What Makes a Good Mortgage Broker, Good?
THEY ARE KNOWLEDGEABLE AND EXPERIENCED
Mortgage transactions are complicated and there is much to learn. Yet, not all states require mortgage brokers to be licensed, although California certainly does. There are two licensing options available to those wishing to operate as a loan officer: Mortgage brokers are licensed and operate under the jurisdiction of the Department of Real Estate, whereas a California Finance Lender (CFL) is under the aegis of the Department of Corporations. Mortgage brokers under the DRE are required to pass the same exam as real estate sales agents. But, just because someone is licensed, it doesn’t make them good. Licensed mortgage brokers have a fiduciary relationship to their clients involving a high degree of trust, fidelity, integrity and confidence.
A loan officer working under a California Finance Lender’s license may be doing many of the same things that a mortgage broker or banker does but is not required to be licensed. The courts have held that CFL brokers do not have a fiduciary duty to their borrowers.
A great many loan officers get their training on-the-job and/or are new to the profession. So it should come as no surprise that there is a significant percentage out there that know very little or whom are out of touch with market events. I’ve been in office meetings in which the loan officers didn’t know what the Prime Rate was currently fixed at. I’ve also witnessed cases of loan agents not knowing how to process a loan, read a rate sheet or understand what causes mortgage rates to move. I have seen other instances of mortgage brokers possessing astonishing little knowledge of lenders programs, guidelines, and rates, but succeeded because they were good marketers or gave “good phone”. These individuals relied almost wholly on the lenders’ reps to put their deals together and their processors to keep them stuck together. Not surprisingly, their closings were full of surprises and erratic. Thus, there are conceivably individuals working under a corporation’s license out there doing loans that were flipping hamburgers last week. To be on the safe side, ask the broker/loan officer to summarize his/her work experience over the past 10 years.
Just as there are good realtors and bad realtors, there are mortgage brokers and there are…mortgage brokers. It is rare that you will find a good real estate broker that is also a good mortgage broker—there’s a world of difference between the two professions and there is too much to stay on top of to serve both professions well. Good mortgage brokers specialize—they don’t try to wear two hats.
THEY PROVIDE A GOOD FIT.
In one respect good mortgage brokers are a little like custom tailors. Just as people come in different sizes and colors, their finances, goals, and personalities are similarly individualized. So, it’s important that one’s mortgage complements one’s degree of risk avoidance and financial goals. In short, it needs to fit your comfort zone. For example, many people are uncomfortable with anything other than a 30-year fixed rate mortgage while some have no qualms about adjustable rate mortgages (ARMs), interest only (I/Os) loans and neg-ams. Bottom line, if it’s not a good fit, it’s not for you. Beware of brokers that try to “steer” you into a loan. It may be because it has a more favorable commission structure for the broker. A good broker should be able to explain the pros and cons of various types of loans and then be confident enough in his explanation and the client’s ability to decide what’s right for him/her/them. A good broker should have no trouble in explaining the following:
· What is the best type of mortgage for a particular borrower? and why?
· How much should the borrower put down?
· Should a borrower pay points or opt for a zero-point loan?
· Should a borrower raising cash do a “cash-out” refinance or take out a 2nd mortgage? Or a HELOC?
· Should a borrower putting less than 20 percent down go with private mortgage insurance, lender-paid insurance at a higher rate, or take a piggyback second
· Will it pay the borrower to refinance?
· Should the borrower consolidate other debts in a refinance?
· Should the borrower use available cash to pay down debt, pay points, or make a larger down payment?
THEY ASK QUESTIONS AND—LISTEN
Good brokers ask a lot of questions for good reasons: how else are they to determine what you want or need? Remember brokers have a fiduciary responsibility to keep clients personal details confidential. Their interest in your financial affairs is purely professional. Believe me, after having viewed hundreds of credit reports there’s nothing titillating about one more. But an attentive borrower can tell a lot about the broker from the thoroughness of their questions. A bad broker gives you an answer right off the bat. Bad brokers know what mortgage type you need and/or the answer to any other question that you may have, even without having learned anything about you, partly because they want to get your deal as quickly as possible and move on to the next one.
