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Copyright 1995 - 2005
All rights reserved.
Christine Baker
BayHouse.com

 

 

 Shopping for a Mortgage

How to Shop for a Lender/Broker
BayHouse Quote Request Form
Why I don't broker loans anymore
How does a broker get paid? - Rebates
Rates - the Quoting Game
Low Quoting
"Quote Site" deletes BayHouse and threatens with Legal Action
No Cost Loans
Bi-Weekly Loans
Service Release Premiums
Loan Processing and Closing
Direct Lender (Bank) versus Broker
Locks
Where will Rates Go? Economic Calendar and Forecasts

To get a Low Interest Rate ...

Good Service ...

and the Program Right for YOU

... obtain copies of your credit from all three Credit Bureaus.

It is essential that you review your credit prior to looking at homes.

At least 70% of all reports contain errors, often causing delays and/or higher loan fees and interest rates.

Be aware that your FICO Credit Score could be lowered every time you apply for a loan and the broker/lender runs your credit and FICO Credit Scores vary dramatically from day to day WITHOUT any changes on the credit reports.

    Almost all mortgages (except FHA and VA) are now declined if your credit scores are not meeting the underwriting guidelines.

Learn more about Mortgage Credit.

... read the Definitions

explaining many terms and business practices such as Locks, Low Quoting, "Quote Site" deletes BayHouse Account and No Cost Loans.

... complete the loan application

Make photocopies for your records and to shop around. There used to be a link to a downloadable and printable application, but unfortunately that's gone.  Do NOT submit electronic applications because you won't have a copy of what you sent off.

Links to downloadable applications and 1003 programs at the BayHouse Forum.

Please note that you are signing the application under penalty of perjury.

Robert Bruss reported that the government confiscated a home in Southern California because the borrower listed a non existing second job on the application. The loan was supposedly current and the auditors were doing a routine audit at Great Western bank.

... obtain Quotes using the BayHouse Quote Request Form for PURCHASE or REFI

Fax, E-mail or snail mail the completed Quote Request, Application and Credit Report to one or two lenders/brokers.

If this is your FIRST mortgage loan application I highly recommend you set up at least a couple of "in person" meetings.

DON'T sign the application, as that gives permission to run your credit again, lowering your credit scores.

DON'T request 20 quotes on the first try, find out if you filled out the application completely and correctly first.

Once you decided to work with a broker/lender, you provide a signed application.

Read Credible lenders/brokers at the BayHouse Forum.

Mortgage Fraud by Robert J. Sadler, Marketing Director GAPS/AEGIS (TM)

"... If a lender detects misrepresentation, federal law provides for those convicted of loan fraud to receive a possible 30-year sentence and up to $1 million in fines! ..."

WOW! A 30-year sentence and up to $1 Million in fines?

How much does a broker/lender get fined for making misrepresentations to the borrower?

There is no fine, as far as I know, but I don't know the law. The only suits I am aware of were against lenders and brokers who charged more than they disclosed on their revised disclosures, supplied to the borrower at closing, or who understated the APR (meaningless for ARMs anyway.)

A few commen concerns or problems with the BayHouse Quote Request

Your broker refuses to answer the questions?

Hire a new broker who will.

You feel uncomfortable asking so many questions?

Just think of all the questions YOU have to answer on the loan application.

You know you have a few credit dings and feel like you have to be grateful for anyone trying to "help" you?

Commissions for the "credit impaired" are usually 2 to 4 times higher than for A paper loans.

Subsequently, it's much more important to ask about fees and commissions. Brokers know that you can NOT quickly move your loan elsewhere and they often hit you with outrageous fees at closing.

You don't think you should ask how much your broker will earn on your loan?

Well, then don't. It's YOUR money :)

Never pay an application fee unless you're sure you'll go with THAT lender!

Some companies may want to substitute their own disclosures and procedures.

That's ok, as long as all the pertinent questions on the Quote Request are answered (highly unlikely) AND there is not page after page of procedures, terms and conditions in legalese. I would not accept those annoying disclaimers as a substitute.

You want to establish

  1. how much the broker will charge for brokering your loan
  2. what services you will receive.

I don't think you can expect much service if the broker makes less than $2,000.

Don't be surprised if you close late and DON'T get what you expected. You might even lose that house you thought you were moving into next week, because you've got no loan!

