Upfront Mortgage Brokers
The concept of mortgage brokers disclosing the real wholesale mortgage prices to their customers has caught my eye again recently, as it is being promoted by some most respectful mortgage experts and advisors. Some of them sound very enthusiastic about it; some see the panacea for predatory lending in it. Well, there seems to be quite some good common sense in it, but somehow certain aspects of the deal keep me puzzled and wondering.
When one wants to borrow some money to, say, buy a home, he can either shop for a retail lender with the best offer himself or hire a broker to find the best deal on the market. The advantages of having a broker are obvious – a broker being constantly in the business has a far better knowledge and understanding of the mortgage market and procedures, he can provide his customer with a better deal. Well, at least in theory. The disadvantages are also obvious – the costs of the service. Moreover, a conventional broker tends to work for a commission, which s/he does not tell the customer in advance, which, in its turn, leaves a lot of room for tricks and speculations.
For example, a conventional broker quotes some price to a customer. The price will very likely be based on the wholesale price of the product plus a certain markup from the broker himself, but the customer will never know how much has been actually marked up, because wholesale prices are among the most thoroughly guarded industry secrets. Wholesale prices change every day, sometimes twice a day. Only brokers and retail lenders have access to this information, thus they are free to use it to their own advantage. It would be funny if they didn’t. A broker-quoted price of 5% interest at 2 points may well mean that the 2 points are just the broker’s service charge in disguise. However, rates change, and the next day the wholesale lender may change the price of the same product to 5.25% at 1 point rebate. The broker may be tempted to take advantage of the situation and quote the new price to the customer (5.25% - blame the market!) intentionally failing to mention the 1point rebate, i.e. just keeping the 1 point amount from the lender all to himself in addition to the 2 points he already gets from you. The broker will be paid more for getting you a worse deal! I am intentionally oversimplifying and aggravating this illustrative situation, but the bottom line remains: as long as wholesale prices are secret to the public, a borrower’s only hope is the conscience of his broker.
There are always good honest brokers who do not overcharge their customers or push them into lousy deals, but there are some who do. Telling one type from the other is a hard job. To make the choice easier for the borrower, the upfront broker concept was introduced originally by a number of individual brokers in their everyday work and later consolidated into The Upfront Mortgage Brokers Association (UMBA). The major difference of upfront brokers from conventional brokers is that they disclose the cost of their service to the customer upfront, the cost does not change later, AND they show their customers the real wholesale prices! The idea is that they offer you a choice of wholesale mortgage products in your pre-approved price range and you pick one yourself instead of being stuck with the product picked for you by a conventional broker as the result of his secret considerations. Wow! Or is it? Why is it that somehow it feels like there something that holds me back and I do not rejoice, as I probably should?
The Association’s site provides a description of the organization and all the good things they do, which, in short, is to have the customer’s best interest at heart. More brokers, even if they are not upfront, should read that and act accordingly. However, so far we see, that the obligations and qualities required of the members of the association leave most brokers rather hesitant to join, even though many of them like to claim that they are upfront mortgage brokers when it comes to actually working with customers. Perhaps due to the recent rise in the popularity of the upfront idea, the brokers try to attract customers that would not be theirs otherwise. It is not right to trust somebody to pick a mortgage for you, if this somebody starts your business with lies. Such impostors, by the way, compromise the whole movement, as they lie to their customers, who, as a result, may lose faith in upfront mortgage brokers in general. The most useful (more practical, less sentimental) page on the Association’s site is this one. Here you can search for UMBs in your area and see, whether the one you are about to deal with is really a UMB. If s/he is not in the list – do not trust this person whatever s/he claims to be. Official membership in the Association does not imply only disclosing the fees upfront, it also suggests that the person is characterized by a certain moral level that will not allow him/her to take advantage of the customers. Judging by the thin number of approved members this asset should be quite reliable. The bottom line remains, though: as long as wholesale prices are secret to the public, a borrower’s only hope is the conscience of his broker. There is an almost sure chance that you will get real, up-to-date, valid wholesale quotes from an official UMB. As to all the rest – whatever they claim, the truth is hidden from the public eye. There are sites that claim to quote wholesale prices, but I would not trust any of them really, because, as I mentioned above, the rates change every day or sometimes twice a day. Very few companies bother to update their site information so often. Retailers are rather busy updating their retail prices, on their sites, too.
My point is: it is still the matter of morals. A registered UMBA member is a lot less likely to take advantage of customers and commit them to a mortgage on unfavorable for them terms. It is not a fact, though, that a conventional mortgage broker will not stir a finger other than to squeeze as much as possible for himself out of a deal. There are good professionals, honest hard-working people in the business, whose help in finding the best suited for each customer mortgage is invaluable. The fact, however, is that when a broker is not registered as a UMBA member, the moral standard is harder to guess.
Apart from the morals, there are still prices. Even though an upfront broker discloses the fees in the very beginning, experience tells us, that the cost of the deal will not be any considerably lower, than dealing with an honest conventional broker. The customer may feel better from knowing exactly what amount goes where and what it originates from instead of blind guessing over the matter, but he has to be prepared to pay. Brokers’ services are generally costly. In fact, they are quite expensive; but you have to realize that brokers save you a lot of work; they have to take care of every little detail of your mortgage deal. We have to be appreciative of the effort it requires.
