This story from MoneySense — “5 things your mortgage broker isn’t telling you” — caused quite a fracas in our industry this week.
Brokers understandably found parts of it misleading and were angered by the headline, which seemingly paints all of us with the same brush.
Despite its inclusion of my comments, I didn’t get an advanced copy of the story. If I had, several problematic generalizations would have stood out. Among them…
Re: “Your Broker” has Commission Conflicts
· Fact: Compensation influences many a broker. There is no denying that. Things like tiered pricing, volume bonus and “points programs” routinely lead to conflicts. (For that matter, compensation conflicts also cause many bankers to quote above-market rates.) Despite that, some brokers use a revenue-neutral methodology when recommending mortgages. In other words, they pick the best lender and product for the client and then look at the compensation. Other things equal, a borrower is best served by this type of broker, but it’s hard to know when you’ve truly found one.
· Perspective: Most brokers’ overriding desire is to close the deal, get paid and get referrals. That requires a satisfied customer. This incentive largely counterbalances potential compensation conflicts.
Re: “Your Broker” doesn’t Negotiate as Claimed
· Fact: Brokers never negotiate with 40+ lenders, not for one client. Instead, they size up the borrower’s situation and recommend a lender from their approved lender list. That “list” generally has far less than 40 lenders. (We’re talking only about prime mortgages here. The non-prime market is a different story.)
· Perspective: If you are a qualified borrower and you go to a bank, you get recommendations from one lender — that lender. By contrast, a broker typically recommends products from up to a dozen sources, with 90% of their business going to roughly three lenders (according to Maritz Research). If the broker does high volume and maintains status with multiple providers, he/she may recommend from a list of 15–20+ lenders. That’s why a broker from a high-producing brokerage can sometimes get you a better deal.
Re: “Your Broker” is Inexperienced
· Fact: Other things equal, consumers are better served by experienced brokers. Inexperience can lead to less suitable lender and product recommendations, more paperwork, delayed closings, unnecessary fees for the client and so on.
· Perspective: The majority of full-time brokers have been doing mortgages for years. But there are also talented rookie brokers who work under experienced mentors. The “fact” above starts with “other things equal” for a reason, because new brokers sometimes discount more aggressively. That can occasionally offset some of the experience factor. Just remember that interest rates are but one element of total borrowing cost.
Re: “Your Broker” isn’t Highlighting the Fine Print
· Fact: The article misleads here, to say the least. Most brokers go out of their way to differentiate themselves from financial institutions (FIs). One way they do that is by offering expertise on the “fine print.” Brokers compare contractual terms from multiple lenders and typically must disclose product risks, by law. A 10-basis-point rate savings is useless if you pay more on the back end with inferior refinance, blending, porting, conversion and/or penalty policies. Mortgage professionals know that, and most want you to know that.
· Perspective: Certain bad-apple brokers may skim over a mortgage’s features and just sell the mortgage with the best rate, most broker compensation, or best lender perks (for the broker). But this is not the rule.
Re: “Your Broker” has No Options for Unqualified Clients
· Fact: Experienced brokers use numerous strategies to help clients who may not qualify (e.g., tactics for those with hard-to-prove income, credit repair, credit score optimization, down payment and co-signor strategies, second mortgage strategies, etc.).
· Perspective: Non-prime (a.k.a. “B”) mortgage lending is a specialty. “A” brokers sometimes hold themselves out as “B” lending experts when they’re not. Unless they’ve closed tens of millions in non-prime business and/or the majority of their business is non-prime, they likely don’t have the expertise of a true alternative lending specialist. A brokerage head I respect once said that only 5% of brokers are truly competent in “B” lending. That’s probably not far off. Nevertheless, brokers are generally far more versed than the average banker in counselling hard-to-place clients.
As this story demonstrates, sweeping statements can seriously detract from an article’s message. The worthwhile consumer cautions here seem to have been lost in the way they were presented.
MoneySense’s next article (“5 Things Your Banker Isn’t Telling You”) should be even more thought-provoking. That one’s on the way — right, guys?
Rob McLister, CMT