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Mortgage Loans - secret methods that drive up the cost of your
home purchase or refinance.
There are an enormous amount of fees associated with doing a
loan. Most of them are fees that the loan officer and mortgage
company cannot control, and are a part of every loan. In the case
of the rest of the loan fees, the loan officer is in complete
control of how much they will make off of a loan. Unfortunately,
the typical consumer is unaware of these costs because they are
hidden (legally so) in the loan paperwork and closing documents.
However, laws are in the process of being drafted to correct this
outright thievery.
In order to understand how a mortgage company makes money on a
loan, you first need to understand which of these costs are
profitable for the mortgage company. You can read our article on
the real
costs of doing a loan.
Fees Which Profit the Mortgage Company
The following fees determine the profit on the loan. They are
completely under the control of the loan officer or mortgage
broker. There is no standard for these fees; the unscrupulous loan
officer will try and make as much as possible from you with these
fees. After being in the loan business, I watched loan officers
gouging their clients every day. It is a rampant, common
occurrence. Most loan officers are not paid a salary, they are
paid through commissions from every loan they originate that
closes. This puts the pressure on them to make as much money as
possible, wherever possible. Loan officers typically split the
profits (usually 50/50) for each loan with the company for which
they work. Therefore, every dollar they can squeeze out of you is
50 cents into their pocket. To originate a loan, the loan officer
merely gets a client to fill out a loan application.
- Origination or Application Fees: These are fees for
processing the mortgage application and may be a flat fee or a
percentage of the mortgage. They usually are equal to one
point. In fact, they are just a point called by a fancy name
so the loan officer can charge more for the loan.
- Points: A point is equal to 1% of the amount borrowed. For
example, one point on a loan amount of $50,000.00 is $500.00
dollars. Points can be payable when the loan is approved
(before closing) or at closing. For FHA and VA mortgages, the
seller-not the buyer-must pay the points. Even if you are not
using an FHA or VA mortgage, you may want to negotiate points
in the purchase offer. Some lenders will let you finance
points, adding this cost to the mortgage, which will increase
your interest costs. If you pay the points up front, they are
deductible from your income taxes in the year they are paid.
Different deductibility rules apply to second homes.
- Application Fees: Application fees are non-refundable and
100% pure profit for the mortgage broker. Walk out if they ask
for an application fee up front. The only exception to this
rule is if you have tough credit. In this case, the loan
officer will have to do a lot of work before he can tell if
your loan will go through. Time is money and he will want to
be paid for this effort. If your loan gets denied without an
application fee up front, the loan officer has put in a lot of
hours for nothing.
- Points "On the Back": These are fees and
commissions earned by the mortgage broker by selling you a
loan whose interest rate is above the going rate. More about
this later in this chapter.
The "normal fees" in the industry are an origination
fee (1 "point") plus one additional point. Some brokers
have a limit on how much a loan officer can charge in fees-the
loan application fee, the origination fee, and the points, but not
all. However, there is no absolute hard and fast rules.
Getting Points on the Back
Also known as "yield-spread fees", points on the back
are one of the ways a loan officer makes more funds available to
the total loan "kitty." It is essentially a
"kick-back" from the mortgage bank the loan officer is
buying the loan from, earned by selling a customer a loan at an
interest rate that is above the going rate.
Each day, loan officers receive rates from banks for all of
their loan programs. Listed for each program is the "par
interest rate." The par interest rate is the interest rate at
which the broker does not have to pay a fee to "buy" the
loan and then sell it to you, nor does he receive a commission for
selling you the loan at this rate. You might say that the par rate
is "loan equilibrium." Table 3 shows an example of the
types of rates a bank might publish to their subscribing mortgage
companies every day.
EXAMPLE RATE SHEET ON A 30-YEAR LOAN
| |
6.5 |
6.75 |
7.0 |
7.25 |
7.5 |
| 15-day Lock |
.50 |
.25 |
0.00 |
(.5) |
(1.5) |
| 30-day Lock |
.75 |
.50 |
.25 |
0.00 |
(.25) |
| 45-day Lock |
1.50 |
.75 |
.50 |
.25 |
0.00 |
| 60-day Lock |
2.50 |
1.00 |
.75 |
.50 |
.25 |
In the above example, the "par" value for a 15-day
lock is 7.0%. The numbers in parentheses are the points returned
to the loan proceeds as additional funds to offset the costs of
the loan (or as a commission for loan officer). Why would anyone
knowingly pay this higher rate? To get a "no-cost loan,"
which I will talk about next.
