Let’s look at family and friends first.  Usually, a loan officer or broker loves to get a referral from a family member or a friend.  This means you are not a shopper.  You already trust them because your family, friend, etc. trusts them.

If you don’t shop then they can jack up your rate even higher than they would a normal client.  And they do it with a syrupy smile and a fruit basket at closing.

You think it’s a better deal using someone your family approves of but really if you don’t have interest rate information and the right documents, you end up paying a higher rate than your family did!

A referral from a real estate agent is another slippery slope.  One of 2 things could happen.  First, they could take money to refer you.  It is against the law for anyone to pay for a referral.

Unfortunately, that does not stop real estate agents from demanding money for you.  It happens all the time.  No one is paying attention so the agents and loan officers run wild.

Now let me ask you this.  If the loan officer had to pay to get you, are they not going to make that up somehow?  Maybe like jacking up your rate even higher to pay for the referral fee to the agent.  Yes, that is exactly what happens.

Second, real estate agents and loan officers are an incestuous bunch.  Since the professions are intertwined, many people like to make money from both selling property and originating loans.

However, you can’t do that without disclosing it.  But borrowers might think they are getting screwed if the same person sells them the home and does their mortgage…and they are probably right.

So to get around this, owners used their husbands and wives.  For example, if I owned a real estate company, then I would make my wife the owner of my mortgage company.  Then I refer all my real estate clients to my mortgage company.  Excuse me…my wife’s mortgage company.

Except, you don’t know it is my wife because she has a different last name than I do and by the way she has never even set foot in the place.

There was a real estate agent in Denver who was on the radio touting his services, of course, but also the services of this “super fantastic” mortgage professional.

Well the “super fantastic” mortgage professional turns out to be his wife.  They have different last names and he never tells people on the air that’s his wife.

She also had an office right next to his in his real estate company.

It all goes back to picking the right person.

They tell you, “there is no prepayment penalty on your loan”…you end up with a prepay.

They tell you, “your interest rate is fixed”…you end up with an adjustable rate.

The initial and final papers look daunting but really most of it is just standard disclosing.  There are only a handful of places you need to make sure say the right thing.

But there definitely is a loophole here.  There is only one little place in the initial disclosures that states you are getting a prepayment penalty.  The Good Faith Estimate is just an estimate right?  So, they can change things from start to finish.

They can change whatever they want.  If they lied to get you in the door then yes, you will show up to the closing and look at loan terms you have never seen before.

And you won’t find out until the closing.  Are you willing to take that chance?

There is only one way to protect yourself.  Find the right mortgage provider from the start.  They will show you on the documents the answer to your question. Remember in real estate and mortgages, unless it is in writing….it does not exist.

This is not overly dramatic.

Example #1:

In 1999, the brokers carved out a sizeable chunk of the bank’s business.  At one point, the brokers were originating 75% of the loans to the bank’s 25%.  Well the banks were not going to stand for this so they went to Capitol Hill.

With all their money (the broker’s organizations have none), they changed the law so only brokers have to disclose the money they make from increasing your rate.

Yield spread premium has to be disclosed by brokers but the bank’s service release premium does not.  The banks thought if borrowers saw this massive dollar amount on the closing statement when they used a broker, they would run back to the banks.

Well, they underestimated the resourcefulness of the brokers.  Most people still to this day have no idea their rate was increased just to put money in the broker’s pocket even though it is on the closing statement.

Back to the drawing board for the banks.
Example #2:

In California, the phrase “no cost” was outlawed because it is hugely misleading.  Well the big boys like Countrywide, Washington Mutual, and others use this all the time and other misleading statements.

To get around this, they switched all their mortgage divisions into banking divisions.  Mortgage companies have to abide by certain state rules.  Banks don’t like those rules so by putting their mortgage operation under the umbrella of their banking division, they are now under FDIC rules and not mortgage rules.   Now they can do whatever they want when it comes to mortgages.  There are no state specific mortgage rules so they get a blanket pass to screw people.

Example #3:

Big banks are always one of the top contributors to both political parties.  They throw tons of money to each side to make sure they get their way.

Interestingly, all you hear is, “the brokers caused the foreclosures”.  All the politicians jumped on the bandwagon and blamed only the brokers for the foreclosures.

Are you kidding?  If you actually looked at the numbers you would find the foreclosures are being caused by builders selling overpriced houses using their own mortgage company and banks pushing the option ARMs and other high risk loans.

Yes the brokers sold those too.  But the banks sold so many more.

If you get all the mouthpieces to bash brokers, where do borrowers go?  They go back to the bank….the wolf.

By the way, the bank’s rates are much higher.  The only reason they do all this and throw so much money toward it is to protect their profit.  And a huge profit for them is the increase in the rate.

A bank employee has no idea what the bank is making off your rate.  They are given a rate sheet that has already been artificially bumped up to build in profit for the bank.

A bank employee does not have access to wholesale rate data.

There are many different versions of banks too.  There are the banks that have your checking accounts like Wells Fargo.  There are banks like Countrywide that only do mortgages.  And then there are banks that became a bank for one reason and one reason only.

To hide their yield spread premium from you.  After 1999, many big brokers became banks to be able to hide the money made from increasing your rate.  Those guys are sneaky because they still talk the talk and walk the walk of a broker.
Do not ever use a bank.  You will always pay a higher rate.  That is just their business model and there is no way around it.

