Higher loan delinquencies have led to some bad press for mortgage brokers — as in charges some brokers got consumers into bad loans just to make a bigger commission.
I’ve got a story coming out Sunday on brokers, commissions and Web site developers who say they get consumers better deals by taking commissions out of the equation.
To get the industry’s side, I interviewed Harry H. Dinham, 63, recent past president of the National Association of Mortgage Brokers and a broker in Plano, Tex.
Here’s some highlights from the interview.
Q. How do you respond to charge that brokers steer people into higher cost loans?
A. “It’s an awfully hard thing to do. When you live in a competitive area like Dallas — Plano is just north of Dallas — every deal you get you fight for. The chance of you being able to up-charge is very rare.”
“It may happen in some instances but those people are letting that happen to them. They have not done their shopping as they should. … The consumer has to be a lot smarter shopper. Shop, go to at least three places.”
And before signing the final loan documents, a consumer should get a good faith estimate of what he or she will pay, he said
Q. But is there a conflict when most brokers work on commission? Critics say brokers earn more if a borrower pays more and that’s a recipe for consumers to lose.
A. “I’ve been doing this 40 years. When I first started doing this in ‘67, bankers and savings and loans were all charging points, origination fees, based on loan amount. If you are doing $500,000, you are going to pay 1 percent of that. It’s been that way in this business forever.”
“If they are talking about the amount of money they are making. The norm is 50 basis points, so $2,500. (Blogger’s note: He’s saying the broker would take half the 1 percent origination fee, which means he would earn $2,500 on a $500,000 loan, and the broker’s employer would get the same.) I don’t think it’s wrong. That’s the way business has been done.”
Dinham also said that brokers in general either charge consumers a higher rate and get a yield spread premium from the lender or the consumer pays the broker a fee to get a lower interest rate.
If a consumer goes directly to a lender, the same rules apply, he said.
Q. So lenders make the same money off consumers?
A. “Sure they do. Brokers disclose the yield spread premium. No one else has to disclose it.” (Blogger’s note: By law, brokers must disclose the yield spread premium — often referred to as YSP — but lenders have no similar requirement, experts say.)
“Mortgages are just like bonds. They are traded in the open market. The bank is earning the same fee. They are not disclosing it to the consumer. When they sell the loan they earn that fee.”
Q. What about the charge that brokers get consumers to refinance loans more often than necessary?
A. “We are small business people. We live in these small communities. We go to the same church. We bank with these people, go to the same cleaners, etc. We do loans. If we did them a bad job, do you think they would continue to come back to us?”
“There has to be something to the fact we have been able to garner more than 50% market share. We are doing something right. If we weren’t, we wouldn’t be in business.”
(Blogger’s note: Stats show brokers handle 50 to 60 percent of all loans made. In California, the figure is closer to 60 percent.)
“My theory is everybody who comes through the door is worth about seven loans if you do it right. They buy a new house, or add something, or remodel. That’s the way you get people to come back to you.”
Q. What do you think of new Internet sites that say they get people better deals because their brokers don’t earn commissions or commissions don’t vary by loan type or that their systems automatically check with lenders to get the lowest rate available instead of relying on human judgment?
A. “If you’re financing up to $1 million, you don’t want to do that over the Internet … Think about it. If I am going to buy something that costs as much money as a house, I’m not gong to do it on a machine, computer. I want to talk to somebody, have that hand shake agreement.”
Dinham said an online site also may advertise a flat fee of $395. But, “If you check the loan amounts, the interest rates, it’s going to be eye opening. Anywhere from 3/8 to ½ a point higher than you can get at a good broker shop. They are putting all the fees into the loan itself.”
He said such sites earn a yield spread premium from the lender for charging a higher interest rate to the borrower in exchange for that low flat fee advertised.
Q. If online sites aren’t the fix the lending world needs, what do you recommend? In California, for example, mortgage brokers do not have a fiduciary duty to either the consumer or lender. By comparison, a real estate agent is a fiduciary of a home buyer, if the agent represents that buyer. Should new laws require brokers to have fiduciary duty to either the consumer or lender?
A. Dinham said brokers can have 30 to 40 lenders they work with and get price quotes from. It would be unrealistic to expect a broker to be a fiduciary of just one lender, or to be a fiduciary of a consumer when they have ongoing business relationships with several lenders.
“It’s hard to have two masters,” he said.
In Texas, brokers disclose upfront that they are independent contractors and not fiduciaries. Dinham said he discloses his fees upfront and all brokers should do the same.
Q. So are any new regulations needed?
A. “One of the biggest problems we have in our industry is fraud. The other problem is every state has different requirements (for brokers).”
Dinham said he supports a national licensing or registry program for mortgage brokers. That would prevent bad apples from moving from state to state.
He also said that while brokers generally need to be state licensed, a loan officer at a bank does not. Lenders also aren’t required to do background checks on people they hire to work with consumers on loans, he said.
He said the fact that a broker or loan officer could “commit fraud at one place and then go to another place the next day is kind of amazing.”
More industry drivel!
According to this week’s guest, how to fix the mortgage industry is:
If the customer is not a savvy shopper (most) then he/she deserves to get ripped off.
California has case law upheld by the CA Supreme Court that Mortgage Brokers do have a fiduciary responsibility.
The LA Times blog did a story on this topic a couple of months ago.
Umm, so what is his “fix”? All I hear is a defense of the status quo.
Yeah, uh, you see the fix is to regulate the mortgage brokers so that you can’t greedy high school / college dropouts trying to grift the system because they don’t want to get a real job. That industry needs to get bleed of all scumbags that are in it right because it was easy money for 5 years. That will solve a lot problems. See, that was easy. Gee, I’m such a nice guy huh?