For example, if you wanted a $150,000.00 loan, but didn't have
enough to cover the loan costs, you could bump up your interest
rate to 7.5%, giving you: $150,000.00 x 1.5%/100 = $2,250.00.
This money will be credited to the loan proceeds at closing.
What does this mean? It means that if your closing costs are
$2,250.00, you won't have to lay out a dime to do the loan. Keep
in mind, though, that if you are purchasing a home, you can't just
up the interest rate to get your down payment. You must have
enough money for the down payment.
And if you didn't know that the rate you were getting was
higher than the par rate (meaning you paid full loan costs)? The
loan officer gets that $2,250.00. Do some loan officers
"forget" to tell you about this little loan surplus?
Unfortunately, yes; it is one of the most profitable methods used
by loan officers.
No-cost Loans
You've heard of those no-cost refinance loans? Forget it. There
is no such thing. A broker must make money on every loan. Many
well-intentioned loan officers honestly believe they are giving
you a loan for free, but this simply is not the case.
In the example above, I showed you how you could get a loan at
an interest rate above the par rate and get points on the back.
The points on the back translate to extra funds available to pay
the cost of the loan plus pay the loan officer a commission. So
what's wrong with this? Nothing, but you are financing the
"free cost" of the loan over the term of the loan
(usually 30 years), which can double or triple the closing costs
(by way of additional interest) as compared to pay the closing
costs in cash.
How Do You Know if the Loan Officer is Jacking up Your
Interest Rate?
It bears repeating that it is the loan officer who picks the
interest rate he is going to sell you and, consequently, the
commissions he will earn on the loan. If he is competing with
another loan company to get your loan, he may not be greedy and
not jack up the rate. But if you don't shop around, don't trust
him to be honest. Some loan officers are completely up-front with
you, but some aren't. Always shop around, especially if you have
"A" credit. Some loan officers will charge you less if
they know your loan will be a piece of cake to put through the
system.
Take extra caution if you have less than stellar credit and
must get a non-conforming loan, as these are typically the biggest
target of shady loan officers. Desperate people have been known to
have swallowed higher interest rates and 5 points in fees. This
definitely is gouging.
The coming legislation?
The Washington Post stated in an article titled Mortgage
Brokers Likely to Disclose Fees Under New U.S. Guidelines (Oct 13,
2001) that "An estimated 150 class-action suits are now
pending in federal courts around the country pitting groups of
borrowers against lenders who paid yield-spread fees to
brokers". If plaintiffs, numbering 30,000 in one lawsuit
alone, are victorious, the the potential settlement cost is quoted
by the Post to be $135 million. Naturally, as such costs
could put a good percentage lenders out of business, many are
asking for better clarification by Housing
and Urban Development (HUD) as protection.
HUD is in the process of recommending new legislation governing
the home-buying process. In a press release issued on October 15,
2001, HUD's Housing Secretary Mel Martinez stated some of the key
goals of the new legislation:
- Full, upfront disclosure of all costs associated with
obtaining a home loan in understandable terms prior to the
payment of non-refundable fees. Full disclosure would be a
description of the specific services to be performed by the
broker, a statement of whether the broker is acting as an
agent for the borrower, and the amount of the total
compensation to the broker, including any yield spread premium
paid by a lender. In addition, HUD believes that the broker
should explain the various loan options. The borrower should
be informed that he or she may pay higher upfront costs for a
mortgage with a lower interest rate, or conversely pay a
higher interest rate in return for lower upfront costs. In the
latter case, the broker may be receiving a yield spread
premium.
- Clarification of Yield Spread Premiums - payments
made by lenders for loans with higher interest rates. HUD's
statement of policy says that yield spread premiums are legal
if the broker actually performs services for the homebuyer,
and if the total compensation the broker receives is
reasonably related to the total value of the services the
broker performs. Disclosure is especially important when
borrowers may be paying yield spread premiums. Borrowers
should know as early as possible what their settlement costs
will be, so that they can shop for the best option.
-
Clarification of current HUD policy that states that
consumer payments are not legal if they are overcharges, or if
no service is provided. HUD is restating and clarifying
its policy that excessive and unreasonable fees are illegal
under RESPA because they are unreasonable and not a payment
for a bona fide service.
The new policy will make clear that it is illegal for a
settlement service provider to mark-up fees when it is making
a payment to another settlement service provider, unless it
provides additional value to the homebuyer in the process, or
when a provider does no work for the fee and charges an
unreasonable amount.
- Expansion of RESPA enforcement. Last year, HUD
fielded more than 900 RESPA-related complaints, approximately
one-third involving kickbacks and other questionable payments.
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