Advanced Game Play

When it comes to shopping lenders, it’s important to keep a number of things in mind.

1. If you want to make sure you are not paying more for your mortgage than you need to, restrict your shopping efforts to mortgage brokers. If you are a member of a credit union, check with their resident loan officer to find out if they are functioning as a direct lender or broker. If they fund and service member loans, they’re a direct lender. If not, they’re in the brokerage business. They have to abide by the same disclosure requirements that other brokers have to abide by.

2. Shopping rates is a fool’s game if you don’t concentrate on finding the broker offering the lowest par rate for the mortgage product you are looking for. This doesn’t mean that you can’t buy a higher rate to generate a rebate to cover your closing costs or a lower rate to reduce monthly payments. Par is just a reference point. Instead of asking the broker then what rates he has available, be specific. Ask him what the par rate is for the mortgage product you are looking for, e.g., 30 year fixed rate, 20 year fixed rate, 15 year fixed rate, adjustable, interest only, or 10, 7, or 5 year balloon.

It is also important to understand that the rate you are quoted over phone may not be deliverable. Old school loan officers, whether they work for a direct lender or broker, play a game called “Quote and Float”. Getting you to float with the market affords them the means to boost your rate at lock-in to generate additional undisclosed/under-disclosed income. If you lock-in a loan, the opportunity is lost. Here’s how the game is played.

a. To get business in the door, they quote an interest rate well below market to get you to complete an application. The loan officer knows that consumers are basically lazy. Once they’ve completed an application and forked out the appraisal and credit report fee, they’ll be sticking around until the bitter end.

It’s important for you to understand that no broker is going to be in a position to offer a mortgage rate lower than everyone else because brokers who have been in business for three or four years all have access to the same direct lenders. Put another way, no broker has a relationship with a direct lender who offers interest rates lower than the prevailing market.

b. So they don’t have to deliver the quoted rate at application they convince you that rates are dropping and that it would be foolish to lock-in or overprice the lock-in to make it exceedingly expensive.

c. On those rare occasions when borrowers insist on locking in their loan, the loan officer unable to deliver the quoted rate recommends a lock-in period knowing full well the loan won’t get approved and funded in time or, worse yet, doesn’t lock the loan in at all hoping rates will drop so the mortgage can be covered. Admittedly, the latter doesn’t happen very often but when it does the loan officer just blames his processor for not following through on the order knowing that you really don’t have any option but to go through with the transaction.

Given the fact that mortgage rates change from one day to the next, knowing that no broker is going to be in a position to deliver a rate substantially lower than the prevailing market, you will always be in a position to negotiate the lowest rate at the lowest available cost if you focus on shopping the par rate. In the end it doesn’t matter what the loan officer quotes, it’s what he delivers and you’re assured the best rate at the lowest possible cost, insisting on a par rate or by controlling the size of a paired rebate so you’re not paying more than you have to secure your loan. The specific broker you deal with, therefore, is pretty much irrelevant.

Speaking from personal experience, I guarantee you when you approach the shopping process comparing par rates, you will put each and every broker you talk to on notice that he/s not working with an ill-formed borrower. What’s more, he knows from the outset that he is going to have a problem boosting your rate to collect a rebate because you put him on notice that you understand the pricing game.

3. Once you have boiled the list of possible brokers down to two or three, concentrate on finding the one offering the lowest origination fee. I just refinanced a $108,000 loan on a property in California. I agreed to pay a 1% origination fee because the loan was a bit more complicated than most because I’m self employed and the loan officer was kind enough to drive out to the house to take the application and then at closing to deliver loan documents.

In addition to knowing that brokers originate loans for as little as $1,000, there’s also wisdom in knowing what you are actually paying for. When it comes to the origination of a mortgage, loan officers like to characterize themselves as service providers rather than salesman but the reality is that they are primarily salesmen. To understand why I say this, consider what they actually do.

a. They provide counseling. (Not needed if you know what you’re doing.)

b. Take an application. (At most an hour’s time.)

c. Prepare a Good Faith Estimate. (At most another 15 minutes.)

d. Tell you what documentation the underwriter will need to get your approved. (Usually this is provided already on their business card or a ready made flyer.)

e. Sometimes they actually collect the paperwork and pass it along to the loan processor. More often than not, your processor takes care of this.

f. Lock-in your loan if a lock-in is desired at application. (Another 15 minutes.)

g. Call you when your loan is approved. (Another 15 minutes.)

h. Lock-in your loan for delivery if the lock-in hasn’t already been ordered. (Another 15 minutes.)

i. Answer questions that come from borrowers and real estate agents regarding the progress of your loan. (All in, maybe an hour.)

In all, a loan officer isn’t likely to put in more than three hours of his time. Now that you know this, what value would you put on the service he has provided on an hourly basis? You might want to keep this in mind when you talk with the broker about his origination fee.

I cite this only because the broker’s cost and effort to originate a $500,000 loan isn’t any greater than the cost to originate mine. Now I doubt you’ll find a broker willing to originate a $500,000 loan for $1,080 but there’s little doubt in my mind you can find someone that will charge less than 1% ($5,000) which in many markets is a standard origination fee.

It’s also worth mentioning that when I refinanced my mortgage six months ago the broker I was dealing with told me that times were tough. How tough? Given tighter underwriting requirements brought about by the subprime mess, he was having to turn away eight out of every ten borrowers.

How does this help you? If you have excellent credit, you’re in the driver’s seat when it comes to negotiating what the broker is going to be paid for his services because he knows you can take your business elsewhere.

4. Once you have decided on the broker, the final step lies in verifying that he is going to deliver your mortgage on the agreed upon terms. Ask him to prepare a Good Faith Estimate at par so you can determine what your closing costs will be whether you intend to take advantage of rebate pricing or wish to buy a lower rate. The verification process is simple.

a. Is the origination fee shown the one you agreed upon?

b. Does the Good Faith show a discount fee? It shouldn’t, if you’re going for par pricing.

c. Does the Good Faith include a line item entry labeled P.O.C., Service Release Premium (SRP) or Yield Spread Premium (YSP). If the Good Faith includes one or more of these entries then he intends to sell you a rate above par to generate income above and beyond the specified origination fee.

5. Once the cost of a par loan has been established, only then can you seriously consider the possibility buying a premium rate to eliminate the need to come out of pocket to cover your closing costs. To do that the first thing you need to do is divide your total non-recurring closing costs by the intended loan amount. This is the percent rebate needed to eliminate the need to write a check to cover your closing costs. Once that percentage is calculated, ask the loan officer to tell you what interest rate will be needed to generate just enough of a rebate to cover those costs. Now have him prepare a second Good Faith at the premium interest rate.

Be careful when you do this because your loan officer may still see an opportunity here to generate additional income. If the rebate associated with a particular rate exceeds the amount of money that’s needed, let the broker know that you expect the excess to be distributed to you at closing. As long as the amount does not exceed 1%, the distribution to you is perfectly legal. If he informs you that he can’t do that, have him provide you with the reference from the Fannie Mae, Freddie Mac, FHA or VA seller guide that states that the practice is prohibited. He won’t be able to produce that but it, again, will put him on notice that you didn’t just get off that turnip truck.