Alternative Approaches to Selecting a Loan Provider
30 May 2006, Revised January 11, 2011, January 9, 2012
Finding a mortgage loan provider has always been a major challenge for a consumer. It is a very complex process with a lot at stake; thousands of loan providers vie for their attention, yet tales of skullduggery abound. Distrust is pervasive, and for good reason. Here are just a few of the abuses that pervade this market:
Price Low-Balling: Loan providers sometimes deliberately quote a very low price in order to "hook" borrowers who are shopping. Later on, the low price disappears because (allegedly) the market changed, or the lender discovered fees that were not mentioned before, or for a dozen other reasons.
Opportunistic Pricing: Many loan providers charge what the market will bear, which means that borrowers who are naïve and trusting and don't shop alternatives will pay higher markups than knowledgeable and aggressive shoppers. The loan officers and mortgage brokers with whom borrowers deal generally earn more on the deal if they can induce the borrower to pay more. In 2011, however new rules on compensation my put an end to this.
Market Niche Misclassification: Borrowers are sometimes classified as belonging to a higher risk category than is in fact the case, which increases the markup. Borrowers who are erroneously classified as sub-prime get whacked twice, since the wholesale prices on sub-prime loans are higher, and markups are also higher.
Price Omissions: Fixed-rate mortgages ordinarily have 3 price components, the interest rate, points, and fixed-dollar fees, while adjustable rate mortgages have more. Loan providers quoting prices sometimes omit one or more price components until it is too late for the borrower to do anything about it.
Profiting on Third Party Services: Some lenders add a markup to third party charges, such as appraisal fees or credit report charges. The borrower is billed for these charges without knowing about the markups.
Not all loan providers practice these abuses but it is extremely difficult for a borrower to know which ones do and which don’t. Major loan providers spend a fortune every day trying to convince potential borrowers that they can be trusted, but it helps not a whit. Some of the worst offenders are the biggest spenders.
To identify themselves as trustworthy, mortgage loan providers must voluntarily give up the right to use their superior knowledge to take advantage of borrowers. There are different ways to do this.
This is the latest and best of the approaches, incorporating the best features of the three approaches discussed below. The first 4 of the market abuses cited above require that loan officers have discretion in pricing loans. On the CLN this is not the case, borrowers receive their price information from the lender's pricing system, with the loan officer not part of the process.
The CLN attacks the last abuse by providing borrowers with alternative sources of title insurance and mortgage insurance. For a more complete discussion, see Finding a Mortgage on the Professor's Certified Lender Network.
The Upfront Mortgage Broker (UMB) negotiates with the borrower upfront to set a fee for services. This freezes the UMB’s markup – the difference between the price paid by the borrower and the wholesale price. Since all the abuses to which borrowers are vulnerable have the objective of increasing the loan provider's markup, freezing the markup eliminates the potential for abuse.
UMBs set their fee to you upfront, shop the market for you and provide professional counsel on your mortgage options. UMBs are listed at www.upfrontmortgagebrokers.org. Read How to Deal With a UMB. Recommended for those who want the maximum assistance from a trustworthy source.
The Upfront Mortgage Lender (UML) provides on-line mortgage pricing functionality that allows potential borrowers to price their particular deal accurately, and compare it with the price of the same deal on other sites. Showing all their cards eliminates their information advantage over the borrower. See Introducing: Upfront Mortgage Lenders.
There were 7 UMLs in 2011, see List of Upfront Mortgage Lenders. Recommended for knowledgeable borrowers with the capacity to navigate different web sites effectively.
Both the above approaches have limitations. UMBs don’t offer on-line pricing functionality, which is of value not only for shopping, but also for being able to compare different loan types, rate/point combinations, down payments, and so one. UMLs can provide no assurances to borrowers who can’t price their deals on the site because they have atypical features.
The newest approach combines the strengths of UMBs and UMLs. One of the two UMLs, Amerisave.com, has become a “fixed-markup UML”, disclosing its wholesale price and markup to the user. The markup changes with the loan size but not with the borrower’s credit, down payment or anything else. This means that a borrower who uses the site but must consult a loan counselor to be accurately priced, will nonetheless receive the same markup. This feature is particularly valuable to sub-prime borrowers, or those who might be but aren’t sure.
I will monitor Amerisave and guarantee the markup, but there is a proviso. Disclosure of the wholesale price, the fixed-markup commitment and my guarantee only apply to borrowers who access Amerisave through my web site. To try this site, click HERE.
The limitation of this approach is that it applies to a single loan source. Borrowers are encouraged, therefore, to comparison shop against UMBs or other on-line sites.
Recommended for those who want to control the mortgage selection process themselves while being assured of fair treatment.
In contemplation of retirement, I have taken several steps to assure the continuation of the certification processes described above. I have never received any compensation from UMBs, but the likelihood of finding a replacement who would continue that practice seemed low. I decided, therefore, to deed all my intellectual property connected to UMBs, including trademarks, to the Upfront Mortgage Brokers Association (UMBA), a non-profit corporation that I chartered. UMBA has gradually taken over my monitoring and other functions. It is supported by dues paid by UMBs.
To assure the continued viability of my arrangement with Amerisave, my agreement with them requires that they compensate me for my monitoring function. As part of my inducement to Amerisave to keep its markup fixed for sub-prime loans, I agreed to forgo any payment on these loans. I have no other financial interest in Amerisave.