Mortgage Brokers account for 70% of all loan originations.
There are good and bad apples in every type of business or industry. Good Doctors and Bad Doctors or Good Mechanics and Bad Mechanics etc…Some unscrupulous brokers have given the industry a bad name.
The most successful people build their business on word of mouth and operate with integrity. It is important that each consumer gets referrals or researches the licenses or Better Business Bureau rating on any person or company in which they decide to do business.
Everyloan Financial ( everyloan.com ) operates with integrity and maintains a AA Rating with the Better Business Bureau. Over time the Bad companies and Bad brokers will get weeded out and the good companies and honest brokers will survive. We are here help the consumers with better home financing decisions. Only the strong survive. Everyloan.com provides updated news and information to educate the consumer about the complicated mortgage process and the myriad of home financing choices. Everyloan.com can help each borrower find the right loan for their individual situation.
I think this interview is consistent with Matt’s other interviews with the detached ‘want-to-bees’ of the once soaring mortgage industry. NAMB has been a major disappointment from day one.
Matt: It makes no difference what these guys have to say… They are mostly oblivious to the depths of the situation, which I’m afraid that you may be as well. No Pulitzer here!
Sub prime and Alt A have seen their time come and go. Loan Officers, Brokers, Lenders (if any are left when this is over), etc., will now return to the days of Fannie & Freddie (DU & LP) approvals. There will no longer be any opportunity to fudge the facts.
Matt: Go find your Pulitzer elsewhere.
You put the fox in charge of the hen house.
When all the hens get eaten you go talk to the fox about how the it all happenend AND how to fix the problem. He tells you there really is nothing wrong….the hens are just stupid.
Dr. What? is right. These clowns are oblivous to the mess they created, and you cannot expect them to fix the problem when they really have no grasp of the situation or how deep rooted it is.
There are people of integrity within this industry, but those who tried to stop the insanity, who warned executive management, Wall Street the Feds AND the media of the inevitable results of the course they were on we demoted, fired, laid off or ignored. If just one more person in this industry says “Who would have thought is would get this bad” I am going to scream. And we haven’t even hit rock bottom yet.
Mortgage Brokers, Real Estate Agents and companies, Appraisers, Lenders doing anything to make a lot money in a short possible ways. These people are crooked and idiots. It is our ultimate decisions. We signed paperwork. We are responsible. There must be a way to change our system.
Matt: Great reporting on the light-headed broker! Or he is simply oblivious to the fraud and deceipt prevalent in the mortgage and real estate sales businesses nationwide. I doubt it!!!
With 25 years of experience in the mortgage business I can tell you unreservedly that this industry could use a “Barrier to Entry”, such as a 4 year degree minimum to obtain a license to conduct “financially sensitive business”. While other business sectors practically require barriers to entry, and tough licensing protocols, amazingly the real estate and mortgage broker sector does not. Yes it is populated with theives who have found other business sectors hostile to their presence. Consequently you have the rampant fraud and disaster you see today. Greed and stupidity go hand-in-hand.
Brian L -
There are far too many from the loan application level to the wall street trader level that have their 4-year degree. Maybe they should have to receive a Masters Degree in Greed to fully qualify.
Bankrupcy and Foreclosure are the Best Choice.
In defense of Wall Street, mortgage brokers, appraisers, loan officers, account executives, account managers, processors and lenders -
Many of these borrowers could read, some even had documents in their primary , AND many of them had a 3 days or more to cancel. All they needed was a law degree to understand the legal mumbo jumbo that most attorneys don’t understand…… Let the buyer beware indeed!
Greed is Good.
Jim Cramer’s right in the video above. This mortgage guy is amoral at best. It’s just a matter of time before the #@%& hits the fan on a larger scale. Look at brokeruniverse.com to see what the mortgage brokers are going through. It’s about time to shake up the industry, and Bernecke is going to let it all happen. No rate reduction tomorrow and loans will be almost impossible for the average home buyer and homeowner (refinance) to acquire……… Make sure you have at least a 5/1, 10/1 or 30 yr. fixed…..and hang on to your hat.
I am a loan officer and as a part of my service, I explain in Black & White how I get paid. I educate my clients on how to read a rate sheet, so that if they don’t work with me, they are informed and can’t be taken advantage of. Consumers need to work with professionals, Loan officers that have access to “real time” information, and not just work with someone who is not licensed.
Just last week, American Home Mortgage and its wholesale counterpart, American Brokers Conduit, became the latest casualties of the credit crisis. Last year, this company closed over $58 billion in home loans.
Despite being, by all accounts, a well-run business, market conditions forced them to file for bankruptcy, leaving billions of dollars in loans in their pipeline unable to close. Tens of thousands of borrowers have now been left without financing as a result of companies like this going under. Clearly, with over 100 national lenders having now closed shop in the last eight months, this is no longer simply a subprime lending issue.
The credit market is experiencing unprecedented turmoil. According to Federal Reserve Chairman, Ben Bernanke, “Financial markets have been volatile in recent weeks, credit conditions have become tighter for some households and businesses, and the housing correction is ongoing.
Thank you.
Lori -
I’m baffled by your first comment about educating clients on how to read rate sheets. For starters, most reputable lenders have had automated pricing engines for a number of years now… so what advantages have you been providing these clients by educating them on how to read rate sheets?
Consumers have NO desire to read rate sheets. Loan officers have no INTENT to share rate sheets / or automated pricing engine details with consumers unless they can hide premium / yield spread.
Why don’t you teach your clients how to understand estimated and final HUD 1’s instead?