Know how brokers, bankers offer loans

Savvy mortgage shoppers can make the distinction


With more people than ever buying homes, consumers are facing a seemingly ceaseless barrage of offers for mortgages, home equity loans and equity lines of credit from mortgage bankers, mortgage brokers and online lenders.

While a borrower often looks for the lender offering the lowest rate, it may be helpful to consider whether an offer is coming from a broker, a banker or an online lender.

The main difference between a broker and a banker, industry experts said, is that a broker arranges a loan between a consumer and a lender, who then typically sells the loan to investors on what is known as the secondary market. A banker or bank, on the other hand, lends its money and then either sells the loan on the secondary market or keeps it in its portfolio.

But does this distinction matter to consumers?

It depends on a variety of factors, experts said, including what the consumer is looking for in a loan. For example, a mortgage banker is likely to have "in-house" underwriting.

"That allows for a quicker and perhaps more flexible response to an application for a loan," said Oded Ben-Ami, a senior loan officer for Sterling National Mortgage in Great Neck, N.Y.

Direct lenders who keep loans in their portfolios are able to make "nonstandard" underwriting decisions or take risks that lenders who sell all their loans on the secondary market might not take.

"That's a benefit that we sell all the time," said Jason Abell, a mortgage banker with Wells Fargo in Columbia. "The money that we lend is written here - Wells Fargo is writing the check."

Mortgage brokers said their ability to shop around for the best loan for a client is their most valuable service.

"I work with 30 different lenders," said Neil Sweren, president of AllyMac Mortgage Services in Owings Mills and a past president of the Maryland Mortgage Brokers Association. "What we're selling is flexibility."

Julie Teitel, a vice president and mortgage consultant for mortgage broker IPI Skyscraper Mortgage in New York, said that even today - with interest rates as low as they have been in decades - the rates offered by lenders are in a constant state of flux.

"One week, Chase might be offering the best rate in town; then they get busy, raise their rates, and the next week Citibank has the best deal," Teitel said. "We're constantly monitoring the market so we have the ability to bring the customer to the right lender at the right time."

In addition, she said, a mortgage broker is more likely than a banker to make it possible for a borrower to take advantage of a sudden drop in rates.

"If we have a customer with one lender, and the rates drop dramatically, we can take them to another bank if the first lender won't lower the rate," she said. On the other hand, Teitel said, if a borrower has gone directly to a lender, it is unlikely the borrower would even be aware that another lender was offering a lower rate.

Another advantage of dealing with a mortgage broker, Teitel said, is that in most cases the lender, not the consumer, pays the broker's fee.

But, some mortgage bankers say, there is no such thing as a free lunch.

"This is the mortgage broker's biggest secret," said Michael Moskowitz, president of Equity Now, a mortgage banker and direct lender in New York. "They say, `We're getting paid by the bank,' but the only reason they're getting paid by the bank is because the bank is ultimately getting paid by the customer."

Moskowitz said that while mortgage bankers - being the actual lenders - charge customers directly to originate a loan, mortgage brokers are often paid by the lender, particularly when offering zero-point loans. That would be fine, he said, except that in practice, the amount that the broker is paid by the lender is determined by the interest rate the customer agrees to pay.

"There is no such thing as a single current interest rate," Moskowitz said. "Instead, there is a range of interest rates being charged at a specific point in time for a specific price."

For example, Moskowitz said, if at a given time a lender is willing to pay a broker 1 point - or 1 percent of the loan amount - for negotiating a mortgage at, say, 4.875 percent, that lender will pay the broker 1.5 points for arranging a loan at 5 percent, or 0.5 point for a loan at 4.75 percent.

If, however, a broker offers a mortgage to a borrower at a specific interest rate and interest rates in general then drop by one-eighth of a percentage point while the application is pending, the broker now has a decision to make: Does he pass along the reduction to the customer and still get paid only 1 point from the lender, or does he allow the loan to go through at the higher rate?

"The temptation to play the market at the expense of the borrower is huge," Moskowitz said.

Melissa Cohn, president of the Manhattan Mortgage Co., a New York City mortgage broker, said that while some brokers may play the market, reputable brokers do not.

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