(Updated February 2015)
The security of online information transmission has never been safer. Consumers, constantly This April Fool's Day, learn to find an honest mortgage broker so that the trick isn't on you at the closing.
If you've ever shopped for a mortgage, you might have had a sinking feeling that not everything was right about the transaction. "Before I became a mortgage broker, I had purchased two homes," says Marcy Wolf, a Houston-based mortgage broker with Action Mortgage. "I certainly felt like there were games being played and fees I didn't know about. Once I got into the industry, I realized that I really had been getting screwed."
Marcy is currently a member of the Upfront Mortgage Brokers Association (UMBA), a group that was formed in 2006 by Jack Guttentag, a professor at the Wharton School of Business. Member brokers follow six tenets that represent a true commitment to work in the best interests of the consumer.
"I was actually an engineer in my previously life, and realized that I didn't want to switch to a career where I would feel like a used car salesman," says Wolf. "So, I did some research to find an ethical approach to being a broker where I could feel like I was protecting the consumer."
Unlike loan officers, who represent only one lender, mortgage brokers serve as intermediaries, working with many lenders to help borrowers find the one that's the right fit for them. As such, they can perform a valuable service to their customers. However, you have to take care to ensure you're getting the loan that's best for you, rather than one that's most profitable for your broker.
Disclosure of fees upfront
While it is not necessary to use a UMBA member broker to have a good mortgage experience, much can be learned in exploring the difference in approach between a typical broker and a UMBA broker. One of the biggest differences is that a UMBA broker will put all of their fees up front and in writing before the client agrees to work with them. This eliminates most of the suspect, miscellaneous or "junk fees" that are often tacked on at closing.
"An average broker can hide junk fees or blatantly put them on an estimate and say that they are legitimate fees," explains Wolf. "A junk fee is just that, a way to pad the pocket of the mortgage broker. Putting all of your fees in writing up front eliminates things like $495 processing fees or $83 courier fees that are really just junk in this day and age. It also helps to eliminate the practice of steering clients towards a 4.25% rate rather than 4% rate because the broker will get paid more."
Junk fees are not the only trick that brokers play on clients, but they are one of the most common. "Certainly, bait and switch schemes are out there," says Wolf referring to the practice of luring clients in with low interest rates and promises that never materialize. "I feel really bad for those consumers!"
A changing market for brokers and clients
To be sure, a lot has changed about getting a mortgage and dealing with a broker in recent years. For one thing, brokers can no longer earn a higher commission by steering you into a more expensive mortgage - that is, get paid more when you take a loan with higher fees or a higher interest rate than other options. That's been prohibited by new federal regulations adopted since the crash. So if you do encounter an unscrupulous broker, it's harder for them to take advantage of you.
The shakeout in the mortgage industry that occurred with the collapse of the housing bubble and subsequent recession also drove a lot of the fringe and shady operators out of the market. So a broker you encounter today is more likely to a solid, reliable one than you might have encountered during the bubble years.
In addition, most of the shaky loan products that were commonly sold to borrowers during the bubble years have practically disappeared from the market, so unscrupulous brokers don't have nearly as many tools for taking advantage of clients as they did a decade ago.
Furthermore, all lenders must now provide you with a Good Faith Estimate when you apply for a mortgage that details all the fees you'll be charged for completing the loan, as well as the interest rate and disclosing potential rate changes or hidden charges down the road. These will also be disclosed in the Truth in Lending statement you receive at closing, which will have the final figures.
Some lenders and brokers will try to get you to commit to the loan before providing the Good Faith Estimate, though. They may charge a fee for applying or try to get you to lock in the rate (which you have to pay for) before providing the estimate. So look for a broker who'll disclose everything up front without charging you for it.
One of the other things is that it can be difficult for the average consumer to identify which fees are junk and which are necessary and legitimate. Complicating the task is that there is no standard terminology for the fees lenders charge on a mortgage - the names for what is essentially the same fee will vary from lender to lender. Furthermore, many lenders structure their fees differently, so what one lender may bill as two separate items another will charge as a single fee.
Though brokers handle a smaller share of the overall mortgage market these days, they still provide a valuable service by helping clients find the loans that best suit their needs. They can be particularly useful for borrowers with special circumstances that make getting a mortgage a challenge, or simply for finding the lowest interest rate and best loan package in your area. If you're looking for a mortgage, it's well worth including at least one when shopping for quotes.