Protecting Against Mortgage Broker Tricks
July 15, 2000, revised October 5, 2002, October 31, 2008
"I know you have written about tricks that mortgage brokers pull, but I'm sure I don't have them all. Could you list them and explain how I deal with them?"
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 your protection.
Since writing the first version of this article, I have developed Upfront Mortgage Brokers who operate in a way that puts the tricks out of bounds. Hence, in addition to the "protections" cited below, the reader can, in every case, add "use an Upfront Mortgage Broker." I have also become sensitized to the fact that many of the tricks mentioned, or very similar tricks, can be played by lenders. Where this is the case, I now indicate it.
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. "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.
Protection: Require the broker or lender to provide a written list of all fees to be paid by you, including known payments to third parties such as credit reports and appraisal fees. It should not include prepaid items, payments by the lender to the mortgage broker, or charges by third parties unconnected to the lender which are not accurately known until later. Read How to Shop Settlement Costs. A list of charges that you can use is shown in the list of Questions to Ask the Mortgage Broker below.
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. Randy Johnson, in his excellent book, "How to Save Thousands of Dollars on Your Home Mortgage" (John Wiley & Sons, 1998) claims that this game is common, played by lenders and brokers alike.
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 inform 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? This is much less of a hazard dealing with a lender.
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. See the List of Questions to Ask the Mortgage Broker below.
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 shown on the Truth in Lending disclosure statement.
If I were to shop mortgage brokers tomorrow, I would ask the following questions of any broker interested in my business.
QUESTIONS TO ASK THE MORTGAGE BROKER
When I lock the rate/points, will you provide me with a copy of the loan commitment letter as soon as it has been received from the lender?
If I elect to float the rate/points, on the day the terms are locked will you give me the rate/points that are consistent with those being quoted to potential new customers on that day?
Before accepting any money, but after the loan features have been established, will you provide me with the following information in writing?
Type of Loan: ______________
Term:___________Years
Lock Period:______Days
Loan Amount:$_____________
Interest Rate: _______%
*Paid before closing. If credited against other fees, deduct from the other fees.
NAME OF MORTGAGE BROKER:
SIGNATURE:
"I know you have written about tricks that mortgage brokers pull, but I'm sure I don't have them all. Could you list them and explain how I deal with them?"
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 your protection.
Since writing the first version of this article, I have developed Upfront Mortgage Brokers who operate in a way that puts the tricks out of bounds. Hence, in addition to the "protections" cited below, the reader can, in every case, add "use an Upfront Mortgage Broker." I have also become sensitized to the fact that many of the tricks mentioned, or very similar tricks, can be played by lenders. Where this is the case, I now indicate it.
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. "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.
Protection: Require the broker or lender to provide a written list of all fees to be paid by you, including known payments to third parties such as credit reports and appraisal fees. It should not include prepaid items, payments by the lender to the mortgage broker, or charges by third parties unconnected to the lender which are not accurately known until later. Read How to Shop Settlement Costs. A list of charges that you can use is shown in the list of Questions to Ask the Mortgage Broker below.
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. Randy Johnson, in his excellent book, "How to Save Thousands of Dollars on Your Home Mortgage" (John Wiley & Sons, 1998) claims that this game is common, played by lenders and brokers alike.
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 inform 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? This is much less of a hazard dealing with a lender.
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. See the List of Questions to Ask the Mortgage Broker below.
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 shown on the Truth in Lending disclosure statement.
If I were to shop mortgage brokers tomorrow, I would ask the following questions of any broker interested in my business.
QUESTIONS TO ASK THE MORTGAGE BROKER
When I lock the rate/points, will you provide me with a copy of the loan commitment letter as soon as it has been received from the lender?
If I elect to float the rate/points, on the day the terms are locked will you give me the rate/points that are consistent with those being quoted to potential new customers on that day?
Before accepting any money, but after the loan features have been established, will you provide me with the following information in writing?
Type of Loan: ______________
Term:___________Years
Lock Period:______Days
Loan Amount:$_____________
Interest Rate: _______%
| Fee | Percent of Loan | Dollars |
| Payable to Me or the Lender | ||
| Application Fee* | XXXXXXXXXX | |
| Commitment Fee* | XXXXXXXXXX | |
| Points | XXXXXXXXXX | |
| Origination Fee | ||
| Mortgage Broker Fee | ||
| All Other Fees | ||
| Payable to Third Parties | ||
| Credit Report | XXXXXXXXXX | |
| Appraisal | XXXXXXXXXX | |
| Other | XXXXXXXXXX | |
| Total | ||
*Paid before closing. If credited against other fees, deduct from the other fees.
NAME OF MORTGAGE BROKER:
SIGNATURE: