The lending industry is built on what is called “rebates” or “YSP” (Yield Spread Premium)
A few years ago, the banking industry realized that loan brokers were able to aggressively compete with them and the % of loans orignated was declining through banks. Good for consumer. NOT good for big business.
In an effort to portray mortgage brokers in a bad light, a regulation was created which states that direct lenders do not have to disclose 1 important piece of information to you, but brokers do. (explained below)
It created an unlevel playing field and created the illusion that you would always get the best loan by going to a direct lender, and to this day still has a large % of people fooled.
Because the industry is loosely regulated, a large number of unethical,dishonest,immoral,rogues stepped in and preyed on vast numbers of people by misleading them and taking advantage by overcharging borrower’s to make large commissions.(Rebates or YSP) The bad eggs overshadowed the honest loan officers. Bad for consumer. Good for banks.
It totally distorted what should have been a blessing for the consumer.
This confirmed what the banking industry wanted to show.
Here is how it works:
If you deal with a “direct lender” (one who loans their own money from deposits like banks OR large lenders) they do not AND will not disclose to you that you are paying a higher rate than you need to.
They may say things like we don’t have any closing costs or origination fees, but in fact it’s just built into their pricing. They have to pay employees and commissions too.
When you deal with a bank, they only offer you their limited products and rates do vary.
When you deal with a broker, there are true wholesale PAR rates. If a broker gave you the PAR rate, they would not receive a single penny from the lender, that is why brokers charge a fee. The problem is that many charge ridiculous, outrageous,predatory fees, esp to 1st time buyers and those with credit issues.
IF the broker receives a rebate or YSP, it MUST be disclosed to the borrower, but usually ONLY shows up on 1 line of the closing statement that the borrower ONLY sees at doc signing, and is so overwhelmed with pages at that time, they wouldn’t understand it if it jumped out and bit them.
The ONLY way that rebate is received is because the borrower was OVERCHARGED in rate, so the lender will receive a higher return for the life of that loan.
The broker is rewarded with a commission from the lender for screwing the borrower. Many charge an up front fee AND Overcharge you in rate. They only tell you about the up front fee.
Anybody that claims “NO COST LOANS” are just overcharging you to the point that the commission on the back end covers all the fees and their profit.
It will cost the borrower in higher rates and higher monthly payment for the life of the loan, so the “NO COST LOAN” ends up costing a small fortune in the long run, In our area, possibly tens of thousands of dollars over the life of the loan, AND there still may be fees!
If you plan on keeping a loan for LESS than 2 years, a no cost loan might make sense.
If you plan on keeping a loan longer than 5 years, it is in your best interest to pay a FAIR fee to get a loan, AND buy the rate down to secure a lower rate and payment for the life of the loan, if it makes sense.
The ONLY fee that a broker is in direct control of is their fees. They CANNOT legally profit in any way from the fees for lender underwriting, title, escrow & appraisal UNLESS they have ownership in them.
There is absolutely NO generalization that will ensure that you received the best loan possible on any given day OR that going to a bank/direct lender will get you a lower rate.
The best thing that you can do is find someone that you trust, agree on their fee, and let them work for you.
There are honest, ethical people in the brokerage biz, and you may benefit by using them.
It’s confusing, even to consumers who have originated multiple mortgages.
Please post any questions that you have or I can contact you privately at your request.
