5 Things Your Mortgage Broker Isn't Telling You (MoneySense) - Paula's Take
January 8 2016 Posted by Siemens Group
In this recent MoneySense article the author speaks of some provocative topics. The mortgage industry has changed over the past 10+ years, and the mortgage broker has not been immune to some of these negative changes. Below are my comments addressing the article.
1) Commissions Are Your Friend
Commissions paid to brokers have changed over the past several years. Similar to many industries there has been a compression to everyone’s bottom line. Some brokers would look at the commission as perhaps the defining choice between two products IF the two products were essentially the same; however, under the current lending guidelines more often it is lender policy that dictates a choice of product for a client. Every aspect of lending has changed over the last 3 years: Rental properties, self-employed applications, commissioned income applications, Home Equity Lines of Credit, applications in a corporations name, and applications for significant renovations or building, to name a few, are considered based on each lenders’ policies, and those policies vary significantly. It is only through a detailed exploration of which lenders are favorably considering all aspects of one’s application that a broker can determine which lenders are the best candidates for their client. After determining this, a broker must consider all of the small print which is typically not advertised by the lender but discovered through experience (no lender advertises what they don’t want the consumer to know, such as that their IRD calculation is higher than other lenders or that their port policy is subject to change without notice).
2) Um, I Don't Actually Negotiate With 40 Lenders
To address the number of lenders brokers work with: Yes, there are several lenders to whom a broker can submit your file to but in so many cases there are regional limitations to your application, such as credit unions, or perhaps many lenders policies are not really much to write home about. A broker would likely quickly dismiss a bulk of the possible lenders based on their “vanilla” mortgage products. Some lenders do not work with brokers under a compensation model as the article highlights; however, most brokers will learn of their products as a practice and will offer work with the non-broker lenders on the clients’ behalf, in exchange for a charging a fee for service.
In order to be competitive lenders have looked for ways to save money. Lenders now look at a broker’s submission-to-approval ratio to ensure that their underwriters’ time is not being spent on files that do not fit their guidelines. They will also have an approval-to-funding ratio that the broker must maintain in order to continue to be an approved broker to submit files to that lender. This is why it is important for the broker to continuously learn about the small print and quirky lending policies so that when they have found a good lending choice for their client they will be successful with their submission. It is equally important that their client has agreed to the terms of the lender’s product before submitting so the client isn’t surprised by the terms of the commitment, resulting in fewer pulled files for the broker/lender.
3) In the Brokerage Business, Experience Matters
Experience is important when working with a broker. However, many junior brokers work with a team lead (mentor) who has many years of experience, so the fact that the broker is rather new to the field does not necessarily mean that they lack in knowledge.
4) The Fine Print Matters
The most important thing that every borrower must know is this: Do not look at the rate until you have chosen the correct product for you. Over the years I have had many clients tell me that their colleague just got x% from their bank. Water cooler discussions about mortgages are often dangerous to have because they are often full of misinformation, such as quoting a variable rate 5 yr rate as if it is a fixed rate, etc. I really feel it is important for borrowers to communicate with their broker any offers they feel are superior to the offer presented. A good broker will do the research and know the small print of any offer and will be able to communicate whether the offer is accurate, or a good product choice for their application.
5) I'm Not a Miracle Worker
Brokers are not miracle workers; however, the fact that they have the entire industry’s policies to work with gives any borrower with blemishes a fighting chance. We have had clients who have been declined by their own bank, and we have had the decision overturned through extra documentation or good old fashion underwriting. A broker is an independent party and will work to ensure their client gets the best financing available to them.
Yes, brokers get paid a commission for placing the mortgage; they are “self-employed” and must get paid to stay in business. It is important to have a strong broker community, as the consumer is the ultimate winner. The broker advocates on the client’s behalf and creates competition in the mortgage industry. Without brokers there is less competition which means higher pricing; just look at how the consolidation in the airline industry has impacted prices for airline tickets.