On a purchase, I'd be very happy with $3,000 to the broker and great service such as detailed written program descriptions, accurate disclosures, replies within 24 hours, lender pre-approval, etc.

(I'm talking San Francisco Bay Area dollars here. Adjust for your cost of living in your area.)

There is nothing more frustrating than an incompetent and/or flaky loan agent causing delays at closing.

Mortgage Quote Site deleted BayHouse account, threatened with legal action and falsely accused me of sending "hate" mail.

First they sent me junk E-mail, then they deleted the BayHouse account after two days:

"... You are of a different philosophy and have been deleted from our site ..."

Instead of playing the "low quoting" game, I had quoted extremely high rates.

I asked how they do business, and Dr. David J. Roberts replied with legal threats and a complaint to my web host based on false accusations.

In e-mail sent to my ISP (Internet Service Provider) Dr. David J. Roberts claims:

"... Please note that your Zoom.Com client, Ms. Baker (bayhouse.com) is engaged in activities that are not permitted on the Internet... The sending of "hate" mail to mortgageloan.com ..."

My ISP forwarded the above E-mail to me and wrote:

"This looks pretty serious. Please deal with it before I have to become involved. Thanks. Kristen"

I subsequently asked Dr. David J. Roberts:

"... If "hate" mail was sent to MortgageLoan.com from a BayHouse account, please forward this mail to me immediately ...."

Dr. David J. Roberts' reply: "Ms. Baker, Please do not write us anymore. There are a lot of recreational activities in the Bay area. Take a vacation... get out and enjoy life. Have a nice day.
Thank you, David Roberts"

This IS the real estate and mortgage business.

Be VERY careful and get EVERYTHING in writing.

At the REDC Auction on August 6, 1995 in Santa Clara, I asked the agent of First Republic Mortgage what their profit would be on a $200,000 loan with a 20% down payment, excellent credit and income (A paper.)

I could not get an answer other than "it depends on the loan" and "every loan is different."

That's BS. Yes, every loan is different, but they DID quote rates.

Apparently, their profit depends on how much they can get away with.

Why I don't broker loans anymore

I got very tired of working without pay.

I found that too often I spent a tremendous amount of time getting marginal loans approved as A paper. I didn't charge for credit disputes and many hours of counseling buyers and their agents on negotiations and contract writing.

I remember one borrower who went to bank of America INSTEAD of taking the MCC program.

Often the real estate agents tried to steer the buyers to their "preferred lending professional" so they could CONTROL the buyers and didn't run the risk of me answering the buyers' questions about inspections, contracts and contingencies.

I got tired of

... explaining over and over that the rates in the Sunday paper were quoted the previous Wednesday.

... having to prove that a quote is not true if it sounds too good to be true.

I made countless calls to other brokers and banks about their much lower rate, only to hear that it was a "printing error" or "due in 5" or "fixed, but it's the start rate..."

The sad reality:

MOST people want to be sold, want to believe what they hear, want to hear that "it's easy, no problem, just sign at the dotted line. I will take care of you ... "

And that's not my thing.

How does a broker get paid?

Often not at all.

Only when the loan closes does the broker receive a commission.

Once the loan recorded the lender mails or direct deposits the commission check.

Just like in any other business, brokers have wholesale rate sheets and mark up the cost with their profit.

Example:

At 8% the Lender offers to pay 1/2 point to the broker, commonly this is called a REBATE.

One point = 1% of the loan amount.

On a $200,000 loan, one point = $2,000.

If the broker wants to earn $2,000, he quotes 8% + 1/2 point.

You pay $1,000 and the Lender pays $1,000 to the broker.

If the broker wants a $4,000 profit, you pay 1.5 points ($3,000) and the Lender pays 1/2 point ($1,000) in our example.

Your aunt gives you a $100,000 gift.

Now you only need a $100,000 loan.

The broker quoted you 8% + 1.5 points because he wanted to make a $4,000 profit.

Since you reduced your loan amount, the profit is accordingly reduced to $2,000. (1.5 points or $1,500 from you and 1/2 point or $500 from the Lender.)

You will have to pay an additional 2 points ($2,000) or the broker just lost a $2,000 commission.

What would the broker do?

In my experience, the broker would say "sorry, rates went up."

