How the Real World Works, part 1

Folks,

The music industry provides for me a host of object lessons on how the world
works, which helps
me think thru problems I have by reflecting how the music industry handles such
a problem. The
more ideas we have on how things work, the more resources we have to
creatively address
problems. Here is something I wrote up after talking to mortgage bankers and
mortgage brokers.
I invite such people on the list to correct any errors, and further invite
everyone to lay out "how the
real world works" in their fields as well.. perhaps you have inside info on say
the auto industry, or
rock concerts, or academia... feel free to write something up for the benefit of
us all...

John


Mortgage Bankers vs. Mortgage Brokers

The government recently concluded hearings into the mortgage industry, and it
might be helpful to outline the issues being discussed.

First, there is a difference you must know. A mortgage banker is in the
business of lending money to homeowners and buyers. Most mortgage bankers have
"wholesale" and "retail" divisions. Mortgage brokers, on the other hand, retail
mortgage "products" they get wholesale from mortgage bankers. Both are
required by law to present the potential borrower with a "good faith estimate"
of
the loan and costs. A common misperception is a mortgage broker can get you a
better deal, since they are working off a wholesale basis. As you will see,
this is simply not the case, and where the abuses arise.

Washington Mutual is one of the largest retail mortgage bankers, and it is
also one of the largest wholesale (supporting brokers) mortgage bankers. They do
both. You cannot compare an offer from a Washington Mutual mortgage banker to
an offer from a mortgage broker, because Washington Mutual, wholesale
division will not allow a mortgage broker to use a wholesale offer to undercut a
retail offer. Most, if not all, banks have this policy and the means to enforce
it.

So if a broker says he can get you a better deal, because he can buy
wholesale, he is being disingenuous. He can get you a different deal, but never
the
same deal. And if you approach a broker first, he will steer you into the deal
that yields him the most money.

You can go to a broker first, and get a "good faith estimate" which will list
all of the fees the broker believes are necessary. The good faith estimate is
not required to list the rebates the banks pay the brokers for originating
loans. Say you want your broker to place your loan with bank A, and get you the
best deal. Bank A may have the best rates for you, but pays lower kickbacks
to the broker. Bank B may pay higher kickbacks, but charge you more interest.
The broker may be inclined to say Bank A is "uncompetitive" and Bank B is
better of you. Uncompetitive in this sense is from the point of view of the
broker.

Mortgage bankers advertise heavily, and a consumer may get a "good faith
estimate" from a banker first, and then shop around to compare the banker's
"good
faith estimate" to the broker's "good faith estimate". Watch for this: the
broker will never offer a lower cost on the same deal, and not because it cannot
be done so much as it is just not as profitable. The brokers, seeing the
bank's original "good faith estimate" they must "beat," will offer something
different, which appears initially to the consumer as better.

At this point, the consumer again fills out paperwork, and more, and begins
to tire of the process. Also there is often an urgency to the process having
to do with the real estate being supported by the transaction.

This is where it gets interesting, where the difference matters. Banks set
standards for the mortgage loans they will offer. Brokers evolved to help get
mortgages for people who do not fit the banks criteria. Such clients are
higher risk, and like any business, the higher the risk, the more the costs.
Creditworthiness problems, legal complications of any sort, verification issues
are
all handled expertly by brokers, for a fee. In fact, the more problems you
have, the happier a broker is, since it all adds up to the broker's benefit.

Mortgage bankers on the other hand, are paid strictly on the loan amount,
regardless of how easy or complex the mortgage turns out to be. (Full
disclosure: bank mortgage loan reps can win sales contests in which they are
awarded
such items as a TV or a shiney new bicycle; in no case do they get awards on any
particular loan). In fact, you may notice how a broker asks for as much
information about you as possible (the more problems to spot), whereas bankers
ask
for as little information as possible.

Everyone has problems, so both bankers and brokers have seen it all. Your
banker is expert in minimizing the problems, and making them go away as soon as
possible, especially since to a mortgage banker the problem is just another
headache, not more money. Your broker can make problems go away as well, but
makes extra money for the service.

Government hearings have been held on the brokers' practices. Brokers are
being unfairly challenged inasmuch as they do provide an important value. For
people who get turned down by bankers, brokers provide an important service,
but of course for a fee. Those fees reflect the complexity of the problem.
This is the heart of the complaints that resulted in goverment hearings.

But if you are not turned down by a banker, and you are not going get the
same deal for less from a broker, then you have no reason to work with a broker.
What you get from a broker in most instances is a different deal fraught with
fee opportunities that don't show up until the last minute, when everyone is
in a rush. You ought not complain if you take your business to a broker who
needs to charge extra for his services. If you asked Johnny Cochran to defend
you over a parking ticket, you can't be surprised if his fee is five thousand
dollars.

Another important point is the mortgage you get ought to be in relation to your
entire lifestyle,
and decided upon in concert with your CPA who can tell you how to best structure
your mortgage
to maximize the benefits to you as a self-employed person.

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