| Protecting Against Loan Provider Tricks |  |
July 15, 2000, revised October 5, 2002, October 31, 2008,
June 3, 2011
The original version of this article was about mortgage brokers. As I realized that most of the tricks described were used by lenders as well as brokers, I revised to recognize that fact, but I did not change the title -- until now.
A core problem in mortgage shopping is that the loan provider knows far more than the borrower. So mortgage shoppers need to know how to protect themselves. Here are some of the tricks of the trade, followed by suggestions on way to protect yourself.
To draw customers, some brokers and lenders will advertise low-ball prices that they have no intention of honoring. Once they get you in the door, they will play bait and switch, or letem dangle.
"Bait and switch" is the game played by some appliance merchants and others who advertise a low-ball price but when you arrive at the store they happen to be out of the advertised special and try to interest you in something else. The mortgage market equivalent is finding that you do not qualify for the price quoted: the most oft-cited reasons are that your credit score is too low, or the value of your property is too low.
"Letem dangle" means keeping you on the hook in the hope that market rates might drop enough to make the advertised special profitable.
Lenders play these games as well as brokers.
Protection: Don't respond to any ad that quotes a price 1/2 point or more below the lowest price offered by anyone else. Read Is This Deal Too Good to be True?
Some mortgage brokers and lenders will fail to mention certain fees until the borrower is in too deep to bail out, then remember them. This scam has become very difficult if not impossible with the introduction of a new Good Faith Estimate in 2010. See The New GFE Will Help Borrowers.
Usually there is a lag between the time a borrower submits an application and the time when the loan terms are locked. The loan provider will always explain to the borrower that the terms quoted at time of application are subject to change with the market. If market rates subsequently rise, the borrower will indeed see the rate on his loan rise. If market rates decline, on the other hand, some loan providers will leave the rate on the loan unchanged unless the borrower challenges it.
Protection: You must monitor the market during the period prior to locking the loan, and let the loan provider know you are doing so. My wholesaler price series can be used for that purpose, since it shows prices day by day. See Wholesale Price Tables and Charts. Another option is to deal with Upfront Mortgage Lenders whose prices you can shop online.
Some mortgage brokers will charge borrowers to lock the rate and points, but not lock with the lender. If interest rates don't rise, the broker pockets the lock premium, and if they do rise the broker moves to Mexico. Read Did You Pay For Insurance You Didn't Get?
Protection: In the first version of this column, I advised borrowers not to deal with a mortgage broker who was not in business before 1994 when the current refinance boom began. The rationale for this was that mortgage brokers who cheated on rate locks are almost always new brokers. But many (perhaps most) mortgage brokers who have entered the market since 1994 do not cheat on rate locks, and it isn't fair to tar them all with the same brush.
A better way to protect yourself is to insist on seeing the loan commitment letter from the lender who has allegedly locked your loan. You should not deal with a mortgage broker who won't agree to show you the commitment letter. On a purchase transaction, mortgage brokers who have been referred to you by your real estate sales agent can usually be depended on because the sales agent's commission is dependent on your deal getting done.
Borrowers prepared to take the risk may elect to "float" the rate and points during the period until the loan closes, betting that market rates will not rise. The "market rate", however, is what the loan provider says it is, and some of them up the price as the closing date approaches. Lenders do this as well as brokers.
Protection: If you float past the point where you can bail out and shop elsewhere, your negotiating power is weak -- unless you had the foresight to protect yourself in advance when your negotiating power was strong. You should get the loan provider to agree in advance that the price offered you when you lock near closing will be the same as the shortest lock-period price being quoted to potential new customers on the same day.
Borrowers who want to refinance a mortgage that has a sizeable prepayment penalty may fall prey to the interim refinance ploy. The first refinance is for an increased loan amount that includes the penalty but carries a high rate, while the second, occurring several months later, lowers the rate. The borrower does avoid having to pay the penalty in cash, but the cost of the two deals wipes out most or all of the gains from refinancing.
Protection: Just don't do it. Read The Interim Refinance Scam.
Borrowers who accept whatever they are told may fall prey to contract chicanery: incorporating a provision in the loan note favorable to the lender, without mentioning it to the borrower. Lenders will usually pay an extra point or so for a prepayment penalty, so the broker who includes it in the contract without your knowledge can put the point in his pocket -- rather than in yours, where it belongs. Loan officers working for lenders might do this as well.
Protection: Read all documents carefully at every stage of the process; if there is a prepayment penalty, it is now shown on the Good Faith Estimate as well as in the Truth in Lending disclosure statement.
