If there’s one thing Americans generally hate, it’s haggling with a broker, dealer or salesperson over the price of a commodity. It doesn’t matter whether it’s cars, houses, or even bananas from the local fruit stand, most people don’t want to negotiate the price of goods.
In the residential housing market, the concept of a buyer’s broker has become more mainstream as home buyers realized that they, too, were entitled to have someone on their side to help with the negotiations. Buyer’s brokers owe their fiduciary duty and loyalty to the buyer, not the seller, as in conventional agency.
But when it comes to getting a mortgage, a lot of home buyers feel they are in the dark. It’s tough enough to figure out what the going rate on a mortgage is, or should be. But borrowers must also wade through the morass of closing costs and fees, and figure out which ones are junk and which ones are legitimate and how all of them will affect the actual price of the loan.
When they go to their local mortgage broker, most borrowers believe that the broker works for them, seeking the best loan on the market with the cheapest possible terms. This may not always be the case, asserts George Fox, the founder and executive director of the National Association of Mortgage Planners, a three-year old non-profit group that certifies “mortgage planners.”
“We call ourselves mortgage planners because we help the buyers plan and manage the mortgage process,” said Fox. “We sit down with them and look at what they want to do. We ask them how long they’re going to be there, help them understand what types of mortgages exist, and we explain that the borrower has the right to know what fees are being paid to the mortgage broker.”
Fox believes that mortgage brokers are paid by the borrower and should be acting as the borrower’s agent in finding the best deal. All NAMP members work under a four-page, written representation agreement with their clients that spells out their responsibilities.
According to the agreement, which borrowers may want to have scrutinized by their real estate attorneys before they sign it, the mortgage planner must “consult in the Borrower’s best interest, advise Borrower as to the benefits and risks of loan programs, use best efforts to secure terms and conditions suitable to Borrower, maintain timely communication with all parties, and provide Borrower with copies of all correspondence and documents in a timely manner.”
But isn’t this what all mortgage brokers are supposed to do?
Yes, says Fox, but many don’t because in addition to getting paid by the borrower, many mortgage brokers receive extra fees, called “premiums” from the wholesale lender to make the loan. In essence, they’re taking money from both sides of the table. NAMP members take only 1.5 points (a point is one percent of the loan amount) and will return any premiums they receive to the borrower to defray costs.
“How can you work in the borrower’s best interest if you’re taking money from someone on the other side of the transaction?” Fox asks.
“This perceived conflict of interest comes up a lot in conversation,” admits Robert M. O’Toole, senior staff vice president of the Mortgage Bankers Association of America. “I think you have to try to figure out what the job of the broker is and what the conversation is and what is the understanding between the borrower and the mortgage broker. If the broker says “I’m going to find you the best deal,” and he does, then he’s fulfilled his responsibility. If, because he found the best deal, he gets two additional points, it shouldn’t matter (to the borrower).”
O’Toole says whatever premiums are given to the mortgage broker are done outside the primary transaction.
“The broker has delivered to the consumer what he said he would. And, after the loan is made, the (wholesale lender) says, for bringing this deal to us or recommending this borrower, we’re able to sell the loan and we’re going to share with you. It does happen close to the closing, but isn’t part of the closing transaction,” he says.
O’Toole says the borrower is responsible for asking about all the fees being paid to the mortgage broker. Fox says his members simply disclose everything upfront. “Many times, you’ll ask and the broker won’t tell you.”
“Why should they tell,” counters O’Toole. “Why should anyone know how much money you make?”
Some states, like California, require mortgage brokers to tell how much they’re earning on a particular deal. Other states require brokers to answer if you ask them specifically. Other states do not even address the disclosure issue.
Is it in your best interest to find out how much money your mortgage broker is going to earn from the transaction? That depends on who you ask. Fox says yes, you should know who has their hands in your broker’s pocket.
“For someone to say we need additional disclosure, you only have to look at the papers in the transaction. We have so much disclosure that it’s meaningless. Not many people read all those documents,” O’Toole says.
For more information about mortgage planners, call George Fox toll-free at (800) 724-2004.