Mortgage broker

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A mortgage broker acts as an intermediary who sources mortgage loans on behalf of individuals or businesses.

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Traditionally, banks and other lending institutions have distributed their own products. However as markets for mortgages have become more competitive, the role of the mortgage broker has become more popular. Today in most developed mortgage markets (especially the U.S., UK, Australia, Spain and Canada) mortgage brokers are the largest distributors of mortgage products for lenders.

However, given the critical nature of the mortgage broker's role, a great number of consumers are now seeking out the services of Certified Mortgage Planners, industry experts that work in concert with Certified Financial Planners to align consumers' home finance position with their larger financial portfolio(s).^{[citation needed]}

The majority of mortgage brokers are regulated to ensure a level of protection for the consumer. The extent of the regulation depends on the jurisdiction.

1 Why use a mortgage broker?
2 Tasks of mortgage broker
3 Mortgage brokerage in the USA
4 Mortgage brokerage in Canada
5 External links

[edit] Why use a mortgage broker?

In competitive mortgage markets many lenders use an array of rate offers and other incentives to attract customers. To many consumers, due to their infrequent purchases of mortgage products, the mortgage market may appear confusing and somewhat daunting. A mortgage broker can guide them through the process of selecting a suitable mortgage and offer mortgage and property related financial advice. Strictly speaking, a broker is someone who does NOT close in his name, and is required to disclose his yield spread premium. A banker (correspondent) closes the loan in his own name, and is not required to report his YSP. Correspondents typically sell the loan quickly to a larger lender.

For borrowers with poor credit records, or other unusual circumstances, finding a lender may be difficult. A mortgage broker, having specialized knowledge and multiple lending sources, will normally be a valuable resource in obtaining financing.

[edit] Tasks of mortgage broker

The nature and scope of a mortgage broker's activities varies with jurisdiction. For example in the UK anyone offering mortgage brokerage is offering a regulated financial activity; the broker is responsible for ensuring the advice is appropriate for the borrowers circumstances and is held financially liable if the advice is later shown to be defective. In other jurisdictions the transaction undertaken by the broker may be limited to pointing the borrower in the direction of an appropriate lender and no advice given.

Therefore the work undertaken by the broker will depend on the depth of their service and liabilities. Typically the following tasks are undertaken:

Marketing to attract clients
Assessment of the borrowers circumstances. This may include assessment of credit history (normally obtained via a credit report) and affordability (verified by income documentation).
Assessing the market to find a mortgage product that fits the clients needs.
Applying for a lenders agreement in principle (pre-approval)
Gathering all needed documents (paystubs/payslips, bank statements, etc.),
Completing a lender application form.
Explaining the legal disclosures.
Submitting all material to the lender.

[edit] Mortgage brokerage in the USA

Over 80% of home loans issued in the U.S. today are negotiated by brokers.^{[citation needed]} The banks have used brokers to effectively outsource the job of finding and qualifying borrowers, and also to outsource some of the liabilities for fraud and foreclosure onto the originators through legal agreements.

During the process of loan origination, the broker gathers and processes paperwork associated with mortgaging real estate.

As of 2005, there are approximately 50,000 ^[1] active mortgage brokerage operations across the USA. Today, mortgage brokers in addition to correspondents originate 57% ^[2] of American mortgages. The remaining 43% ^[3] is retail done through the lenders retail channel, which means the lender does not go through a broker.

[edit] Difference between a mortgage broker and a loan officer

A loan officer acts as the conduit between buyer and lender. Most states require the mortgage broker to be licensed. States regulate lending practice and licensing, but the rules vary. Most have a license for those who wish to be a "Broker Associate", a "Brokerage Business", and a "Direct Lender".

A mortgage broker is normally registered with the state, and personally liable (punishable by revocation or prison) for fraud for the life of a loan. A loan officer is typically not liable for their actions, and instead works under the umbrella license of their current institution. Typically, they have less experience in the field.

Also, loan officer usually connotes someone who works for a lender, and has involvement in the internal processes of a lender. A broker exclusively uses the money of others to fund their loans.

[edit] Industry competitiveness

A large segment of the mortgage finance industry is commission based. Potential clients can compare a lender's loan terms to those of others through advertisements or internet quotes.

In the 1970s, mortgage brokers did not have access to wholesale markets, unlike traditional bankers. Today, mortgage brokers are more competitive with their access to wholesale capital markets and pricing discounts. A mortgage broker has lower overhead costs compared to large and expensive banking operations because of their small structure.^{[citation needed]} They can lower rates instantly to compete for clients. On the other hand, larger companies are less competitive since they provide their sales representatives their fixed rate sheets. The loan officer often cannot reduce their companies profit margin and may be higher or lower than the marketplace, depending on the decision of managers. Thus, mortgage brokers have gained between 60-70% of the marketplace.

Mortgage brokers can obtain loan approvals from the largest secondary wholesale market lenders in the country. For example, Fannie Mae may issue a loan approval to a client through its mortgage broker, which can then be assigned to any of a number of mortgage bankers on the approved list. The broker will often compare rates for that day. The broker will then assign the loan to a designated licensed lender based on their pricing and closing speed. The lender may close the loan and service the loan. They may either fund it permanently or temporarily with a warehouse line of credit prior to selling it into a larger lending pool.

