July 13, 2000, Reviewed July 3, 2009
One of the reasons that conventional mortgage brokers conceal their fee
as long as possible is a concern that consumers don't fully appreciate
the value the brokers provide. Because consumers dealing with UMBs agree
on a fee in advance, it is important that consumers also understand
exactly what they are getting for their money, and what it might be
worth.
Pass-through of Wholesale Prices
The UMB provides access to wholesale
prices posted by lenders, as opposed to the retail prices consumers
would be obliged to pay if they shopped lenders.
Lenders offer lower prices to brokers because brokers perform costly
services for them that they would otherwise be forced to provide for
themselves. The most important of these services is finding and
servicing customer needs. Absent mortgage brokers, lenders must maintain
a costly sales and loan-processing force plus the infrastructure
required to support it.
Lenders who operate through both wholesale and retail distribution
channels quote wholesale rates on fixed-rate mortgages from .25% to .50%
lower than retail rates. It tends to be a little higher on 15-year than
on 30-year mortgages, and it varies from lender to lender. The average
might be about .375%.
To determine what this is worth in upfront fees, the rate difference
must be converted into points. This is an imperfect exercise because
lenders vary widely in how they trade off rate against points. But as a
rough rule of thumb, a .375% difference in rate is worth about 1.5
points. On an average loan of $130,000, this amounts to $1950.
Assurance of Fair Treatment
Customers of UMBs are not vulnerable to the
various “tricks” of the mortgage broker trade. For example, customers
who allow the rate and points to “float” with the market until near the
closing date often are not given the best deal available because their
bargaining power is gone. This does not happen with a UMB.
Shopping
Lenders for the Best Price and Service
Mortgage brokers can
shop lenders much more effectively than consumers. Brokers are in the
market every day, where consumers are in the market a few times during
their lives. Brokers receive price information from lenders daily as a
matter of course. They know the features of the transaction that affect
the price and underwriting requirements. They have relationships with
multiple lenders, and are therefore well positioned to find and shop
among the lenders offering particular features. And they know the
lenders who take 10 days to underwrite a loan and those who take one
day.
In addition, price differences between lenders are smaller in the
wholesale market than in the retail market. This is because lenders know
that brokers are careful and knowledgeable shoppers while most consumers
are not.
The potential saving to a consumer from having the UMB do their shopping
is very large, especially if they have weak credit. This is illustrated
in the table below (drawn from
Should Borrowers With Poor Credit Shop?), which shows the high and
low rates quoted by retail lenders on a zero-point 30-year FRM in
California, for borrowers with different credit ratings. On the day
these data were compiled, the potential savings were as large as .625%
for A-rate borrowers, and as large as 4.75%. for D-rated borrowers.
| Borrower Rating |
Lowest Rate |
Highest Rate |
Spread |
| A |
7.875% |
8.50% |
0.625% |
| B |
8.99 |
11.62 |
1.63 |
| C |
9.50 |
12.00 |
2.50 |
| D |
10.25 |
15.00 |
4.75 |
The actual saving depends on how effectively you would have shopped on
your own behalf, if you had elected to do that rather than using an UMB.
Only thorough and meticulous shoppers who place no value on their
shopping time should disregard this source of value.
Counseling to Determine the Least-Costly Loan Program
Brokers also
provide counsel on the loan program that best meets the customer's
needs. Usually the customer doesn't realize the full benefit of careful
program selection until later, perhaps years later, but sometimes the
benefits are reaped upfront. Here is an example provided by a broker.
"This clients had excellent credit but little cash. They were prepared
to take a first mortgage for 80% of property value at 8.75% plus a
second mortgage for 10% of value at 11%. The weighted average interest
rate would have been 9%. But because the client's wife is a doctor, they
qualified for a niche loan offered only to doctors. The loan is for 100%
of property value, at 8.5% and no points. This saved them .5% in rate."
It is difficult for borrowers to attach value to this, because they
typically won't know about it when the UMB's fee is established.
Counseling on Difficult Qualification Cases
Many loan applicants have
credit or other problems that pose difficulties in qualifying for a
loan. The value added by a broker who finds a way to overcome such
problems can be extremely high, though difficult to quantify.