August 21, 2000

“I am talking to two mortgage brokers, but they don’t know it.  I plan to submit applications through both.  After the applications have been approved and I have decided to lock the loan terms, I will disclose what I have done and have them compete for the loan. I am doing this to protect myself against mortgage broker tricks described in your column.  What do you think of this strategy?"  

By the time your loan application has been approved, half or more of my work has been done, but I'd have to cut my margin to the bone or lose the loan.

It’s like hiring two house painters and putting them to work on different sides of the house where they can’t see each other.  When they have each finished about half of their side, you introduce them and say, “Nice job fellas, now the one who gives me the lower price can finish it and get paid.”

As an economist, I am offended by the waste double-apping causes in triggering two sets of costs.  Since broker fees must be large enough to cover all their costs, including those associated with aborted applications, double-apping raises the general level of fees for all borrowers.

To you, the argument for double-apping may appear compelling. 

When the lender approves your application, you don't have a binding loan-price commitment from the broker.  Until the price is locked, it remains open and subject to gamesmanship by the broker using tricks I’ve described in other columns.  If you don’t have enough time before closing to start again with another loan provider, your bargaining position is weak.  Double-apping prevents the broker from taking advantage of this in negotiating the lock price. 

It is not complete protection, however, because the lock price does not finalize the settlement costs other than points.  When the application has been approved, the settlement costs provided you are merely “estimates”.  If you double-app, a resentful broker will play every game he knows to augment your fees as you move to closing.  Run into a major road-block, furthermore, and a resentful broker may not be willing to go the extra mile to remove it. 

There is an alternative to double-apping that protects you better, is fair to the broker, and avoids wasted effort.  Demand to know the price before the work begins. 

While the price of the mortgage cannot be set in advance, the price of the broker's services can.  The most important of these services is determining the type of mortgage that best meets your needs, and shopping lenders for the best available price. 

The standard practice of mortgage brokers is to load the price of their services into the price of the loan.  This pricing method allows brokers to practice gamesmanship to raise their compensation, and encourages double-apping by borrowers as a defense.  Separating the price of the broker’s services from the price of the mortgage eliminates gamesmanship by the broker and the need for double-apping. 

UMBs act as the borrower’s representative in shopping for a loan.  Where other brokers add a markup to the wholesale prices they receive from lenders before quoting prices to consumers, UMBs pass through the prices without a markup.  Other brokers keep the prices they receive from lenders under wraps, but UMBs disclose these prices at the customer’s request.