I have always advised consumers who need a mortgage to decide early on whether they wanted to shop for one themselves or retain an expert to shop for them. Shopping for a mortgage is very different from shopping for a mortgage expert.
Those who would likely do better retaining an expert may be uncomfortable with the bargaining and confrontations that may be associated with effective shopping; or they may know very little about mortgages and disinclined to invest the time required to learn more. My practice has been to recommend that such borrowers seek out an Upfront Mortgage Broker (UMB).
UMBs practice full transparency in pricing their services. The borrower and UMB agree in advance (in writing) on the UMB’s fee, which includes any payments received by the broker from the lender. The UMB passes through the wholesale price to the borrower. This approach converts the broker from an independent contractor to the de facto agent of the borrower, although the relationship may not meet all the legal requirements of agency.
UMBs belong to the Upfront Mortgage Brokers Association (UMBA), a nonprofit organization that lists UMBs by state and discloses background information about each member. I am the (unpaid) chairman of the board of UMBA.
The new disclosure requirements from the U.S. Department of Housing and Urban Development (HUD) that became effective Jan. 1 include a major provision that mirrors a key part of the UMB creed. All loan providers must now disclose their total origination fee on the new Good Faith Estimate (GFE).
For brokers, the fee must include any payments received from the lender on loans carrying interest rates above the par or zero point rate, called the yield spread premium, or YSP.
Many readers have asked me whether these new requirements have converted all brokers into UMBs, and whether, as a result, UMBA was going to shut itself down, its job done?
The answer to both questions is "no." For one thing, it is extremely difficult for borrowers to know whether any loan provider is required to disclose YSP. The requirement applies only to brokers, defined as loan providers who do not fund loans. Loan officers who are employed by lenders have no comparable requirement.
Further, in order to avoid having to disclose YSP, many brokers are joining "pseudo" lender organizations that change their legal status from independent contractors to loan-officer employees of lender firms. They may keep their names and look exactly like the brokers they were before, except that now, in the eyes of the law, they are not brokers and don’t have to disclose YSP.
There is only one sure way for a borrower to know that a given loan provider is subject to the full disclosure rules. If the loan provider belongs to UMBA, the brokers are required to disclose YSP.
In addition, the new disclosure rules are designed to help borrowers shop for mortgages, not for mortgage experts. Origination fees must be disclosed by the loan provider only after a borrower has submitted a loan application. HUD envisages borrowers shopping for mortgages by comparing the completed GFEs received from multiple loan providers.
But borrowers shopping for mortgage experts are not helped at all by a requirement that they submit an application in order to learn how much the experts charge for their services. Borrowers shopping for an expert need this information before making an application, indeed, in their first meeting with the expert.
In short, borrowers who want to retain a mortgage expert at a fixed fee to shop the market should shop UMBA members. This assures that the experts they shop will immediately provide the information they need to make an informed selection, because UMBA members are explicitly committed to working with borrowers in this way.
The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.
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