And you'd get a 8.5% interest rate and still only pay 1.5 points, but the broker would get 2 extra points (rebate) from the Lender for the higher interest rate.

The broker has the same amount of work for the $100K loan or the $500K loan.

That's why I recommend that a fee should be negotiated before formal application.

And, this example is rather unrealistic. Often the borrower gets a higher loan than originally applied for and the broker subsequently gets a higher commission if you didn't use the Quote Request Form or otherwise limited the broker fee.

On average, for a 30-year fixed rate loan, every point changes the interest rate by 1/4%.

That's how "no cost" and "no point" loans are created.

You agree to the higher interest rate in exchange for no points and/or no closing costs, the broker uses the high rebate to pay for your closing costs.

Confused? Sometimes a picture is worth a thousand words. So I scanned A Wholesale Rate Sheet for viewing here to better illustrate the complexity of lending.

Ask your broker for a copy of a whole sale rate sheet to make sure you're not being "low quoted."

They may say that's illegal, but that's not true. They can write "Example" on the rate sheet, I got the letter from the California DRE approving sample rates without APR.

Rates - the Quoting Game

The mortgage market is extrememly sophisticated. Home loans are securitized and sold on Wall Street.

Fannie Mae and Freddie Mac purchase the conforming loans and we have many Jumbo investors for the higher loan amounts.

All brokers have almost identical rates. Sometimes brokers receive volume discounts from certain wholesalers, but usually their pricing is a little higher to begin with. The main difference in the quoted rates is the profit.

Since rates change continually, the quoted rate is meaningless unless you lock. The broker's profit or fee is the important figure.

Sometimes wholesale lenders will offer special rates for loans locked by a certain date, because they purchased a commitment for a certain dollar amount or because business is slow, etc.

"Lock with a 21 day lock by noon tomorrow, 2 day delivery" would be a typical offer.

Should that rate be quoted to someone shopping for rates? One can't prepare the loan package in 2 days, as you need a title report and appraisal.

There are many issues to the rate quoting game, be sure to get everything in writing.

"Mortgage Quote Site" deletes BayHouse Account is a typical example of the philosophy in the Mortgage Business.

And here is an ad for loan agents as seen on 9/14/2001:

Loan agent advertisement

Notice the "No Need to disclose rebate" and the "100% Commission + SRP" (service release premium.)

Mortgage companies are CONTINUALLY exploring legal ways to be able to NOT disclose their commission.  Banks don't have to disclose commissions.

They organized as a mortgage BANKER so they can make SECRET PROFITS and low quote?

Another lending outfit I wouldn't touch with a 100 ft pole ....

Low Quoting

In Fall 1993, I was taught how to "low quote" in the Loan Origination class at Cal State Hayward for the California Association of Mortgage bankers' Certificate Program.

When the instructor was asked how she quotes, she replied:

"I quote with a 1/2 point profit on the phone. Our office expects to make 1 to 1.5 points. When the borrowers come in to fill out the application I advise them that the rates changed."

Her bait and switch tactic can easily make a $10,000 difference over the life of a loan.

BTW, this scummy instructor was the president of a California Mortgage Women Association. Don't be fooled by titles and designations!

Officials in trade organizations can be crooks like anyone else. The longer they've been in business, the better they got at deception and manipulation.

Ask for a copy of the wholesale rate sheet at the time of the quote.

CA law *used to* require mortgage brokers to disclose all profits within 3 days of receipt of the application.

Since the DRE once again dropped the ball, the only protection you now have is the completed and signed Quote Request Form.

No Cost Loans

They are my favorite loans, simply because they are "no brainers."

If you have no closing costs and you lower your rate with a "no cost" refi, how could you lose?

The California DRE disagrees with me. They made prohibiting the advertisements of "no cost" loans by CA Mortgage brokers their priority in 1993, while B of A was running full page ads (legally) in the Chronicle.

The DRE position is that the borrower always pays for the loan due to the higher interest rate compared to a new loan with the borrower paying closing costs and points.

However, apparently they don't realize that they are comparing to the wrong rate. I truly belief that the CA DRE has been completely corrupted by Corporate America. It's that, or they are braindead.

The "no cost" refinance is the only sure winner as it costs the borrower nothing, no matter how soon the loan is paid off.

And next time rates go any lower, you do it again!

On average it takes over 5 years to recover closing costs and points.

