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Mortgage Bankers vs. Banks and Direct Lenders

Comparing Mortgage Bankers to Banks and Direct Lenders

Understanding how mortgage bankers compare to banks and direct lenders is crucial when shopping for a mortgage. However, finding unbiased information is difficult. False myths and stereotypes dominate the mortgage landscape. It’s important to separate fact from fiction.

Below is a breakdown of a few factors that can influence a borrower’s decision of where to obtain their mortgage. A sober comparison of the facts reveals both distinct differences and surprising similarities between mortgage bankers, banks and direct lenders.

Loan Servicing

Almost all mortgages are sold on the secondary market. Gone are the days of big banks and lenders servicing home loans for entire terms. The only variable now is when the loan is sold.

  • Banks and direct lenders often service loans for the first year in order to collect interest payments. Then, they sell the loans
  • Bankers never service loans. They are typically sold by the lender immediately after closing

Rates and Fees

Mortgage transactions are never free. Borrowers pay for their mortgage through the rate, fees or a combination of the two. It’s critical to recognize that rates and fees are interrelated. One directly impacts the other. Here are the facts:

Banks and Direct Lenders

  • They are limited to offering only their mortgage rates
  • Historically, they have been able to charge fewer fees than mortgage bankers because the bulk of their profit is tied to the rate:
    • They collect interest payments when they service loans
    • They collect a Service Release Premium (SRP) when they sell loans. The SRP is largely affected by the interest rate. Therefore, they have a financial incentive when setting the rate. Most banks bump their rates to increase profitability
    • It’s not uncommon for banks and direct lenders to charge fees in addition to what they earn on the rate
    • They are not required to disclose the SRP to borrowers

Mortgage Bankers

  • Historically, they have been able to offer lower mortgage rates because they can shop among multiple wholesale lenders. They also have access to wholesale rates with no profit built in
  • They never collect interest payments or profit by selling loans on the secondary market. Instead, they are paid a fee for the service they provide. Mortgage Bankers can earn their fee in one of two ways:
    • Borrower Paid: The borrower pays an origination fee to the mortgage banker and obtains the lowest wholesale mortgage rate available
    • Lender Paid: The borrower pays zero origination fees in return for a slightly higher mortgage rate. The wholesale lender then pays the mortgage banker a yield spread premium (YSP)
    • They cannot charge an origination fee and collect YSP. It’s strictly one or the other
    • They are required to disclose the YSP to borrowers

Home Loan Options

Today, borrowers have fewer home loan options than in years past. Mortgage bankers, banks, and direct lenders generally have access to the same basic home loan programs. The most popular are Conventional, FHA, and VA.

  • The difference is that banks and direct lenders don’t always offer all programs. And they are often inflexible with qualifying guidelines
  • Mortgage bankers have access to a variety of different wholesale lenders. Each offers different programs, niches and guideline enhancements. Mortgage bankers can also access specialized portfolio programs through wholesale lenders. They can provide several home loan options for their customers and approve certain loans that banks deny

Together, mortgage bankers, banks and direct lenders provide borrowers with a clearly defined choice. Understanding the differences allows borrowers to make educated decisions about where to obtain a mortgage. Borrowers should base their decision on what’s best for their individual situation.

HVCC Appraisal Rule

HVCC Appraisal Law

On May 1, 2009 the Home Value Code of Conduct (HVCC) rule became law. It dramatically changed many aspects of the appraisal process for most borrowers in the United States. The law was spearheaded by NY Attorney General Andrew Cuomo and was rooted in his belief that there were illegitimate and unlawful partnerships between real estate and mortgage professionals and the appraisers they use. He believes that these relationships largely contributed to the financial meltdown. Instead of purging the lending world of a few bad apples, the federal government hastily passed Cuomo’s law without fully thinking through the consequences. The law’s basic intent is to protect the consumer by ensuring that Realtors and loan originators do not collude with appraisers. The reality is that HVCC increases costs for homeowners, further skews home valuations across the country and lines the pockets of the big banks. It has also played a role in slowing the recovery in the housing market.

Loan originators used to be able to refer borrowers to quality appraisers that they worked with in the past and knew they could trust. Borrowers benefited from this by having experienced and knowledgeable appraisers serve them at relatively reasonable prices. Now, thanks to Mr. Cuomo’s law, all appraisal orders have to be ordered and managed by newly established Appraisal Management Companies (AMC’s). AMC’s, which were rare prior to the HVCC law, now command control of the bulk of appraisal orders in the country. They are really nothing more than middle-men. They receive orders and simply pass them on to appraisers in the field.

Increased Costs to Consumers

Forcing originators to use an AMC increases the cost to the consumer both directly and indirectly AMC’s are free to negotiate fee-split arrangements with the appraisers. Once given this incredible power, they immediately forced appraisers to accept, on the average, 50% less fee. While doing this, they chose to arbitrarily increase the consumer cost of an appraisal to around $450.00 for a standard appraisal, $500 for FHA, and even more for Jumbo appraisals. Naturally, experienced and knowledgeable appraisers have not been too inclined to go from working independently, making a modest $300-$400 per appraisal, to accepting work from an AMC clearinghouse for $75-$150.00 per appraisal. Many of the nation’s most respected and seasoned appraisers simply left the appraisal business altogether. Who can blame them?

Compounding the cost issue is the fact that it is harder than ever for a borrower to transfer an appraisal between lenders, even though the borrower is the one paying for it. This severely limits a consumer’s options. Every lender and bank is aligned with different AMC companies. If a borrower draws an inexperienced appraiser who produces a sub-par appraisal, they are either stuck with it, or they have to pay for a whole new appraisal through another AMC. Similarly, if a borrower has a bad experience with a lender (e.g. finds out that their lender misrepresented the rate or fees at time of application), they have no choice but to continue with that lender or pay the full fee to another AMC company associated with another lender.

Along with causing higher fees for consumers, the HVCC rules have caused a poorer quality of appraisals. Filling the void left in the industry by the exodus of skilled and seasoned appraisers is an army of newer, less experienced appraisers who are willing to work for the reduced fees. Granted, there is nothing wrong with accepting lesser pay. But, these new appraisers are generally inexperienced and their appraisals are often riddled with mistakes. They also have little motivation to admit mistakes or fix issues in a timely manner. The simple truth, that is obvious to every honest professional in the industry, is that consumers have suffered because of poor appraisal quality. After all, the accuracy of an appraisal report can make or break a loan. This is especially true in today’s climate of stricter underwriting guidelines. Not closing loans because of inaccurate appraisal values does nothing but hurt consumers and slow the recovery in the housing market.

Home Owners Will Pay Appraisal Fees Up Front

To further complicate things for the consumer; the new rule requires that homeowners pay the AMC’s upfront with a credit card (no, you cannot pay with cash or check). These fees are generally non-refundable. So, consumers are forced to use an AMC that their lender chooses. They are then forced to blindly pay this company before ever meeting the appraiser who might or might not produce an accurate assessment.

Ironically, many of the AMC’s are owned by the very same “big banks” that Mr. Cuomo originally blamed for the banking crisis. That’s right. HVCC actually perpetuates, encourages, and rewards the collusion between the big banks and the appraisers that it was supposedly meant to stop. No one wins except for the AMC’s and the big banks that own them. Instead of protecting the consumer, the law restricts their choices, leaves them vulnerable to higher fees and susceptible to shoddy and inaccurate appraisals.

The HVCC rule has had the opposite effect of its supposed intention. It is a law that needs to be reevaluated for the sake of the consumer and our nation’s housing recovery.