All too often we see folks stopping by our models shopping for a new home. Lets face it, things are tough now but there are still good buyers looking for new homes. Most of the buyers we encounter are armed with the knowledge (mostly media driven) that the market is tough and quickly point out “it is a buyers market”. Many buyers these days go from builder’s model to builder’s model analyzing prices and features in order to make a good buying decision for their family. Fair enough.
It is bad enough that the buyer’s real estate agents typically have no idea how to help or advise their clients in the new construction or pre-construction arena. You see, most of these agents spend their days in the general real estate market and little or no experience learning the new home business. There are some exceptions but generally we gladly pay them 3% of the purchase price to deliver the customers to us and stay out of the way and we all know it. More on that in another article.
I must say that I am really tired however, of watching buyers being “led to the slaughter” by mortgage brokers who many times make more money on the loans than the realtors and for that matter these days, the builder. You see they use a little known tool called the
“yield spread premium”. I am not suggesting that any of us not be paid a fair wage for the work we do. I am suggesting that gouging, and violating the trust of our buyers is just not right and should be illegal.
Here come the buyers announcing that they “already have a mortgage broker” and a pre-approval. It almost always turns out that the closer they are to their lender the worse they get taken advantage of. The broker has pulled their clients credit and had them bring in all of the documents required by the lender which in most cases takes hours for the buyers. Many times they tell their client “whatever you do make sure nobody pulls your credit” because it will make your score go down along with all sorts of other partially true or even untrue and misleading information. My company has a list of “Preferred Lenders” for one reason. To help people get the best mortgage rates and fees possible without getting taken advantage of. We have absolutely no financial interest in these mortgage brokers whatsoever and receive no fees for referring customers to them. We just want to get the loans closed quickly and leave the closing table with a satisfied buyer.
You see these buyers’ mortgage brokers tell their clients (friends and relatives) that they will only charge them ½ a point (percentage) or one point on the loan as some kind of favor. They point this out on the good faith estimate and again warn their clients that there are many unscrupulous mortgage brokers out there that will take advantage of them. This is what happens next. The mortgage broker’s fees on the HUD (closing statement), which nobody usually gets to see more than an hour or even minutes prior to the closing (despite laws to the contrary in most states) show additional processing and other “junk” fees. Now one point is up to 1.5 points or so. This is still not so terrible but it doesn’t stop there. Back to the yield spread premium. This clever little tool is nothing more than a fee paid by the lender (bank) directly to the mortgage broker as a commission for the mortgage broker selling their client a mortgage rate that is higher than the one they actually could have qualified for. This fee is typically paid outside of the closing (POC) and does not appear in the buyers column on the HUD. The bigger the “spread” the more the fee is.
I have seen buyer’s mortgage brokers (close friends and even relatives remember) walk away from the closing with more than $15,000 in yield spread premium fees in addition to the fees that the buyers see in their column of the HUD. Here is the best part. Most states do not require these little arrangements to be specifically disclosed and in fact, most states only require a note in the margin of the HUD showing the amount and the initials “POC”. I have seen buyers question this amount and the closing attorney or Title Company almost always explains it like this. “You are not paying this fee today as part of your closing costs, this is a transaction between the broker and lender paid outside of the closing” This is certainly not the whole truth. The buyers are paying all of this by paying a higher rate than the rate they could have qualified for. And to make it worse, they trusted their mortgage broker, and it is legal. However, the buyers rarely question this because they are focused on the fees in their column. I asked the Title Company we work with how many times buyers ever asked for a more detailed explanation of these fees, there answer was “only once in 3 years”.
I must say that I have known many great mortgage brokers and still do. They make a fair fee for their services and close loans quickly and professionally without stalling the process looking for perhaps a lender they can make the biggest “spread” from.
Lets all work together in the interest of getting our closings done and educating our buyers without taking advantage of our customers. Once my partner said to a mortgage broker after the closing, when pointing out a yield spread premium of over $14,000, “this is not right…We do not do things like this around here.” The response…”I am not from around here” and he walked away from the closing with a check for almost $19,000 for a $240,000 home loan.
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