by Brian Brady
Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL
Score one more screw up for the Government-Banking Complex…and watch mortgage brokers thrive because of it.
Andrew Duncan of Keller Williams in Tampa, FL reprinted a Mortgage News Daily story:
As part of the changes to the Real Estate Settlement Procedures Act, borrowers can no longer shop for a home with a firm loan commitment in hand. While that might not be a big deal in today’s buyer’s market — it could give cash-rich buyers an advantage when sellers are back in the driver’s seat.
Under the new RESPA rule, a lender cannot perform income, asset and credit verifications until the prospective borrower has received a Good Faith Estimate, Patton Boggs LLP Partner Rich Andreano told MortgageDaily.com in a telephone interview. Andreano is a RESPA expert with nearly 25 years’ experience who advises mortgage bankers, mortgage brokers and other providers of mortgage-related services about regulatory compliance and transactional issues.
What this means is that mortgage lenders will be forbidden from performing normal income and asset verifications, or seek permission to perform those tasks, without issuing a binding Good-Faith-Estimate of loan fees. Pragmatically, this means that most large, direct lenders will not want to commit to the fees until they know the exact loan amount and purchase price.
One more reason to do business with a mortgage broker. Mortgage brokers don’t fund loans, they arrange them. What mortgage brokers do have in their arsenal is all the pre-approval tools needed to secure an automated underwriting approval. The new good faith estimate favors brokers because it allows them to fully-disclose the fee they earn for arranging that loan, while putting a time limit on the rate.
Andreano explained that HUD’s position is that verifications cannot be performed until the borrower has been provided with a GFE. But if a loan commitment is issued and the property costs vary significantly — the lender cannot revise the GFE.
“What you can’t do before the consumer gets a GFE in their hands is you can’t ask them to give you any verifying documents, nor can you ask them to give you authority to verify,” he stated. “The lender would be stuck with the cost estimates in the GFE.”
Mortgage brokers would be taking on a huge risk by filling that void, right? Not true. Mortgage brokers can issue a good-faith-estimate with a definitive time deadline on it; they only “fees” they are “locking in” are “origination fees”. Mortgage brokers would be advised to estimate third-party fees, such as appraisal, title, escrow, etc., very generously to remain within the letter of the law. Early disclosure allows for mortgage brokers to perform the necessary due diligence required to issue a pre-approval letter.
The ultimate responsibility for TILA disclosure falls upon the wholesale lender, when the loan is locked or submitted. Pragmatically, this allows a mortgage broker to use all the pre-approval tools a wholesale lender offers, to perform that due diligence, while the retail channel of the very same lender will avoid such duties for fear of limiting its profits.
Mortgage brokers earned disclosed fees, just like real estate brokers, while direct lenders earn undisclosed loan profits (yield spread premium). When faced with regulations that might limit those profits, the lenders just pick up their balls and go home.
That’s great news for mortgage brokers. Even the big lenders know that.
Robert Worthington says:
Brian, I don’t personally know you, but could I ask for some advice? How do I find and how do I know when I’ve found the right mortgage broker?
March 17, 2010 — 7:28 pm
Brian Brady says:
Gosh, that’s a question worthy of being answered in a dedicated article. I will answer that for you in a post.
For now, here are some thoughts:
1- Distance matters a tiny bit. Not all buyers must meet with the MB but having one that will come to visit, once or twice a month, is important. Someone from Milwaukee should be able to cover your needs.
2- Someone with good references from other agents and customers. Check them and ask what they didn’t like about him/her as well as what they did like. It would be even better if you could speak with listing agents about their communication
3- Ask them what they get off on funding. Most of us have niches and love getting them. You might actually have two mortgage brokers, on call, to service different borrowers.
4- Never underestimate the power of “no”. You’ll learn that while some deals CAN be funded, they’ll take forever and distract you from profitable activities.
March 17, 2010 — 8:01 pm
Robert Worthington says:
Brian you are awesome. Thank you for helping a young man like me start off on the right foot to find a MB.
March 17, 2010 — 11:00 pm
Wayne Long says:
Wow! Another example of the government making rules to “protect” the consumer without understanding the implications.
March 18, 2010 — 2:54 am
John Kalinowski says:
Brian – Won’t it just result in buyers going to a mortgage broker just to get a pre-approval, but then to their direct lender for the final loan once they have a contract?
March 19, 2010 — 6:25 pm
Brian Brady says:
I can’t understand why a buyer would do that, John. Mortgage brokers typically cost less, offer transparent pricing, and would now be 2-5 days ahead in the loan process than a direct lender
March 20, 2010 — 4:50 am
John Kalinowski says:
Brian – People do lots of things that don’t make sense, and that I’ll never understand. For instance, I can’t imagine for the life of me why any seller would ever list with any other company but mine. We have better marketing, smarter agents, the best signs in town, and fair pricing, but they still list with companies who don’t come close to what we do and sometimes even charge more!
March 20, 2010 — 5:31 am
barry says:
Brian
It’s hard to believe the Feds will do anything to help mortgage brokers to the detriment of direct lenders. The problem is some of the big lenders prepare pre-approvals with very little verifications just to get a potential client in the door and then problems occur later in the process.
March 21, 2010 — 12:08 am
Wayne Long says:
“The problem is some of the big lenders prepare pre-approvals with very little verifications just to get a potential client in the door and then problems occur later in the process”
As a Realtor – this is what we don’t want. You should be able to pre-qual clients and verify so that the client, Realtor, and mortgage person know what to expect going into the home search and subsequent transaction.
It is interesting that the new rules benefit the broker vs. the direct lender…..
March 21, 2010 — 6:39 am
Brian Brady says:
“It is interesting that the new rules benefit the broker vs. the direct lender”
It wasn’t by design (which is why I expect legislation that “forbids” my expert opinion on whether a borrower can be approved)
“The problem is some of the big lenders prepare pre-approvals with very little verifications just to get a potential client in the door and then problems occur later in the process.”
That pretty much supports the reason for doing business with a mortgage broker. Having more than one funding source is paramount to success in the quirky world of lending
March 21, 2010 — 4:14 pm