As previously mentioned, good brokers are also good listeners because every borrower brings to the table their unique collection of needs, wants, and limitations and there are very few deals don’t have some twist, turn or kink to them.
THEY COMMUNICATE EFFECTIVELY WITH BORROWERS
A good broker knows that financing is an arcane science for a good many people. Mortgages can be complex instruments, particularly some of the concepts involving option ARM hybrids and 1st Lien Lines of Credit, but they are not beyond the comprehension of the average borrower, provided they are explained properly. If you don’t understand what you are being told, it is probably because of the poor communication skills of the broker. Poor brokers all too frequently use mortgage acronyms of which borrowers have understandably little knowledge or comprehension. How these people can expect someone to buy something they don’t understand is beyond me. I am continually amazed by borrowers asking me to explain something that they never understood from their previous broker or real estate agent. Don’t let a broker assume you understand something when you don’t. A broker who doesn’t allow that finance is a complicated subject, combined with a borrower who is afraid of looking stupid, are likely to be in for some surprises down the road.
THEY ARE PROBLEM SOLVERS
A good broker should ask you the following question: “What is it that you are trying to accomplish with this loan?” Is it to minimize your mortgage payment, pay off your mortgage in less time, have access to cash reserves in the event of an unforeseen development, etc.? A good question to ask the broker is “Given, what you know about me what would you do if you were me?” Then listen to what they have to say. Ironically, most problem borrowers think they know more than good mortgage brokers. Good brokers are problem solvers and can surprise you with solutions that you may not have thought of or programs of which you may be unaware.
THEY ARE CONSCIENTIOUS.
The majority of brokers use the same 2 or 3 lenders because it’s easy. But good brokers shop for rates and programs as if they were the client. It’s one of the reasons for borrowers to utilize their services. Brokers obtain their pricing off of wholesale rate sheets or pricing engines. Oft-times there are considerable differences between one lender’s programs and guidelines and another’s. Also, the broker must, at the same time, be mindful of which lender is apt to approve his client.
With respect to whether one should pay points or not, a good broker is apt to start out by saying, “Well, that depends…” It may be maddening to hear but the fact is that IT DOES DEPEND on how long you expect to live in a home or have that mortgage as to whether it’s in your best interest to pay points or not.
Accurate pricing depends on a 15-16 different parameters involving the borrower(s), the property, and the transaction. Without addressing these parameters, the quote you receive is meaningless. To receive an accurate quote a broker should ask the following questions:
1. Loan amount
2. Loan to value
3. Mid-FICO score (of all borrowers on the loan)
4. Occupancy (primary residence, 2nd home, investor property)
5. Type of property (SFR, PUD, Condo, unimproved property)
6. Documentation type (full, stated, SIVA, SISA, NINA, No Doc)
7. Type of mortgage desired (fixed, adjustable, Interest Only, option ARM)
8. Length of fixed rate (if an ARM) 1/1/, 3/1, 5/1, 7/1, 10/1, 15, 30 years
9. Term (15, 30 or 40 years)
10. Lock times (8, 12, 15, 30, 45, 60 or 75 days)
11. Cash out (applicable if it’s a refi)
12. Prepays, if yes 1,2,3, or 5 yrs.
13. Wholesale or rebate pricing
15. Buy downs
16. 2nds or PMI (if LTV > 80%)
All of the above figure into determining a mortgagor’s interest rate. As you can see if one is to provide a relevant answer to “What’s your rate?” it’s not something easily spit out. It’s a little like playing 3-dimensional chess.
But, bad brokers will do more than quote the best prices possible—they will sometimes quote prices even better than the best possible—with the intent of snagging a deal with an unrealistically low quote.
Note: To counteract this you can ask the broker to show you the rate sheets from the lenders he checked. This is not so that you can compare prices—that would require a lot of instruction—but simply to verify that the information is there.
