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Mortgage broker
A mortgage broker acts as an intermediary who
sources mortgages on behalf of individuals or businesses.
Traditionally, banks and other lending institutions
have distributed their own products. However as markets for mortgages
have become more competitive the role of the mortgage broker has
become more popular. Today in most developed mortgage markets (especially
the U.S. , UK , Australia , Spain and Canada ) mortgage brokers
are the largest distributors of mortgage products for lenders.
Most mortgage brokers are regulated to some
degree to ensure a level of consumer protection. The extent of the
regulation depends on the jurisdiction.
Contents
* 1 Why use a mortgage broker?
* 2 Tasks of mortgage broker
* 3 Mortgage brokerage in the USA
o 3.1 Difference between a mortgage broker
and a loan officer
o 3.2 Industry competitiveness
o 3.3 Secondary market influence
o 3.4 Improved consumer laws
o 3.5 Predatory mortgage lending and mortgage
fraud
* 4 Mortgage brokerage in Canada
* 5 Mortgage brokerage in the UK
* 6 See also
* 7 External links
Why use a mortgage broker?
In competitive mortgage markets many lenders
use an array of rate offers and other incentives to attract customers.
To many consumers due to their infrequent purchases of mortgage
products the mortgage market may appear confusing and somewhat daunting.
A mortgage broker can guide them through the process of selecting
a suitable mortgage and offer mortgage and property related financial
advice.
For borrowers with poor credit records or other
unusual circumstances finding a lender may be difficult and therefore
it may be necessary for them to consult a mortgage broker as they
will have the specialised knowledge required.
Tasks of mortgage broker
The nature and scope of a mortgage brokers
activities varies with jurisdiction. For example in the UK anyone
offering mortgage brokerage is offering a regulated financial activity;
the broker is responsible for ensuring the advice is appropriate
for the borrowers circumstances and is held financially liable if
the advice is later shown to be defective. In other jurisdictions
the transaction undertaken by the broker may be limited to pointing
the borrower in the direction of an appropriate lender and no advice
given.
Therefore the work undertaken by the broker
will depend on the depth of their service and liabilities. Typically
the following tasks are undertaken:
* Marketing to attract clients
* Assessment of the borrowers circumstances.
This may include assessment of credit history, affordability (verified
by documentation or otherwise).
* Assessing the market to find a mortgage product
that fits the clients needs.
* Applying for a lenders agreement in principle
(pre-approval)
* Gathering all needed documents (paystubs/payslips,
bank statements, etc.),
* Completing a lender application form.
* Explaining the legal disclosures.
* Submitting all material to the lender.
Mortgage brokerage in the USA
Over 80% of home loans issued in the U.S. today
are negotiated by brokers. The banks have used brokers to effectively
outsource the job of finding and qualifying borrowers, and also
to outsource some of the liabilities for fraud and foreclosure onto
the originators through legal agreements.
During the process of loan origination, the
broker gathers and processes paperwork associated with mortgaging
real estate.
As of 2005, there are approximately 20,000
mortgage brokerage operations across the USA . Today, mortgage brokers
originate 60% of American mortgages.
Difference between a mortgage broker
and a loan officer
A loan officer acts as the conduit between
buyer and lender. Most states require the mortgage broker to be
licensed, while others do not. States regulate lending practice
and licensing, but the rules vary. Most have a license for those
who wish to be a "Broker Associate", a "Brokerage
Business", and a "Direct Lender".
A mortgage broker is normally registered with
the state, and personally liable (punishable by revocation or prison)
for fraud for the life of a loan. A loan officer is typically not
liable for their actions, and instead works under the umbrella license
of their current institution. Typically, they have less experience
in the field.
Also, loan officer usually connotes someone
who works for a lender, and has involvement in the internal processes
of a lender. A broker exclusively uses the money of others to fund
their loans.
Industry competitiveness
A large segment of the mortgage finance industry
is commission based. Potential clients can compare a lender's loan
terms to those of others through advertisements or internet quotes.
In the 1970s, mortgage brokers did not have
access to wholesale markets, unlike traditional bankers. Today,
mortgage brokers are more competitive with their access to wholesale
capital markets and pricing discounts. A mortgage broker has lower
overhead costs compared to large and expensive banking operations
because of their small structure. They can lower rates instantly
to compete for clients. On the other hand, larger companies are
less competitive since they provide their sales representatives
their fixed rate sheets. The loan officer oftentimes cannot reduce
their companies profit margin and may be higher or lower than the
marketplace, depending on the decision of managers. Thus, mortgage
brokers have gained between 60-70% of the marketplace.
Mortgage brokers can obtain loan approvals
from the largest secondary wholesale market lenders in the country.