The original version of this article was about mortgage brokers. As I realized that most of the tricks described were used by lenders as well as brokers, I revised to recognize that fact, but I did not change the title -- until now.
A core problem in mortgage shopping is that the loan provider knows far more than the borrower. So mortgage shoppers need to know how to protect themselves. Here are some of the tricks of the trade, followed by suggestions on way to protect yourself.
Low-Ball Offers
To draw customers, some brokers and lenders will advertise low-ball prices that they have no intention of honoring. Once they get you in the door, they will play bait and switch, or letem dangle.
"Bait and switch" is the game played by some appliance merchants and others who advertise a low-ball price but when you arrive at the store they happen to be out of the advertised special and try to interest you in something else. The mortgage market equivalent is finding that you do not qualify for the price quoted: the most oft-cited reasons are that your credit score is too low, or the value of your property is too low.
"Letem dangle" means keeping you on the hook in the hope that market rates might drop enough to make the advertised special profitable.
Lenders play these games as well as brokers.
Protection: Don't respond to any ad that quotes a price 1/2 point or more below the lowest price offered by anyone else. Read Is This Deal Too Good to be True?
Bait and Remember
Some mortgage brokers and lenders will fail to mention certain fees until the borrower is in too deep to bail out, then remember them. This scam has become very difficult if not impossible with the introduction of a new Good Faith Estimate in 2010. See The New GFE Will Help Borrowers.
Play the Market
Usually there is a lag between the time a borrower submits an application and the time when the loan terms are locked. The loan provider will always explain to the borrower that the terms quoted at time of application are subject to change with the market. If market rates subsequently rise, the borrower will indeed see the rate on his loan rise. If market rates decline, on the other hand, some loan providers will leave the rate on the loan unchanged unless the borrower challenges it.
Protection: You must monitor the market during the period prior to locking the loan, and let the loan provider know you are doing so. My wholesaler price series can be used for that purpose, since it shows prices day by day. See Wholesale Price Tables and Charts. Another option is to deal with Upfront Mortgage Lenders whose prices you can shop online.
Charge the Lock Price But Don't Lock
Some mortgage brokers will charge borrowers to lock the rate and points, but not lock with the lender. If interest rates don't rise, the broker pockets the lock premium, and if they do rise the broker moves to Mexico. Read Did You Pay For Insurance You Didn't Get?
Protection: In the first version of this column, I advised borrowers not to deal with a mortgage broker who was not in business before 1994 when the current refinance boom began. The rationale for this was that mortgage brokers who cheated on rate locks are almost always new brokers. But many (perhaps most) mortgage brokers who have entered the market since 1994 do not cheat on rate locks, and it isn't fair to tar them all with the same brush.
A better way to protect yourself is to insist on seeing the loan commitment letter from the lender who has allegedly locked your loan. You should not deal with a mortgage broker who won't agree to show you the commitment letter. On a purchase transaction, mortgage brokers who have been referred to you by your real estate sales agent can usually be depended on because the sales agent's commission is dependent on your deal getting done.
Rig the Market Rate Against Floaters
Borrowers prepared to take the risk may elect to "float" the rate and points during the period until the loan closes, betting that market rates will not rise. The "market rate", however, is what the loan provider says it is, and some of them up the price as the closing date approaches. Lenders do this as well as brokers.
Protection: If you float past the point where you can bail out and shop elsewhere, your negotiating power is weak -- unless you had the foresight to protect yourself in advance when your negotiating power was strong. You should get the loan provider to agree in advance that the price offered you when you lock near closing will be the same as the shortest lock-period price being quoted to potential new customers on the same day.
Interim Refinance
Borrowers who want to refinance a mortgage that has a sizeable prepayment penalty may fall prey to the interim refinance ploy. The first refinance is for an increased loan amount that includes the penalty but carries a high rate, while the second, occurring several months later, lowers the rate. The borrower does avoid having to pay the penalty in cash, but the cost of the two deals wipes out most or all of the gains from refinancing.
Protection: Just don't do it. Read The Interim Refinance Scam.
Contract Chicanery
Borrowers who accept whatever they are told may fall prey to contract chicanery: incorporating a provision in the loan note favorable to the lender, without mentioning it to the borrower. Lenders will usually pay an extra point or so for a prepayment penalty, so the broker who includes it in the contract without your knowledge can put the point in his pocket -- rather than in yours, where it belongs. Loan officers working for lenders might do this as well.
Protection: Read all documents carefully at every stage of the process; if there is a prepayment penalty, it is now shown on the Good Faith Estimate as well as in the Truth in Lending disclosure statement.