The difference between the "Broker" and "Banker" is the banker's ability to use a short term credit line (known as a warehouse line) to fund the loan until they can sell the loan to the secondary market. Then, they repay their warehouse lender and obtain a profit on the sale of the loan. The borrower will often get a letter notifying them their lender has sold or transferred the loan.

Brokers must also disclose Yield spread premium while Bankers do not. This has created an ambiguous and difficult identification of the true cost to obtain a mortgage. The stricter Broker disclosure requirements, especially the Good Faith Estimate, can often create the illusion that they are charging more to obtain the exact same mortgage when compared to a Banker, when in fact they may cost the same or the Brokers offer may even be less costly. This topic has been hotly debated on Capitol Hill and state level judiciary committees.

Also See: Predatory lending & Mortgage fraud

Sometimes they will sell the loan, but continue to service the loan. Other times, the lender will maintain ownership and sell the rights to service the loan to an outside mortgage service bureau.

[edit] Secondary market influence

Even large companies with a lending license sell, or broker, the mortgage loan transactions they originate and close. A smaller percentage of bankers service and keep their loans than those in past decades. Banks act as a broker due to the increasing size of the loans because few can use depositor's money on mortgage loans. A depositor may request their money back and the lender would need large reserves to refund that money on request. Mortgage bankers do not take deposits and do not find it practical to make loans without a wholesaler in place to purchase them. The required cash of a mortgage banker is only $50,000 in New York. The remainder may be in the form of property assets (an additional $200,000), an additional credit line from another source (an additional $1,000,000). That amount is sufficient to make only two median price home loans. Therefore, mortgage lending is dependent on the secondary market, which includes securitization on Wall Street and other large funds.

The top wholesale institutions are Federal National Mortgage Association, and the Federal Home Loan Mortgage Corporation, commonly referred to as Fannie Mae and Freddie Mac, respectively. Loans must comply with their jointly derived standard application form guidelines so they may become eligible for sale to larger loan servicers or investors. These larger investors could then sell them to Fannie Mae or Freddie Mac to replenish warehouse funds. The goal is to package loan portfolios in conformance with the secondary market to maintain the ability to sell loans for capital. If interest rates drop and the portfolio has a higher average interest rate, the banker can sell the loans at a larger profit based on the difference in the current market rate. Some large lenders will hold their loans until such a gain is possible.

The selling of mortgage loans in the wholesale or secondary market is more common. They provide permanent capital to the borrowers. A "direct lender" may lend directly to a borrower, but can have the loan pre-sold prior to the closing.

Few lenders are comprehensive. That is, few close, keep, and service the mortgage loan. The term is known as portfolio lending, indicating that a loan has been made from funds on deposit or a trust. That type of direct lending is uncommon, and has been declining in usage.

[edit] Improved consumer laws

The laws have improved considerably in favor of consumers. A mortgage broker must comply to standards set by law in order to charge a fee to a borrower. The fees must meet an additional threshold, that the combined rate and costs may not exceed a lower percentage, without being deemed a "High Cost Mortgage". An excess would trigger additional disclosures and warnings of risk to a borrower. Further, the mortgage broker would have to be more compliant with regulators. Costs are likely lower due to this regulation.

Mortgage bankers and banks are not subject to this cost reduction act. Because the selling of loans generates most lender fees, servicing the total in most cases exceeds the high cost act. Whereas mortgage brokers now must reduce their fees, a licenced lender is unaffected by the second portion of fee generation. This is due to the delay of selling the servicing until after closing. Therefore, it is considered a secondary market transaction and not subject to the same regulation.

[edit] Predatory lending and Mortgage servicing fraud

Predatory lending runs unregulated in the mortgage services industry. Consumers are often victims of predatory lending according to CNN. The main concern is that mortgage brokers and lenders whilst operating legally, are dishonestly finding loopholes in the law to obtain additional profit. The main culprit is a little known fee called Yield spread premium, which is a cash rebate wholesale lenders pay to brokers for charging a borrower a higher interest rate than they qualify for.

Some signs of predatory lending include:

Falsifying income/asset and other documentation.
Not disclosing Yield spread premium or other hidden fees BEFORE the settlement/closing.
Failing to provide all RESPA documentation, i.e. Good Faith Estimate, Special Information Booklet, Truth in Lending, etc so the borrower may clearly understand the mortgage terms and lender policies.
Convincing borrowers to refinance a loan without any true benefit.
Influencing a higher Loan Amount and inflated appraisals (usually in tandem with an appraiser).
Unjustly capitalizing on a borrowers relative ignorance about mortgage acquisition.

Another unethical practice involves inserting hidden clauses in contracts in which a borrower will unknowingly promise to pay the broker or lender to find him or her a mortgage whether or not the mortgage is closed. Though regarded as unethical by the National Association of Mortgage Brokers, this practice is perfectly legal. Often a dishonest lender will convince the consumer that he or she is signing an application and nothing else. Often the consumer will not hear again from the lender until after the time expires and then they are forced to pay all costs. Potential borrowers may even be sued without having legal defense.

[edit] Mortgage brokerage in Canada

The laws governing mortgage brokerage in Canada are determined by provincial governments. Throughout Canada, high ratio loans are insured by either the Canada Mortgage and Housing Corporation or Genworth Financial.

Quebec is unique in all of North America as its laws are based on the Civil Code. The law permits mortgage brokerage to be performed by those in the finance industry, as well as those in the real estate industry.

[edit] External links

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