Finding a mortgage loan provider has always been a major challenge for a consumer. It is a very complex process with a lot at stake; thousands of loan providers vie for their attention, yet tales of skullduggery abound. Distrust is pervasive, and for good reason. Here are just a few of the abuses that pervade this market:
Mortgage Market Abuses
Price Low-Balling: Loan providers sometimes deliberately quote a very low price in order to "hook" borrowers who are shopping. Later on, the low price disappears because (allegedly) the market changed, or the lender discovered fees that were not mentioned before, or for a dozen other reasons.
Opportunistic Pricing: Many loan providers charge what the market will bear, which means that borrowers who are naïve and trusting and don't shop alternatives will pay higher markups than knowledgeable and aggressive shoppers. The loan officers and mortgage brokers with whom borrowers deal generally earn more on the deal if they can induce the borrower to pay more. In 2011, however new rules on compensation my put an end to this.
Market Niche Misclassification: Borrowers are sometimes classified as belonging to a higher risk category than is in fact the case, which increases the markup. Borrowers who are erroneously classified as sub-prime get whacked twice, since the wholesale prices on sub-prime loans are higher, and markups are also higher.
Price Omissions: Fixed-rate mortgages ordinarily have 3 price components, the interest rate, points, and fixed-dollar fees, while adjustable rate mortgages have more. Loan providers quoting prices sometimes omit one or more price components until it is too late for the borrower to do anything about it.
Profiting on Third Party Services: Some lenders add a markup to third party charges, such as appraisal fees or credit report charges. The borrower is billed for these charges without knowing about the markups.
Not all loan providers practice these abuses but it is extremely difficult for a borrower to know which ones do and which don’t. Major loan providers spend a fortune every day trying to convince potential borrowers that they can be trusted, but it helps not a whit. Some of the worst offenders are the biggest spenders.
To identify themselves as trustworthy, mortgage loan providers must voluntarily give up the right to use their superior knowledge to take advantage of borrowers. There are different ways to do this.
The Certified Lender Network (CLN) Way
This is the latest and best of the approaches, incorporating the best features of the three approaches discussed below. The first 4 of the market abuses cited above require that loan officers have discretion in pricing loans. On the CLN this is not the case, borrowers receive their price information from the lender's pricing system, with the loan officer not part of the process.
The CLN attacks the last abuse by providing borrowers with alternative sources of title insurance and mortgage insurance. For a more complete discussion, see Finding a Mortgage on the Professor's Certified Lender Network.
The Upfront Mortgage Broker (UMB) Way
The Upfront Mortgage Broker (UMB) negotiates with the borrower upfront to set a fee for services. This freezes the UMB’s markup – the difference between the price paid by the borrower and the wholesale price. Since all the abuses to which borrowers are vulnerable have the objective of increasing the loan provider's markup, freezing the markup eliminates the potential for abuse.
UMBs set their fee to you upfront, shop the market for you and provide professional counsel on your mortgage options. UMBs are listed at www.upfrontmortgagebrokers.org. Read How to Deal With a UMB. Recommended for those who want the maximum assistance from a trustworthy source.
The Upfront Mortgage Lender (UML) Way
The Upfront Mortgage Lender (UML) provides on-line mortgage pricing functionality that allows potential borrowers to price their particular deal accurately, and compare it with the price of the same deal on other sites. Showing all their cards eliminates their information advantage over the borrower. See Introducing: Upfront Mortgage Lenders.
There were 7 UMLs in 2011, see List of Upfront Mortgage Lenders. Recommended for knowledgeable borrowers with the capacity to navigate different web sites effectively.
The Fixed-Markup UML Way
Both the above approaches have limitations. UMBs don’t offer on-line pricing functionality, which is of value not only for shopping, but also for being able to compare different loan types, rate/point combinations, down payments, and so one. UMLs can provide no assurances to borrowers who can’t price their deals on the site because they have atypical features.
The newest approach combines the strengths of UMBs and UMLs. One of the two UMLs, Amerisave.com, has become a “fixed-markup UML”, disclosing its wholesale price and markup to the user. The markup changes with the loan size but not with the borrower’s credit, down payment or anything else. This means that a borrower who uses the site but must consult a loan counselor to be accurately priced, will nonetheless receive the same markup. This feature is particularly valuable to sub-prime borrowers, or those who might be but aren’t sure.
I will monitor Amerisave and guarantee the markup, but there is a proviso. Disclosure of the wholesale price, the fixed-markup commitment and my guarantee only apply to borrowers who access Amerisave through my web site. To try this site, click HERE.
The limitation of this approach is that it applies to a single loan source. Borrowers are encouraged, therefore, to comparison shop against UMBs or other on-line sites.
Recommended for those who want to control the mortgage selection process themselves while being assured of fair treatment.
My Involvement With UMBs and Amerisave
In contemplation of retirement, I have taken several steps to assure the continuation of the certification processes described above. I have never received any compensation from UMBs, but the likelihood of finding a replacement who would continue that practice seemed low. I decided, therefore, to deed all my intellectual property connected to UMBs, including trademarks, to the Upfront Mortgage Brokers Association (UMBA), a non-profit corporation that I chartered. UMBA has gradually taken over my monitoring and other functions. It is supported by dues paid by UMBs.
To assure the continued viability of my arrangement with Amerisave, my agreement with them requires that they compensate me for my monitoring function. As part of my inducement to Amerisave to keep its markup fixed for sub-prime loans, I agreed to forgo any payment on these loans. I have no other financial interest in Amerisave.
My Certified Lender Network
The development of my Certified Lender Network (CLN) more or less makes this article obsolete. Rather than delete it, I decided it might be instructive to leave it as is but add comments on how the CLN eliminates or modifies the hazard. These comments are italicized. For a description of the CLN, see Finding a Mortgage on the Professor's Certified Lender Network.