Mortgage Brokers and Their Share of the Mortgage Business

Mortgage brokers have gotten bigger over the years in part because of a variety of factors in the market, not the least of which is the explosion in housing prices over the past ten to fifteen years. In some markets, housing prices have doubled or more over that period — great if you're an owner with equity in your property that's gone untouched all those years.
But if you're a first-time buyer today, it's terribly hard to scrape up 20 percent, 10 percent, or even 5 percent. As housing prices have outrun income levels, it has also become tougher for many borrowers to move into conventional loans, though to a great extent conventional loans have become less conventional.

Keep in mind that your broker might be making his money by something called a yield spread premium (YSP). If you're looking for a thirty-year loan at 6 percent and two lenders are offering it, but one is paying a yield spread premium of 0.75 percent and the other is offering 1.25 percent, then guess which one your broker has the incentive to recommend to you? The latter, of course, because that's more money in her pocket. Plus, to get that premium, brokers may be rewarding the lender with a higher rate on the loan that you'll end up paying. It's not illegal; it's just part of the business you don't see but you should know about.

Another big reason why mortgage brokers have gotten so popular has to do with the average household's debt level. Rising prices for college educations, cars, vacations, and other family expenses (both necessary and unnecessary) have led many borrowers to tap existing home equity or come to the mortgage market with high debt levels that make them less attractive in the traditional mortgage marketplace.
That's why good mortgage brokers are worth their weight in gold — the best can cast a wider net for solutions than the average bank.
Money: Wholesale and Retail Did you know that money can be sold wholesale and retail? This is a key concept in understanding mortgage brokers and the mortgage industry as a whole.
Mortgage brokers go to mortgage bankers or other sources of loan funding, and they'll get a wholesale rate for the money. If that rate sounds good to the mortgage broker, he'll agree to arrange for that loan with the customer after adding various fees and points so that he can keep his lights on. The broker doesn't make money off the interest on the loan. Instead, he makes his money off the fee income he applies to the loan that customers like you agree to pay.

Have you ever heard the term “upfront mortgage broker?” UMBs, as they're known, disclose their fees to customers in advance and in writing and disclose the wholesale prices passed through from lenders. UMB borrowers pay the broker's fee plus the broker's wholesale loan prices. For names of upfront mortgage brokers, go to the Upfront Mortgage Broker Association's Web site, online at www.upfrontmortgagebrokers.org.

Here's an example: Say a mortgage broker is trying to find you a $300,000 home loan. She goes to her computer with your application papers and finds a loan available for that amount with a great rate of 6.75 percent and no points. She tells her source she's interested. Then, with just a keystroke, she adds her company's standard fees and points to that loan — keeping in mind that whatever she presents you has to be lower than the average in the marketplace just to keep you interested.
Say she adds 2 points to that loan. Remember, a point is 1 percent of the loan amount, so 2 × $3,000 = $6,000 in total points on the loan. You may also have to pay other fees as well based on what the mortgage broker thinks she can charge.
All of a sudden, mortgage brokerage looks like a pretty good business, doesn't it? This is why you should never assume that a mortgage broker is giving you the absolute best deal in the marketplace, just because he's a little cheaper than your neighborhood bank. If your credit rating is good, and your income and assets are in great shape, always ask politely if the broker can do any better on what he's charging you for that loan. Mortgage brokers need to make their cut to stay in business, but they may be willing to do a little better in the name of repeat and referral business. In any event, it never hurts to ask, and you should always keep a competitor's number in your back pocket.

Where can I learn more about mortgage brokers?
The National Association of Mortgage Brokers represents more than 25,000 U.S. mortgage brokers and has been in operation since 1973. Its Web site has a search function for certified mortgage brokers in all fifty states. The address is www.namb.org.

Who Am I Paying Monthly? Whether you get your mortgage through a mortgage broker, mortgage banker, or another resource, you might wonder where your monthly mortgage check goes. Whichever lender funds your loan has the option of keeping the loan under its management, under which circumstances it collects the payments and maintains the primary customer relationship with you.
However, some lenders sell your loan to other companies. Mortgage lenders sell loans into the secondary market because it's a profitable business. They sell their loans through Fannie Mae or Freddie Mac, packagers of huge bunches of individual loans that get sold as securities to institutional investors, including insurance companies. The cash from those purchases gets plowed back into available funds for mortgages that will be made throughout the country in the future by your lender and thousands of others.

A locked rate is one of those things that requires time. If your loan officer is locking in a rate the right way, he has to confirm the lock. That means verbal as well as written confirmation, which isn't instantaneous — it might take a day or two to generate the paperwork. If you say to your loan officer on the phone, “lock my rate,” and he immediately responds, “Okay, it's locked,” then chances are it didn't happen that second — it's actually going to take awhile and you may see a different rate. So write it down.

Here's how the system works. Say a banker makes a point (1 percent) on a package of loans worth $1 million that she sells into the secondary market. The lender gets $1 million in proceeds that can be loaned again and makes a $10,000 profit. That's $120,000 in profit over the course of a year if the same loan amounts are packaged and sold each month — the equivalent of a 12 percent annual return. What would happen if the bank kept your loan? It probably couldn't match that return at 2007 market rates.


by Lisa Holton