Best Mortgage Not Found Using Good Faith Estimates
Author: Rob K. Blake | Date: December 15, 2007 | Filed In: Mortgages
The best mortgage is never found by collecting a handful of Good Faith Estimates or by calling around getting mortgage rate quotes. Yet this is THE shopping method for most.
If you define the best mortgage as the loan having the best mortgage rate, the lowest costs, and the one that fits your financial circumstances in both the short and long term…then standard comparison shopping methods will not work.
Why?
For one, loan officers are not interested in giving you an accurate mortgage quote either verbal or with Good Faith Estimates. That’s the first thing you need to know about what I call “The Call Around Method” of mortgage shopping.
It’s absolutely the silliest shopping method and yet, the widest used, even by otherwise seemingly intelligent people.
See, loan officers know you haven’t a clue about the “real” mortgage rate because that is difficult data for a consumer to obtain and it’s not in their best interest to give you the best mortgage rate. The higher the rate the more money they make.
So they are free to lie…and lie they do. They know low mortgage rate quotes and urgency built into rate changes (”Better get in here and lock before rates jump”) is all they need to create a lot of loan application appointments. They know the best mortgage providers have great reputations, quote accurate rates, provide the best mortgage experience, but most consumers shop by “low rate and cost estimates”…so they win with the “bait-n-switch” tactic all day…every day.
So, since most loan officers are all about getting the appointment and consumers like believing a lie…the dance continues.
It takes over 17 pieces of information from a consumer for an accurate mortgage rate quote. Loan officers give a mortgage rate quote all the time without asking anywhere near the required number of questions.
Why? Are they all incompetent?
Sure, incompetent like a fox!
Once again, because they have no intention of quoting you an accurate rate…only the rate they feel is low enough to trigger an appointment. This intentional lack of diligence in the initial questioning and low-balling the mortgage quote gets double duty because it also serves as the basis for increasing the rate later in the process…the “bait” has been laid out in the old “bait-n-switch”. They can claim ignorance about one or more of these 17 factors which scapegoats the need to increase the rate once the facts come out. The rate switch comes virtually at closing when it’s unlikely you’ll have time to do anything about it.
So how do you turn the tables and find the best mortgage?
Know who you’re dealing with and just what ethical mortgage providers ask before quoting rates.
The 17 pieces of data needed to accurately quote a mortgage rate:
1. Purchase or refinance
2. Loan amount, prepay penalty? (if refinance)
3. Source of down payment (purchase)
4. Credit score
5. Type of property (condo, town home, single family, etc.)
6. Cash out or no cash out (refinance)
7. Source of income (w-2, self-employed, etc.)
8. Address
9. Escrows (with or without in your payment)
10. Appraised value or purchase price
11. Primary residence or investment
12. Type of loan (adjustable, interest only, etc)
13. Term (30yr, 20yr, etc)
14. How long you’ve been on your job (very important for self-employed folks)
15. Any bankruptcy in last 7 years
16. Have you had your property listed for sale in the last 6 months
17. US citizen
If you are talking with a loan officer and after just a couple of questions, he or she blurts out a rate or rifles out Good Faith Estimates, hang up the phone. They don’t have enough information to give an accurate mortgage quote…so their intentions are now clear…they don’t intend to honor anything they say or write.
Run, don’t walk and don’t look back.
Better yet, learn how to locate, interview, and hire a local, ethical, competent mortgage provider whose Good Faith Estimates you can trust. As I’ve said before, the best mortgage only comes from the best mortgage broker…not a bank or a website. Find the best mortgage broker (what I call the “hidden elite”) and you’ll find the best mortgage.
It’s that simple…
How to find the best mortgage provider in your back yard is all outlined in our Mortgage Advantage Shopping System…end the rip-offs and all the wasted time.
Also go to our Real Mortgage Rates Daily Update! to hear the real mortage rate 60 second audio everyday. Know if a loan officer is trying to pull any Good Faith Estimate tricks.
Good Luck!
Author: Rob K. Blake
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I really dislike taking out loans, unless I really have to. This article really made me really glad that I have a mom in the real estate business and who is also a loan officer. She’s very helpful and I don’t have to go through all the trouble of finding an honest one. Another thing I find helpful is the new reality real estate show called Bought and Sold. It airs on Sundays at 10pm on HGTV. I work with them. Have any of you seen it yet?
So your saying the borrwer should pay points, underwrting fee’s, etc instead of the broker getting ysp for his commission?
To answer your question in a nutshell, “yes”.
yield spread premium is a predominantly hidden “extra” cost built into the rate payable by the buyer without his knowledge or full understanding. yield spread premium is charged in addition to the “origination or broker fee”, so it’s double-dipping in my option. And lastly, yield spread premium or “compensation by rate bump” is over the medium and long haul, a much more expensive way to cover one-time real costs like underwriting, title, and other actual closing costs.
Bouncing the rate according to the Harvard Prof. Jackson’s study showed the average total compensation on the 90% of all loans was just over 3%. Meaning on average, the customer is paying 1% fee they can see and understand (origination or mortgage broker fee) and 2% is coming in the form of a rate increase or yield spread premium .
How big of a rate increase creates the additional 2% compensation…about .5% rate increase is needed to create the yield spread premium income.
now the homeowner’s payment is based on 6.5% when he could have had 6.0%. That .5% rate bump will mean $10,000’s in higher payments over time.
yield spread premium is not the smartest way to pay one-time costs…unless you’re only going to be in the house less than 2 years…and if that’s the case…RENT!
