Alternative Approaches to Selecting a Loan Provider

30 May 2006

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.

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 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 will shop the market for you and provide professional counsel on your mortgage options. Their fee to you is set upfront, and if you get it in writing, I guarantee it. There are 152 UMBs listed HERE.

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. There are only 2 UMLs but a number of near-UMLs can also be shopped if borrowers are aware of their limitations, which I have documented (see Detailed Information on Single-Lender Web Sites).

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. For example, a borrower with a FICO score of 500, who must use started income documentation and cannot make a down payment, cannot price a loan on-line at any site.

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 the new 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 will gradually take over my monitoring and other functions. It will be 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.