If it Ain't Broker, Don't Fix It.
Kevin J. Daum

This article was originally published in a 2007 edition of Log Homes Illustrated magazine.

There is no shortage of people trying to sell you a mortgage these days.  With the slowdown in the refinance market you have probably noticed the number of solicitations through direct mail, radio, TV and email for your mortgage has increased dramatically attempting to make up for lost revenue.   The combination of deregulation and merger mania in the financial services arena has created an environment where now even your local grocery store is offering to be your loan officer of choice. 

So how is a person to decide among all of these companies?  A mortgage is not a decision best left to amateur advisors.  In order to pick the best loan provider, first you have to understand what kind of company is providing you the service.  Here is a guide to how your mortgage is provided and who is best to provide it.

How the Mortgage Market works.

The mortgage market has been inundated with new products and new people selling them.  Most people who have had a mortgage are aware that loans are bought and sold.  Most aren’t aware that there are actually two parts that are sold.  The first part is the loan itself.  If your loan is less than $417,000 chances are your loan will be sold to Fannie Mae  www.fanniemae.com or Freddie Mac www.freddiemac.com these are both Government Sponsored Entities created over 50 years ago for the sole purpose of buying loans and securitizing them on Wall Street so that there would be plenty of money in the market to make home ownership affordable.

Fannie Mae and Freddie Mac often buy the loan itself making most of the interest and allow the original lender to retain the “Servicing”.  The servicing is the part where the lender collects and applies your payments and also deals with issues such as defaults and foreclosures.  When you get a letter saying you now have to make a payment to a different lender, odds are that it’s your servicing and not your loan itself that has recently been sold.

If your loan does not fit the guidelines for Fannie or Freddie it is referred to as “Non-Conforming”.  Jumbo loans above $417,000 are a type of non-conforming loan as are loans with no income verification.  These loans are generally sold to and securitized by large financial firms such as GMAC and Bear Stearns.  Again the servicing can often retained at least for a time by the lender who funded it in the beginning.

Portfolio Lenders

Often large banks and financial institutions such as GMAC, B of A and Wells Fargo will make unique loans out of their own financial portfolio.  This means they don’t sell the note or the servicing and simply collect the interest themselves.

Loan officers with portfolio lenders with a few exceptions are generally the least experienced.  The institutions provide the training and leads to these loan officers but usually train them to simply sell the products at hand.   Management is accepting of the fact that better than 40 percent of these loans will fall out due to people not qualifying for their exact lending criteria.

New Loan Officers without a reputation are attracted to the security and benefits that goes with a big company and its recognizable brand.  Many will drop out or be laid off when the market tightens.  The better ones will move to a broker environment where they can make more money.

Stock Brokers and Insurance Advisors

Many financial services companies such as Morgan Stanley and Ameriprise (part of American Express) either started or acquired mortgage companies during the refinance boom of the last ten years.  What seemed like a natural combination as an idea has presented challenges for the consumer in execution.

While the advisors for these companies are well trained in insurance and securities the mortgage products represented a completely different type of advice to be provided.  Training in the product was limited.  Then in 2003 the National Association of Securities Dealers (NASD) which governs the securities industry along with the SEC issued an edict that securities-oriented advisors were no longer allowed to discuss mortgages in the same conversation as investing. 

NASD was fearful consumers would be talked into taking all of their real estate equity and investing it into the stock market.  Since that time the investment advisors have had a hands-off approach to mortgages simply referring their clients over to order takers on their company’s mortgage side.  With few exceptions the financial services companies have failed to attract experienced knowledgeable loan officers due to secondary branding and limited loan products.

Mortgage Bankers and Direct Lenders

A Mortgage banker is a company that funds mortgages and sells them to other investors.  These companies have institutional relationships and giant lines of credit that allow them to create the loan documents and fund the loans directly to the consumer.  Once the loan is funded they collect the interest until they can sell the loan to the institutional investor.  Sometimes they keep the servicing but more often then not they sell that as well at the beginning.  The largest of these companies is Countrywide and there are hundreds of smaller companies that bank mortgages as well since all that is required is $1,000,000 net worth and there is extra profit for funding the loan.