Sometimes the best mortgage advice has nothing to do with the best mortgage!
I understand your thought process but ysp is based on what the broker feels his compensation should be, not what you think is fair so if the consumer has done his/her homework and is happy with the rate/costs what difference does it make what the broker is getting from the ysp. I’m not saying gouge the consumer because if if I’m charging points on a loan it’s most likley done at par. This is just taking a look from a differnt perspective and I would like to hear your opinion.
If a loan officer or mortgage broker thinks he’s worth 3%, then he should show it to a customer in a way they can understand it and quit hiding behind yield spread premium to do their dirty work.
I hear this argument from mortgage brokers every week for the last 3 years writing this website…they say,”the customer agreed…so he bought what I’m selling. It must be okay.”
My reply is always the same, “Taking advantage of folks who don’t understand yield spread premium or not showing it to them at all (which was the conclusion of the Harvard study too) is not the same as “buyer beware” commerce. The client can’t beware of something hidden from view or not understood as a cost.
As a matter of fact, banks, brokers and loan officers across this country are so used to lying about yield spread premium and SRP, they’ve come to believe that rate bump income is “owed” to them and mollify their own conscience with the “He agreed to the rate and costs so it’s okay” or “I couldn’t make a living any other way” excuses.
If the customer was shown the actual total compensation he was paying the bank or broker for their work on the loan…then and only then, would your argument hold water.
So either show the total compensation on the GFE under origination or broker fee …the whole 3%…then give the customer an option to pay some as a one-time fee and some as a rate increase. See how many clients you get to pick the rate bump. My guess is none.
But that’s not how loans are sold. Loan are sold disclosing in an understandable way, only a fraction of the bank/broker total compensation and then sticking it to borrower via a method he can’t see or understand: Yield Spread Premium (yield spread premium )
Not all mortgage brokers are bad. You can find the best mortgage broker (what I call the “hidden elite”) locally and you’ll find the best mortgage.
How to find the best mortgage provider in your back yard is all outlined in The Mortgage Advantage…end the rip-offs…check it out.
So if you’ve made zero ysp on all your loans for several years you charged points on all your loans. No one has ever asked your for a zero point or zero cost loan? Again, not trying to be confrontational just have really never heard any of these opinions from any other people in the industry.
KM,
I’ve made zero yield spread premium and charged 1% Origination fee on all my loans for over 4 years now. I pass through the wholesale lender rate straight from the ratesheet. If the client picks a rate that has a lender discount point, then he pays that tax deductible fee to the lender (not me).
So be clear with your terms. An origination fee is not “points”…it’s a fee expressed by a percentage, but not “points”.
A 1% Origination fees is a fee. A 1% payment to the lender for lowering the rate longer term is a “point”…short for “discount point” and is tax deductible.
And the answer then to your question of “no cost” loans being requested, never.
See if you work out the numbers, no-cost structures are really super high rate structures, and that’s only the best mortgage structure for folks with a short hold periods…less than 2 years…and folks with that short of a hold period should just rent!
Most of my people when asked are you planning to move in under 2 years, say “no”. So the no-cost, or what more accurately should be called the “super high rate so yield spread premium can cover the costs” structure is an obvious loser.
Thanks for the input…and you’re right. You won’t hear these ethical stances anywhere else but here.
There is too much profit in the extra income lying to the customer creates in the form of yield spread premium and SRP.
They are busy defending the practice as “wholesale to retail” typical mark up. The problem with that analogy and argument is arranging mortgages for folks is not a product…it’s a service. And nobody likes being lied to about a service fee. I don’t care if you are getting your dishwasher repaired or getting a mortgage, the fees need to be truthful, complete, understandable, and fixed so the customer gets the best mortgage service possible.
Do that and you’ll have a client base that adores you. Don’t do it, and once they find out…you’ll never see another dime from them!
Rob…Just to go back to your point that it always makes sense for the borrower to pay 1 point at par compared to no points and a 101.000 ysp to the broker. The average differnce is about .25% in rate so on a $200,000 loan the differnce of $33/month with a 6.5% 1pt rate and a 6.75% 0 point rate. The break even point if closing costs including title, attorney, etc are about $2500 is 6+ years. Do you never have clients who ever think of refinancing again. If they do the 1 point option cost them.
KM,
I see your point. But of course, most folks aren’t given a choice out there of 1 origination and a par rate vs. .25% bump an no origination fee. They are offered a “no-cost” loan, but don’t really know that’s going to entail a rate bump about .75%-1% above par so the bank/broker can make his typical 3% AND cover the hard costs.
If your question pertains only to what OUR clients could have…let say this:
Our clients have all received fixed rate loans going back to June of 2004 when the Fed made it clear rates would do nothing but increase for the foreseeable future. (If they insisted on an ARM or Option ARM, etc. I declined the deal. I work with some very bright folks.)
So we discouraged this new trend of “serial refinancing” that seems to have gripped our industry and does nothing for the client. Giving folks a bogus rationale for refinancing year after year when it’s clear next year’s rate will be higher than today’s rate, can’t be considered the best mortgage advice for the consumer.
So with that more fiscally responsible foundation laid, it’s a foregone conclusion to fix in the best mortgage rate by paying the orgination fee.
That’s been our advice for 3 years now…and folks call to thank us now that our advice prove to be dead on accurate.
Now that values are dropping all over the country, refinancing will not be an option. Given that reality, would the client like to be in the best mortgage rate possible since he’ll be stuck there for the foreseeable future?
I think so.