Dealing
With a UMB
Borrowers should view UMBs as
providers of professional services for which they are paid a fee.
That fee is the only price brokers control, and it is the only price
that borrowers using brokers should shop.
Shopping rates and points with UMBs
is a waste of their time and yours.
The market is so volatile that prices can change once or more before
the day is over, and they will always be reset the following
morning. The only effective way to price shop is to do it on-line,
where you can compare quotes from multiple lenders within minutes of
each other. If this is what you want to do, shop UMLs instead of
UMBs.
Once retained, the UMB will shop the
market for you. Brokers can shop lenders far better than you,
among other reasons, because they are in continuing contact with
many lenders.
Borrowers should engage UMBs in the
same way that they engage other service providers, such as lawyers,
architects or house painters: by assessing their ability to do the
job effectively, the fee they charge for their services, and their
guarantees or other assurances.
Assessing the UMB’s Ability to Help.
UMBs should be interviewed
about their qualifications and experience in the same way you would
interview any other service provider. Engage the broker in a
dialogue regarding your problem, and assess the response. Does this
broker listen and respond thoughtfully?
You should also ask about the
broker’s practice with regard to third party services. This can be a
particularly telling indicator of service quality (see below).
Pricing the Broker’s Services.
The fee for the broker’s
services should be agreed to by both parties, in advance and in
writing. The fee may be a dollar
amount, a percent of the loan,
an hourly charge for the broker's time, or a combination of these.
Most brokers, however, charge a percent of the loan amount.
If there is a separate
processing fee, it should be included in the agreement.
However defined, the UMB's fee will
typically be a significant 4-figure dollar amount. You shouldn't let
that faze you. For one thing, the UMB is going to pass through to
you the wholesale rates received from lenders, which are below the
retail rates quoted by lenders. In many if not most cases, this
saving will completely cover the UMB's fee.
Bear in mind that a one-point fee is
$5,000 on a $500,000 loan but only $500 on a $50,000 loan.
Hence, if the UMB's fee is expressed in points, expect it to be
higher on smaller loans. You should also expect to pay more if the
UMB anticipates that you will be a "tough case" -- for example, you
have credit problems that must be cleared up or you can't document
your finances.
Paying the Broker Fee Directly
Versus Paying It Indirectly:
The broker’s fee may be paid at closing by you, by the lender, or by
both. If the lender pays the fee, it means that you are paying the
lender a higher rate.
While the fee is a negotiated item,
determining whether the fee will be paid by you or by the lender
should be your decision alone. If you are short of cash and/or don’t
expect to have the house very long, you may want to pay a slightly
higher interest rate in order to have the lender pay the broker’s
fee. If you have a long time horizon and enough cash, pay the broker
yourself in order to get the lower rate.
Broker Guarantees:
Upfront Mortgage Brokers provide four
guarantees to borrowers:
*The broker’s total income
from the transaction will not exceed the fee agreed upon
with the borrower, as discussed above.
*The broker will provide the
borrower with a copy of the rate lock commitment from the
lender as soon as it is received. This prevents the broker
from substituting her own lock for the lender’s, a practice
that puts a few additional dollars in the broker’s pocket
but leaves the borrower unprotected against a serious spike
in interest rates.
*The fixed-dollar lender
charges shown on the Good Faith Estimate, which are usually
not part of the lock commitment, will not be changed so long
as the transaction is not changed.
*Third party fees will be
passed along with no direct or indirect markup by the
broker.
Some UMBs go beyond strict
neutrality on third party services, negotiating preferential prices
with service providers and/or guaranteeing third party charges.
Brokers who do either are very likely to be superior in other
dimensions of service as well.
Shopping UMLs
Mortgage Price-Shopping Can Only Be
Done Effectively On-Line: If
your loan is priced by a UML, it will be easy to find, and to
compare to the quotes on other UML sites. In contrast, price quotes
in the hard copy media are always out of date, while telephone and
email quotes by brokers and loan officers are seldom accurate.
Low-balling, the attempt to ensnare customers by quoting low prices
the loan provider has no intention of delivering, is pervasive.
In addition, market price volatility
- prices are reset every day and sometimes within the day -- is not
a problem in shopping UMLs. Their price quotations can be quickly
refreshed.
Do Your Homework:
Upfront Mortgage Lenders (UMLs) are for intelligent shoppers who
have done their homework. Before they start shopping, they should
know the kind of mortgage they want, and the market niche in which
they fall.
"Kind of mortgage" includes the type
(whether fixed-rate, adjustable rate or balloon), term, down
payment, required lock period, and the number of points they want to
pay or receive from the lender. Read
Tutorials on Selecting Mortgage Features.
"Market niche" refers to any
deviations from what lenders consider the ideal applicant. The ideal
applicant has excellent credit, is a citizen or permanent resident
alien, is purchasing or refinancing a single-family detached house
as a primary residence, will not take cash out of the transaction if
refinancing, will not have a second mortgage at closing, will escrow
taxes and insurance, is the sole borrower (or, if one of several,
all will occupy the property), has enough cash from own sources to
meet down payment requirements and settlement costs, has sufficient
income to meet standard maximum ratios of housing expense and total
expense to income, and can fully document required income and
assets.
Once you know the loan you want and
the market niche in which you fall, you can determine very quickly
whether or not a UML meets your needs. You merely check the UML’s
table of Market Niches Priced on Line.
If your mortgage and niche are
priced by the UML, you can easily compare the prices against those
of another UML. Make sure all comparisons are as of the same day,
since a change in the market can invalidate comparisons made on
different days.
Fixed-Markup UML
The advantages of shopping UMLs
assume that shoppers can price their particular deals on the UML
sites being compared. But shoppers who deviate from the features
that are priced on-line -- for example, they have low FICO scores
and cannot document their incomes -- cannot price their loans
on-line. The UML will route them to to a loan officer, at which
point they face all the hazards associated with off-line shopping.
But there is one exception. Any
shopper who goes to Amerisave through my site is guaranteed the same
markup off-line as on-line. The markup is shown and guaranteed by
Amerisave and by me.
This is the only on-line site that
reveals the lender’s markup and guarantees it if the loan has to be
priced off-line. NOTE: The markup is disclosed and the guarantee,
including mine, applies only for the special Amerisave site that is
accessed through my site. Amerisave pays me a fee for my role as
ombudsman to borrowers who access them through my site.
Copyright Jack Guttentag 2008