While many of these mortgage bankers love to tout themselves as Direct Lenders, the truth is that they are simply glorified brokers.  Even though their names are on the documents they can’t simply make loans at their whim.  The loans need to meet the criteria of the investor to whom they are planning on selling it.  If they make a mistake there are severe financial penalties.  For this reason they can often be more careful and cumbersome in their decision making then a portfolio lender.

Many Mortgage Bankers offer their loans at a wholesale rate to brokers.  Ironically some of these mortgage bankers show their hypocrisy by publicly criticizing mortgage brokers when they are actually providing the very service for the brokers that they are criticizing.  There is no real advantage anymore to using a mortgage bank over any other institution.  They have product that can be appropriate but if you as a borrower don’t fit their criteria they will have to find another resource or turn you away.

The biggest advantage of Mortgage Banking over brokering actually goes to the Loan officer.  Federal guidelines require brokers to disclose to you the borrower how much is being paid to the broker in commission.  As a mortgage banker this fee goes undisclosed allowing the banker to charge more without your knowledge of their compensation.  Not all loan officers take advantage of this since they still have to remain competitive in the market place. 

Loan Officers at Mortgage bankers vary in experience.  The larger companies tend to attract the newbies for the security and benefits issue while the smaller companies may house some experienced agents who have grown with the company over the years.   Ultimately they tend to focus on the products available through the bank rather than focusing on the needs of you the borrower.

Mortgage Brokers

65 percent of all mortgages last year were originated by mortgage brokers and with good reason.  Banks and institutions have found that educating consumers and providing customer service is a time consuming and difficult process and happily pay mortgage brokers thousands of dollars to fulfill the needs of the consumer.

A broker is a state licensed entity that has access to hundreds of lenders who discount their rates and fees to the broker.  This means that the broker can provide pricing comparable to the lender who funds your loan.   Most of the top originators in the country are mortgage brokers.  They generally have the most experience as well. The reason is that lending companies come and go over the years and survival in the mortgage industry requires the flexibility to always have competitive product available for your borrowers.

Since mortgage brokers work with many different lenders they train on a variety of products allowing them to help you pick the best product for your situation rather than the product available through their own institution.  Unlike loan officers at institutional lenders, brokers only get paid if your loan closes so they are diligent about getting your loan done right the first time. Since their commission is always disclosed unlike mortgage bankers you can see that you are getting a fair deal at closing.

Ultimately it’s the Education

Again with market consolidation there has been a fair amount of acquisition of Mortgage brokerages by Mortgage Bankers.  These hybrids are bringing the best of the products and pricing of Mortgage Bankers with the expertise and flexibility of traditional Mortgage Brokers.  You as a consumer needn’t worry as much about the back office workings of the particular company as long as the Loan Officer has a variety of product and is willing to provide you with fair pricing and education.

Despite what the financial institutions would like you to think, the mortgage market is a complicated place and picking the right mortgage requires education on a number of factors including programs, rates, taxes, investment, time management and marketability.  Choose a Loan Officer that has lots of experience and is willing to take the time to explain the impact of all the choices.  Log Homes have unique circumstances and regardless of whether a loan officer represents a bank, Mortgage Banker or Mortgage Broker they should be well versed in the Log home process and particularly appraisals.

Regardless of what type of institution you are working with it’s your money that is paying for the Loan officer so demand the best and make sure they work to deserve your business loyalty and referrals.

About the Author...
Kevin Daum is the Founder and CEO of Stratford Financial Services, a Real Estate finance and education company, founded in 1989. Stratford specializes in Purchase loans, Refinance loans and Custom Home Construction finance and has successfully financed thousands of clients. He is the author of "Building Your Own Home for Dummies" (Wiley), as well as "What the Banks Won’t Tell You." Mr. Daum was an Underwriter for Plaza Savings and Loan and Key Bank of New York. He is an INC 500 CEO and has been listed as one the 40 Most Influential People Under 40 in the San Francisco Bay Area. He is the Global Chair for the Edison Innovation Program with the Young Entrepreneurs' Organization (YEO) and is a founding Board member of the Bay Area Chapter of YEO.

Mr. Daum is a frequent contributor to numerous business publications on the subjects of Real Estate and Small Business leadership and speaks regularly on both subjects. He can be contacted at kevin@stratfordfinancial.com.