Are Mortgage Brokers Really THAT Bad?

There is no question that one of the elements in our financial meltdown was the securitization by Wall Street of subprime mortgages and the derivates that flowed from them. It is also true that unscrupulous mortgage brokers originated many of these subprime mortgages. But it is not true that mortgage brokers are responsible for global warming, swine flu, and all the other ills that you can point to in our society.

The truth is that for many borrowers, using a mortgage broker is a smart move that can save them thousands of dollars. So what are those benefits and what should a borrower consider when thinking about where to get a mortgage ?

You should understand, first, that virtually all loans today are being sold to Fannie Mae, Freddie Mac, or FHA. Each of these entities buys loans from lenders who fund the loans; they do not do business directly with the public. So while a company may say, “We are a direct lender,” in fact they will likely own your loan for about a week before selling it.

These banks have three distribution channels through which to operate. They can have their own loan origination departments with loan officers who deal with the public. They can deal with smaller banks or mortgage banking firms who fund loans and sell them to the big banks who, in turn, re-sell them to the sources identified above. These are called correspondents. Mortgage brokers are another channel; they are in effect independent mortgage marketers who do not fund the loans themselves, but rather provide sales and support services to the borrowers.

Whatever your choice is as a consumer, you can be sure that your loan will actually be underwritten by the funder of the loan in accordance with guidelines given to them by Fannie Mae, Freddie Mac, or FHA.

The choice of whom to deal with depends upon a number of factors, but among the most important are the following:

• Independence – The job of a loan officer working for a bank is to maximize the bank’s profit. He works for the bank and represents their interests, not yours. While mortgage brokers are not required in all states – they are in some – to act as the legal agent of the borrower, you can certainly enter into an agreement with a mortgage broker to look out for your interests.


• Multiple Sources – With so few real sources (Fannie Mae, Freddie Mac, or FHA), pricing is quite competitive. But some channels are more efficient than others and have better pricing. A mortgage broker deals with numerous sources, typically a half dozen or more, and thus he can “shop” your loan. Because he is much more experienced than you are at this, he likely will do a much better job than you can, doing what I will call “dialing for dollars.”


• Compensation – A lender that funds your loan is not required to disclose his compensation, the profit spread on your transaction. He may even change the compensation between when you get your initial quote and when you lock in. A mortgage broker, on the other hand, is required by law to disclose his compensation. Indeed, I recommend that you have a contract with a lender just as you would have a contract with a real estate broker. Your agreement is that he will provide his service for an agreed upon fee, say one point. In general, mortgage brokers are more efficient and less costly than a bank’s origination department. In fact, mortgage brokers who are members of the Upfront Mortgage Brokers Association will agree upfront on compensation and guarantee that they won’t raise it later. (Full disclosure: I was a founding member of the UMBA and am on its Board of Directors.)


• Experience – Many lenders, notably the banks, treat the job of loan officer as an entry-level position. Indeed, if you call a bank or other lender’s 800 number, it is likely that you will be talking with someone who knows only what he has learned in a few training sessions. It is also likely that this person is not highly compensated, because he isn’t very valuable. Compensation may be under $10 per hour.