If you tempt a broker to give you a low-ball quote over the phone by not answering his or her questions, you’re apt to get what you deserve.
THEY IDENTIFY WITH THEIR CLIENTS.
They will act in your best interest in dealing with the lender and third parties. They will ensure that the lender fees and third party fees on the Good Faith Estimate (GFE) are accurate. They will strive to obtain the best possible prices and contain third-party charges, such as title insurance and escrow fees. Bear in mind though, the GFE is an estimate of costs, it is not a to-the-penny accounting. But, as a rule of thumb, the GFE should not be off by more than 10%. Also, good brokers are aware of title companies with special rates for refinances or time frames, e.g., if the policy was issued within five years of the new policy’s issue date. On purchases, discounts may be had from title companies in which they issue both the owner’s and lender’s policies.
THEY’RE HONEST TO A FAULT—TO YOUR BENEFIT, NOT THEIRS
The acid test of a good broker is whether the broker will tell a client that a contemplated refinance is not in his/her best interest. I’ve had a number of instances where I’ve been referred business and told the borrower(s) that it was not in their best interest to refinance at the current time. They were surprised by my candor because the other brokers seemed more concerned about the quick buck than the client’s benefit—they all said the same thing—let’s do it.
THEY OPERATE WITH TRANSPARENCY AND KEEP THEIR CLIENTS INFORMED
Failure to keep a borrower informed is one of the most frequent criticisms of brokers that I hear from borrowers, especially on purchase transactions where borrowers are faced with a firm closing date. Brokers often fail to let borrowers know that, while there is no news to report, everything is on track and proceeding apace. Arrange with the broker on how you would like to be updated as to both the type and frequency of communiqués.
Good brokers will furnish you with a Good Faith Estimate (GFE) within 3 days of taking your application. (It’s also the law). A good broker will happily get you a copy of the rate-lock statement as soon as it has been received from the lender, if you ask. Bad brokers keep their borrowers in the dark because they are (take your pick) lazy, negligent, inept or predatory. My introduction to mortgage lending was via Conseco, a once prominent sub-prime lender. It was routine for them to charge 5 points on a deal plus sky-high rates. Women there were among the most successful loan agents because most borrowers couldn’t imagine that the nice woman on the phone who sounded so sweet could be so rapacious as to charge them $23,000 to do a $319,000 loan. But then again she didn’t put it quite that way she spun it so that “they were ‘investing’ just $23,000 of their equity to obtain this super low 9.8% rate”.
GOOD BROKERS GET DOCUMENTS FROM THE LENDER PRIOR TO CLOSING
Obtaining all the documents from the lender provides the borrower with an opportunity to read them at their leisure and clarify any issues. This may be more useful to the borrower than having the broker at the closing. Ask the broker if you will have access to the final documents at least two days prior to closing. Short of a shortened escrow, this should not be a problem.
GOOD BROKERS ATTEND CLOSINGS WHEN NEEDED
Having a broker attend a closing may not always be feasible because the closing is too far away, and sometimes it isn’t necessary because the borrower has been through the drill before. But if the borrower is a novice, having the broker available to help explain things is a major source of comfort. If it’s important to you, ask the broker if he/she will attend the closing.
GOOD BROKERS HAVE A FOLLOWING.
Good brokers are highly recommended and have their reputations to uphold. The broker who has a steady stream of referrals is much more likely to do the right thing than one who purchased your name and address from a leads broker. Mediocre brokers need to solicit constantly, whereas good brokers enjoy referrals from Realtors and satisfied previous customers. Obviously, it is not the case that good brokers never solicit, but the good ones don’t need to buy leads from lead brokers like Lending Tree, e-loan, Quicken, or Price My Loan. As a general rule of thumb, it’s better to be the picker than the “pickee”. Naturally, I would appreciate any referrals that you might provide.
In sum, good brokers are smart, attentive, experienced, conscientious, professionals. They possess effective communication skills, have a good reputation and treat their clients the way they would like to be treated if they were the principal in a transaction.
Copyright © 2020 Rod Haase. All rights reserved.