Surprisingly, you don’t ever see your credit report; the one the loan officer pulled.  They just relay the information back to you.

And they would have no reason to lie about what is on your credit report…would they?

Remember the Bait and Switch.  If they promised some outrageous low rate to get you to call then somehow they have to turn you around.  They have to get you away from that low rate and to another higher rate that makes them a lot of money.

One of the ways they can do that is to make up a problem on your credit report.  Most people just blindly accept the loan officer’s statement and don’t ask for a copy of the report.  Loan officers know this.

And even if you do ask for a copy, somehow it never gets to you.  When a mortgage company pulls your credit it could come back with different scores than say if a car dealership pulls your credit.

Different types of credit warrant different scores.  A mortgage requires all 3 scores for approval.  You have to get the report the loan officer used.  And don’t let them email it.  That kind of information shouldn’t be floating around the internet.
Go down in person and get it, have them mail it, or do whatever it takes to get your hands on the actual report used in your file.

If you don’t, they have the advantage.

Locking requires reserving the money for your loan at that rate, on that day, and at that price whether that be a cost or a premium (money).

When you decide you want to lock, that should be it.  But it isn’t.  You expect some crazy low rate because that is what they advertised.
But they can’t really lock you because that rate doesn’t exist.

So, they tell you that you are locked.  And now they have to wait for the market to get better.  Remember, they told you a rate they could not deliver.  That means the market has to get a lot better for them to make all the money they plan to make.

You may have experienced this if your loan took an extraordinary long time to get processed and closed.

They say they were busy.  Busy all right….they were waiting for the market to come back.  But sometimes the market doesn’t come back and that is when you show up to close and find a much higher rate than you “locked”.

Many loan officers, brokers, and the secondary markets of big companies like to play with your money.  They think they know what the market will do and are always looking to make more.
It’s about as risky as going to Vegas but that doesn’t stop them.  You call to tell them you want to lock.  They say, “sure” and tell you some rate they think will make you happy that day.  But they don’t lock you in the hopes the market gets better and makes them more.

So, they have to watch the market to see when they want to lock you.  What day will they make the most money…that is when they lock you.
Well, there is a huge downside to that right?  What if the market goes the other direction?

Your loan didn’t actually get locked that day and if the market goes against them, you will also end up at closing with a higher rate than you “locked”.

One thing you should know.  If a crooked loan officer or broker makes a mistake on your loan, they will always make it your fault.  If they didn’t lock you and the market moved against them, they won’t take less money for your loan because it was their mistake.

You will show up to close with a higher rate…it is as simple as that.

Yes, discount points are interest paid up front as part of your closing costs to lower your interest rate.  But what happens as the rate goes higher?

Let’s say you have to pay one point to get 5.75%.  Now what if you go up the scale to 6.00% for example?  Let’s say that rate is par which means it doesn’t cost anything and no money is created from that rate either.  Going farther up the scale, 6.25% creates 1 point of yield spread premium or service release premium.

If you have a $300,000 loan, a 6.25% rate creates $3,000 in that example.  (1% X $300,000)  Wow, so who gets that money?  Even though you are the one paying the 6.25% rate, you never see any of that money.  It goes to the mortgage bank, company, or broker who originated your loan.

Yield spread premium is the term for the money made by increasing your rate when brokers do it and service release premium is the term when banks do it but it is the same thing….just different names.

There is a way to see the exact amount of yield spread premium made but only if you use a broker and only on the closing statement.  But by then it is usually too late. A bank does not have to disclose its service release premium at all!

The mortgage industry has confused and tricked you into looking only at costs.  All the while, jacking up your rate to make thousands more on your loan.

If you were shopping for a mortgage and the loan officer presented you an offer of:
“A one point origination fee and also I’ll be making an additional one and a half points by increasing your rate for a total of two and a half points on your loan…how’s that sound?”

It sounds horrible.  You would surely say “No!” and that is why they don’t tell you about it.

By the way this is how all those no cost and no origination offers get done.  You pay for your costs by increasing your rate.  And you don’t just pay for your costs; you pay to line the pockets of the originating company.  They don’t stop increasing your rate until they get at least 2-3% or more off your loan.

It starts by offering a really low rate.  I’m sure you hear the commercials or see the ads in the paper and online….a rate so low you ask yourself, “How can they do that?”

They can’t.  But they don’t care.  It gets the phone to ring, it gets folks down to their office, and it gets online mortgage applications filled out.

Some bait and switch scams come out during the first or second call with a loan officer.  They make up some ridicules reason why you can’t have the rate that was promised on the TV or online.  So believing it was your fault, you close the loan at the obviously higher rate they were always going to charge you in the first place.

The more egregious bait and switch con lets you get all the way to the closing thinking you are actually going to get that low rate.  People get to the closing table and see an outrageously higher rate (it can be as much as 2 points or more!).   Some walk away but sadly many sign because they are backed into a corner.

This con works.  Yes, they do lose loans either at the beginning or at closing.  However, the ones they do close, have so much profit jammed into the rate it still makes them a ton of money.

They get away with this because the Good Faith Estimate is just that…an estimate.  If they made a mistake well then they’re just human right?

Wrong!