Mortgage brokers are by far the single largest source for mortgages and, depending on which data you read, account for about half of all the mortgages generated in the United States.
Mortgage brokers don't have any mortgage money, but they find other lenders who do. A mortgage broker works with different banks to place loans, much like an independent insurance agent works with different insurance companies to get policies for his clients.
Brokers compare different mortgage rates from different mortgage companies and match up the buyers with the rates. Sometimes they will find a mortgage company that offers a particular product not found at most other mortgage companies.
Brokers take mortgage applications from buyers, but they do not approve loans. Instead, a broker will document the loan application with everything the lender needs to approve the loan, including things such as the borrower's pay stubs, bank statements, and W2 forms.
When the file is documented, the broker sends the loan over to the mortgage bank, which will approve the loan, order the closing papers, and provide the funds at closing.
Does that make mortgage brokers more expensive because they add another layer to the costs? No, because mortgage brokers represent the wholesale division of a mortgage bank.
Most major banks have separate divisions — known as “wholesale divisions” — that cater to mortgage brokers. These wholesale operations approve mortgage loans sent to them by mortgage brokers. Wholesale lenders also hire sales staff and customer service people that make sales calls on mortgage brokers, take them to lunch, and help them when there are problems with loans that are in process. And lenders offer mortgage loans at a discount to the broker who in turn “marks up” the interest rate to compete with retail banks, credit unions, and mortgage bankers.
Lenders can offer loans on a wholesale basis because mortgage brokers do most of the “heavy lifting” and absorb a good portion of the overhead.
By eliminating a significant portion of a mortgage operation's expenses (staff, office space, utilities, etc.) and placing it on the shoulders of a mortgage broker, a bank can save enough money to offer these discounts to brokers.
Wholesale lenders price their loans the same way as any other mortgage company; by issuing new rates every day based on current market conditions and the price of mortgage bonds that day.
So which is better, a banker or a broker?
I began my career in real estate finance as a broker in California. Then I worked for a mortgage bank in Texas before starting my own business. So I know how each works from the inside.
By its nature, a broker does indeed have the ability to shop around for the absolute best interest rate, but there are a couple of caveats. The first is that because lenders price their mortgages on the same index, one lender's rate can't be wildly different from another's. When I would scour the various wholesale lenders' rate sheets, I never saw one lender at 6 percent while others were at 7 percent. It can't happen that way. If you see rates vary by that much, then something's wrong. Either someone made a mistake or you're being misled.
I did see variances, but they were marginal. Sometimes one lender would come in 1/8 percent lower than other lenders, but no lender was consistently 1/4 percent lower than anyone else.
Occasionally, in an attempt to gain market share a lender will essentially “give away” mortgages to increase volume. But that never lasts for very long. Lenders take it on the chin to boost volume and then ratchet the rates back up to meet their competitors. Wholesale mortgage companies subscribe to various rate-reporting services that tell them what their competitors are charging.
Most likely a mortgage broker will see a short list of lenders who offer the very same rate, but with minor differences in points. (Well discuss points in detail in chapter 6.) Lender A may offer 6 percent at 1/2 point while Lender B would offer 6 percent at 5/8 of a point, for instance. Even when these rates are attractive, a broker will shop around for a better deal — for him, not for you.
A mortgage broker can also search for different loan types that appeal to a certain segment of borrowers — or loans made available by certain banks but not others. This typically isn't the case with mortgage loans because the bulk of mortgages fall into conventional loan categories, such as Fannie Mae and Freddie Mac insured loans or government loans under FHA or VA programs.
Sometimes when a mortgage bank doesn't offer a certain product, a mortgage broker will find one that does. For example, a mortgage bank may not offer a loan for a condo in a high- rise complex of more than 25 stories. Or a bank doesn't want to finance properties for investors who will rent them out instead of living in them. A broker can have a list of “niche” loan programs and know exactly where a specialty loan needs to be placed. A loan officer for a mortgage bank doesn't have the luxury of going to a list of wholesale lenders and calling them for a special loan program.
Bankers do, however, have a key ingredient that brokers simply do not: control over the loan file. Loan approval times are shorter with a banker than with a broker simply because there are fewer steps the loan needs to go through to get to the closing table.
When a broker delivers a loan file to a wholesale lender, the loan is literally handed off and the broker sits back and waits. When there is a question or a problem with a loan submitted by the broker, the lender's underwriter doesn't call the mortgage broker with the problem. Instead, she'll note what the problem is in the file and then send the file back to the account executive or customer service representative at the mortgage company, who then contacts the loan officer. When the problem is resolved, the process begins all over again with the application going back up the ladder for the underwriter to review. This process may take several days. On the other hand, a mortgage banker would have the underwriter talk to the loan officer or processor and get the issue resolved directly.