For example, Fannie Mae may issue a loan approval to a client through
its mortgage broker, which can then be assigned to any of a number
of mortgage bankers on the approved list. The broker will often
compare rates for that day. The broker will then assign the loan
to a designated lisenced lender based on their pricing and closing
speed. The lender may close the loan and service the loan. They
may either fund it permanently or temporarily with a warehouse line
of credit prior to selling it into a larger lending pool. The only
difference between the "Broker" and "Banker"
is often the banker's ability to use a short term credit line (known
as a warehouse line) to fund the loan until they can sell the loan
to the secondary market. Then, they repay their warehouse lender
and obtain a profit on the sale of the loan. The borrower will often
get a letter notifying them their lender has sold or transferred
the loan.
Sometimes they will sell the loan, but continue
to service the loan. Other times, the lender will maintain ownership
and sell the rights to service the loan to an outside mortgage service
bureau.
Secondary market influence
Even large companies with a lending licence,
sell, or broker the mortgage loan transactions they originate and
close. A smaller percentage of bankers service and keep their loans
than those in past decades. Banks act as a lender due to the increasing
size of the loans because few can use depositor's money on mortgage
loans. A depositor may request their money back and the lender would
need large reserves to refund that money on request. Mortgage bankers
do not take deposits and do not find it practical to make loans
without a wholesaler in place to purchase them. The required cash
of a mortgage banker is only $50,000 in New York . The remainder
may be in the form of property assets (an additional $200,000),
and an additional credit line from another source (an additional
$1,000,000). That amount is sufficient to make only two median price
home loans. Therefore, mortgage lending is dependent on the secondary
market, which includes securitization on Wall Street and other large
funds.
The top wholesale institutions are Federal
National Mortgage Association, and the Federal Home Loan Mortgage
Corporation, commonly referred to as Fannie Mae and Freddie Mac,
respectively. Loans must comply with their jointly derived standard
application form guidelines so they may become eligible for sale
to larger loan servicers or investors. These larger investors could
then sell them to Fannie Mae or Freddie Mac to replenish warehouse
funds. The goal is to package loan portfolios in conformance with
the secondary market to maintain the ability to sell loans for capital.
If interest rates drop and the portfolio has a higher average interest
rate, the banker can sell the loans at a larger profit based on
the difference in the current market rate. Some large lenders will
hold their loans until such a gain is possible.
The selling of mortgage loans in the wholesale
or secondary market is more common. They provide permanent capital
to the borrowers. A "direct lender" may lend directly
to a borrower, but can have the loan pre-sold prior to the closing.
Few lenders are comprehensive. That is, few
close, keep, and service the mortgage loan. The term is known as
portfolio lending, indicating that a loan has been made from funds
on deposit or a trust. That type of direct lending is uncommon,
and has been declining in usage.
Improved consumer laws
The laws have improved considerable in favor
of consumers. A mortgage broker must comply to standards set by
law in order to charge a fee to a borrower. The fees must meet an
additional threshold, that the combined rate and costs may not exceed
a lower percentage, without being deemed a "High Cost Mortgage".
An excess would trigger additional disclosures and warnings of risk
to a borrower. Further, the mortgage broker would have to be more
compliant with regulators. Costs are likely lower due to this regulation.
Mortgage bankers and banks are not subject
to this cost reduction act. Because the selling of loans generates
most lender fees, servicing the total in most cases exceeds the
high cost act. Whereas mortgage brokers now must reduce their fees,
a licenced lender is unaffected by the second portion of fee generation.
This is due to the delay of selling the servicing until after closing.
Therefore, it is considered a secondary market transaction and not
subject to the same regulation.
Consumers can avoid the high interest rates
by utilizing a broker who cannot benefit beyond a set amount.
Predatory mortgage lending and mortgage
fraud
There is concern in the US that consumers are
often victims of predatory mortgage lending CNN. The main concern
is that mortgage brokers and lenders whilst operating legally, are
dishonestly finding loopholes in the law to obtain additional profit.
Some examples of predatory mortgage lending
are:
* Encouraging applicants to include false information.
* Asking borrowers to leave signature lines
blank.
* Failing to include Good Faith Estimates,
Special Information Booklet, Truth in Lending and Hud-1 Settlement
statement.
* Convincing borrowers to refinance a loan
several times and each time increasing monthly payments or amounts
owed.
* Loaning amounts higher than the value of
the home.
* Not explaining unexpected costs at the settlement.
* Balloon loans: one in which after a series
of low pay-ments the entire loan balance is due in a large lump
sum.
Another unethical practice involves inserting
hidden clauses in contracts in which a borrower will unknowingly
promise to pay the broker or lender to find him or her a mortgage
whether or not the mortgage is closed. Though regarded as unethical
by the National Association of Mortgage Brokers, this practice is
perfectly legal. Often a dishonest lender will convince the consumer
that he or she is signing an application and nothing else. Often
the consumer will not hear again from the lender until after the
time expires and then they are forced to pay all costs. Potential
borrowers may even be sued without having legal defense.
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