I used to provide a spreadsheet to my clients comparing the existing loan to a 1.5 point loan, a no point loan and a "no cost" loan. The calculation is rather simple.

Example:

  1. Deduct the new interest only payment from the existing interest only payment to calculate your monthly savings. ($50)
  2. Add all closing costs and points ($3,000)
  3. Divide the total cost by the savings ($3,000/$50)
  4. The result is the number of months to recover the closing costs. (60)

Now you know it will take 5 years until the refinance starts to pay off.

That's a long time, a lot can happen in 5 years:  

  • Rates could go even lower.
  • Maybe you sell the property.
  • Maybe you need cash and decide to refinance.
  • Maybe your property burns, floods, blows or quakes away.

Unless you keep our sample loan for at least 5 year, you just gave away your money and you're not going to get a penny back.

You could add these same $3,000 to your favorite investments.

Of course, if you are SURE that you are going to keep the loan substantially longer and rates are at the all time low, get the lowest rate you can afford. Calculate your closing costs and recovery period at the time you lock.

Especially when you are looking for a very high or very low rate, the points or rebates don't change proportionally to the interest rate and you may end up with a closing cost recovery period of 10 years or more.

When refinancing, keep in mind that you are INCREASING your loan term, i.e. you will end up paying MORE interest if you keep the loan for the full term!

You may want to increase your payments to pay off the loan as scheduled with your existing loan.

Or set any target date, use a payment calculator to create your own amortization schedule.  I highly recommend the calculators included with Quicken.

You're in charge!

Bi-Weekly Loans

There are many scammers selling bi-weekly loans and mortgage acceleration programs.

  • Why pay them to do what you can do yourself?
  • Why commit yourself to having to make that higher payment even if you lose your job or for some reason are short on cash?
  • Why take the risk of the mortgage company running off with your money? It HAS happened!

Use the payment calculators to set up your own schedule and simply increase your monthly payment accordingly.

I highly recommend using Quicken to analyze your loans.  While there are many free calculators on-line, you'll save a lot of time using Quicken because you can save your loans.

In the real estate newsgroups, bi-weeklies and the merits of mortgage prepayment have debated more than any other topic.

If you are interested in the various pros and cons of prepaying your mortgage, check out the postings in misc.consumers.house and misc.investment.real-estate.

Service Release Premiums

Some wholesale bankers offer service release premiums to brokers for high volume (sometimes as little as two loans.)

Often borrowers get higher rates because brokers will place the loans where they make the largest profit.

Brokers usually don't refund these rebates to the borrower. The concept is similar to the car dealers selling cars at or below dealer cost. The dealers already know that they will get a large rebates from the manufacturers.

The broker expects an additional secret profit.

Direct lender (bank) versus broker

You get that warm fuzzy feeling when you walk into your favorite lending institution, you're admiring the marble while you're standing in line?

If you're comfortable in this setting and you don't mind paying for the marble, the bank may be the place to get your loan.

However, be aware that

Obviously, a direct lender's employees (loan officers) are always working for their employer, the lender -- they NEVER represent you!

  • Most bank loan officers are NOT licensed as loan or real estate agents and know very little about real estate and loans other than their own products.
  • The S&L or bank employee's commission is much lower than that of a loan agent working for a mortgage broker.
  • They are often limited to the few programs they offer and generally I found the service to be rather poor.
  • The loan is usually at someone else's desk and as a general rule, the bigger the place, the more problems you can expect.
  • Sometimes they offer very attractive programs and rates, but many times there are restrictions or they are temporary programs.
  • Often they have undesirable features such as prepayment penalties and weird ARM indexes.
  • On a purchase: The listing agent/seller might refuse your offer because they know how "your bank" notoriously causes problems, properties don't appraise and/or close late.
  • Most banks and S&Ls have wholesale departments and offer their programs to brokers at a reduced cost.

If I needed a loan, I would skip the marble and go with a broker.

Most borrowers would tremendously benefit from hiring a broker as consultant and demanding expert representation just as with the purchase.

  • brokers work with many wholesale lenders and can quickly (within days) place your loan with another lender if your loan is turned down.
  • You do NOT pay more for utilizing the services of a broker, because the broker is offered wholesale rates.

Loan Processing and Closing

The broker does most of the work, assembling the loan package and underwriting it.

Loan processing is very paper intensive and time consuming, especially when done properly.

