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How Mortgage Lenders Can Cheat Their Customers You'd have to have come to town on a turnip truck not to know that some mortgage lenders will cheat their customers if they get a chance. Obviously, no one wants to do business with cheaters but millions of people do every year without ever knowing it. Not all of them get cheated, but many do. They may get mad but they proceed with the transaction because of time constraints. Others are simply oblivious to the cheating. This article will help you identify one common method of cheating and how you can take action defend yourself to minimize the damage. Let's say that at the time of application a lender you choose quotes you 6.875% and 1.25 points. Let's even assume that he's being truthful, that this quote really represents the market. Lender's work off of a price list and that part of it looks like this. The bold face numbers are what the Loan Officer quoted to you.
This array demonstrates that if you want a lower rate, you have to pay for it by paying more points. Conversely, those loans that cost you less have a higher rate or yields and are thus worth more in the Secondary market. For example, the difference between a the 6.875% loan and a 7.125% loan is 1.25 points. This means to improve your rate by .25%, you need to pay 1.25 points. Let's assume that after you apply the market improves, rates dropping modestly, say that same .25%. The lender's new rate sheet would show that for a cost of 1.25 points, you could get a 6.625% loan, down from 6.875%. If the lender were being fair with you, he'd pass on the entire improvement in the market to you. But not all lenders will do that willingly. Here's why. Let's say that with their normal markup, the lender was going to make 1.25 points on your transaction, $2,500 on a $200,000 loan. Now remember that a loan with a .25% higher yield is worth 1.25 points more to the lender. (Note that So if the lender can talk you into taking the loan at the terms originally quoted, 6.875% at 1.25 points, they make another $2,500, and that's on top of their normal profit on the loan. They make $5,000, not $2,500 and you pay it all! While "direct lenders" are not required to show their profit, if you are dealing with a broker, RESPA regulations require that all compensation to the broker appear on the documents. The compensation to the cheating broker in this case would show the 1.25 point Loan Origination Fee but, in addition, it would show $2,500 P.O.C. That P.O.C. stands for Paid Outside of Closing, meaning that the broker was receiving an extra $2,500 from the lender. When you are about to lock in your loan, ask the broker to send all the information about the loan, including all costs, to the Settlement Agent and ask the Agent to prepare an "estimated" HUD-1 closing statement. This compensation will show up and you can call your Rep back and ask, "Why did your initial Good Faith Estimate show you were making $2,500 and this one shows you are making $5,000?" If he refuses to budge, call back and ask for the Manager. In my view, you have a perfect right to demand that their compensation be in line with the estimate you received when shopping. Here's another way to protect yourself. Be sure to keep track of the rates every week by writing them down all through the process. If you don't write them down, you'll forget. A good source is HSH Associates at http://www.hsh.com/mtgrates.html. You can also check out Freddie Mac's weekly rate survey at http://www.freddiemac.com/pmms/. If your lender's rates do not track the rates you see at these pages, something is fishy and I'd ask to speak to the lender's Manager. Hint: lenders who cheat are good at "blowing people off" so be prepared to be very demanding, abrupt, and, above all, don't give up until you get satisfaction. Of course, no one wants to go through all this if he doesn't have to. A much better way is to avoid dealing with cheaters in the first place. That means starting out the shopping process by getting referrals from clients and checking them, not just believing rate quotes. You can check out my best-selling "how to" mortgage book HOW TO SAVE THOUSANDS OF DOLLARS ON YOUR HOME MORTGAGE. It contains lots more tips which can save you even more money. Randy Johnson is President of Newport Beach based Independence Mortgage Company and author of the best-selling book HOW TO SAVE THOUSANDS OF DOLLARS ON YOUR HOME MORTGAGE at your local bookstore, or at his website, http://www.loan-wolf.com/ |