Building a relationship
Many homeowners are suffering from this modern day credit crunch. The lack of available mortgage money has driven many owners into foreclosure or to a forced short sale. The increased inventory has driven down housing prices, which in turn has caused lenders to scrutinize mortgage transactions with a finer-toothed comb. A slippery slope indeed.
It's clear that past borrowers received some pretty poor advice from their mortgage advisers. Borrowers, however, are not blameless. Borrowers shirked the due diligence required to obtain the proper mortgage and are now crying 'VICTIM.' Sadly, that cry is pointless when the sheriff sells the home on the courthouse steps.
At the heart of the problem is the relationship the borrower has with his mortgage adviser. Loan originators have absolutely no fiduciary responsibility to a borrower. The only responsibility a bank loan officer or direct lender has, is to her employer. If you can obtain a loan, according to the published guidelines, there's a financial incentive for your adviser to loan you as much money as possible, regardless of your financial goals.
Mortgage brokers and their employees offer a better chance at an unbiased relationship. But even with this scenario, their compensation is tainted by the irresponsible use of yield spread premium. Rather than use yield spread premium as a tool to lower borrowing costs, many unscrupulous mortgage brokers improperly disclosed that compensation and used it to line their pockets.
Unbiased financial advice
How then, can a borrower level the playing field and get the mortgage adviser to truly offer unbiased financial advice? The Federal Reserve Bank has some suggestions about how to do just that and ethical mortgage brokers have been following the model for years now. The Fed recommendation calls to negotiate a broker compensation agreement before the loan application is submitted. Prenegotiated mortgage brokerage fees remove the appearance of bias and put the mortgage adviser on the same side of the table as the client. The idea of up-selling a product is then done with the client's best interest at heart. Recommended loan amounts become a strategic financial planning implementation rather than a way for the adviser to earn a higher commission.
Sometimes borrowers improperly shop for mortgage loans by trying to get the lowest rate and lowest fees. It is virtually impossible to get the lowest rate on your home loan. But rather than engage in the circular practice of mortgage shopping, borrowers might shop advisers instead. Depending on the loan size, mortgage brokers typically earn between 1 percent and 2 percent of the loan amount. Fees ranging from $3,000 to $6,000 — inclusive of broker processing and administration fees — are typical in this market.
Find a loan adviser whom you trust and negotiate a fee for her services. Be transparent with the information you offer. Communicate your short and long-term goals with her, and allow her to make a suitable loan recommendation, mutually exclusive of the fee she earns.
Comments
"The only responsibility a bank loan officer or direct lender has, is to her employer." How is this any different than saying "The only responsibility a mortgage broker has, is to him or herself."? As a Bank Loan Officer and a Lending Professional, I take pride in putting my client's goals ahead of my own. It's just good business and the right thing to do. Having come from the broker world prior to banking, I think there is less incentive in that world to put your client ahead of yourself than at the bank. I've rambled for a moment, but my point is that ANY mortgage professional, regardless of whether they work for a bank or broker, has an ETHICAL responsibility to act in his or her client's best interest. I think it's unfair to generalize that a given class of originators are biased otherwise.
I disagree, Scott. The Federal Reserve is addressing this issue as we speak. Until banks disclose the "secret profits" they make, when selling off their agency loans (like banks do), a mortgage broker will always offer superior transparency to the loan process. I have no doubt that you treat your clients well- bank originators try to do that. However, the bank's "secret profits" restrict you from offering a true transparent loan transaction. It's about disclosure.
How tough is it to get a mortgage broker to provide or negotiate a broker compensation agreement?
Not difficult at all, Shirley- ask for it upfront. I suggest this contract as a template: http://www.loan-wolf.com/retainer.htm
PS- try getting one of those from a bank or direct lender! (It won't happen)
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