The broker verifies employment and assets, orders and reviews the appraisal, preliminary title report and credit report.

The broker SHOULD take the time to analyze the borrower's needs and advise and educate the borrower about the numerous loan options.

The borrower should be able to make an EDUCATED decision based on true facts provided by the broker.

The wholesale lender underwrites the loan again and the Quality Control Department checks some of the information provided (to detect fraud.)

Once the loan is approved without "prior to docs" conditions and locked, the loan documents can be ordered.

After the signed documents come back from the title company, the lender reviews the docs for completeness and accuracy and the funding department will (hopefully) wire the funds to the title company, on time for a smooth closing.

As you can see, there are many steps to closing the loan, there are many opportunities for mistakes to be made, so start early!

When obtaining the loan directly from the lender, their processing department processes the loan just as a broker would.

Except that there is little chance of consultation in favor of the borrower.

Locks

A lock guarantees the rate for a certain amount of time.

The longer the lock, the higher the rate and/or points.

Lenders have to hedge (buy insurance) to protect themselves against rising rates, as they sell the loans immediately after closing.

Generally, I favor not locking until the loan is ready to close within a short term (10 to 30 day) lock.

If you *think* that rates will go up, a long lock might be beneficial, IF you are correct.

Some lenders offer special locks with an option to lower your rate if rates go down. However, the initially locked rate is a little higher to begin with.

There is no such thing as a free lunch. It's usually just hype and promotion.

It is very important that you get a written lock confirmation and that you are realistic about the funding date.

When a loan funds only a day after the lock expires, you will usually receive the market rate. For some strange reason (investor psychology), rates go up real fast, while they come down very slowly.

Sometimes a broker can get an extension for a fee (usually anywhere from 1/4 point to 1 point.)

When a broker locks your loan with a wholesaler (mortgage banker, bank or investor), these funds are then reserved for THAT loan.  Wholesalers secure the money they loan out through their secondary marketing department. They usually pay a fee to reserve the funds at the locked rate for the time of the lock.

Every banker/investor has their own strategy on exactly how they accomplish this, but it's similar to purchasing stock or futures options. Once the option expired, it's worthless.

Occasionally secondary marketing screws up, playing the market, and they don't have enough funds at the locked rate.

When wholesalers don't have the funds to close, they usually will start requesting documents they already had or ask for additional (often ridiculous) documentation, just to delay the closing so that the lock expires or rates improve.

It's not unusual for this to happen.

When a deal sounds too good to be true, there is usually a reason.

Where will Rates go?

I don't predict rates and I don't rely on anyone else's predictions.

In February 1994 the CA Association of Mortgage Bankers predicted rates would go even lower, to the 5%-6% range in 1994.

That didn't happen and rates went up instead. Sometimes financial gurus are correct, as rates can only go up or down. If they really knew where rates are going, they would trade bonds and retire.

Economic Calendar and Forecasts

At this CBS MarketWatch page you will find some of the many reasons why rates always change.

NOBODY controls mortgage rates.

The Feds control short term rates only.

The Feds lower short term rates, but mortgage interest rates increase?

Yes, I've seen it happen, because the bond market expected a larger rate cut, the market felt that inflation might be on the rise or because of many other reasons such as the budget deficit, events in foreign countries, etc.

The right time to buy is when you got a good deal and you are ready to move.

Rates go up, rates go down... what else is new?

If your deal makes sense, go for it!

If you think rates will go down in the future or you anticipate keeping the loan less than 5 years, consider a "No Cost" loan and/or an ARM.

You should be able to refinance whenever rates are what you've been waiting for, unless you have a special loan such as a MCC Loan or very little down payment.

Don't forget the cost of MI if you plan to refinance.

There's more to life than getting the * lowest * rate in ten years.

Follow the instructions here to ensure that you get a low rate for the market at the time and select the appropriate program.

How to shop for a Lender/Broker
BayHouse Quote Request Form
Why I don't broker loans anymore
How does a broker get paid? - Rebates
Rates - the Quoting Game
Low Quoting
"Quote Site" deletes BayHouse and threatens with Legal Action
No Cost Loans
Bi-Weekly Loans
Service Release Premiums
Loan Processing and Closing
Direct lender (bank) versus broker
Locks
Where will Rates Go? Economic Calendar and Forecasts

 

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