Is This Mortgage Broker Upfront?

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November 20, 2000

"My broker claims to be upfront, even though he is not on your list of "Upfront Mortgage Brokers". He says he is upfront because he tells me his fee upfront -- he charges me one point and receives one point from the lender. Is this fee reasonable? Is he really being upfront.?"

You are paying the broker two points, or 2% of the loan amount, for his services. Whether two points is a reasonable fee depends on the loan size, and on how demanding and time-consuming the transaction is expected to be.

On a $50,000 loan, two points is $1,000; on a $500,000 loan, it is $10,000.

If yours is a $500,000 "slam dunk", the fee is excessive. If it is a $50,000 nail-biter, the fee is inadequate.

Your broker, who I’ll call a "conventional mortgage broker" or CMB, is not operating as an Upfront Mortgage Broker (UMB). I’ll explain the difference with an example.

Assume that on the day you lock the terms of the loan, the best terms available to both brokers from wholesale lenders on your selected 30-year fixed-rate mortgage are as follows:

Lender	Interest Rate	Points
A	7.25%	2.9 point charge
B	7.50	2.1 point charge
C	7.75	1.1 point charge
D	8.00	0.4 point charge
E	8.25	0.5 point rebate
F	8.50	1.0 point rebate
G	8.75	1.5 point rebate
H	9.00	1.9 point rebate

These numbers come from the price sheets that wholesale lenders distribute to their brokers every day. The lenders shown are those quoting the fewest points at each interest rate.

The UMB informs you of his fee and shows you this table. The table illustrates clearly that when a lender pays a rebate to the broker, the borrower actually pays for the rebate in the form of a higher interest rate.

The UMB also guides you in making your selection. If you expect to be in your house only a few years, or if you are short of cash, the UMB will recommend a high-rate loan with a rebate. If you expect to be in the house a long time and can afford the cash outlay, the UMB will recommend a low-rate loan for which you must pay points. But the decision will be yours, based on your needs.

For example, if the UMB’s fee is 1.5 points and you select the 7.75% loan available from lender B, you will pay a total of 1.5 + 1.1 = 2.6 points. If you select the 8.75% loan from lender D, you pay 1.5 –1.5 = 0 points. The lender’s rebate covers the broker’s fee, which you are paying indirectly in the higher rate.

In contrast, the CMB you are dealing with will not show you the wholesale prices, and will not allow you to make your own selection. He will shoehorn you into the 8.5% loan because that loan carries a one-point rebate, which provides half of his fee. Your needs don’t figure into the equation.

Why does your CMB do this? Because he wants you to believe that you are paying him only one point, when in fact you are paying him two points -- one now and one later in the higher rate. If he showed you the price table and let you make the decision, the game would be up.

Your particular CMB does tell the borrower the truth about what he is doing -- he is upfront in that sense -- but it is not the whole truth. One can tell the truth and still deceive, and this is a good illustration.

This broker’s modus operandi makes him ineligible to be an Upfront Mortgage Broker. For a list of actual UMBs, click here.