By Jack Guttentag
Saturday, April 5, 2008
In the past 10 years, I have written almost 50 articles on mortgage brokers, but none addressed the most basic question of all: What makes a good broker? Perhaps it took 10 years before I was ready to confront this question, along with its obvious corollary: How do you know a good broker when you see one?
After talking this over with several brokers, I've put together guidelines to help you find a good one. Not all brokers -- even the good ones -- would agree with everything I say.
Loan officers employed by a single lender operate like brokers, except they provide the programs of only one lender. Most of what I say below applies as much to them as to brokers.
Good brokers are selected by borrowers, rather than the reverse: Poor brokers must constantly solicit, whereas good brokers enjoy referrals from previous customers, real estate agents and others. It's not that good brokers never solicit, but the odds are in the borrower's favor if the borrower does the selection.
One test of a good broker is whether the broker will tell a client that a contemplated refinance is not in his interest. The broker who has a constant source of referrals is much more likely to do this than one who bought your name and address from a leads broker. A good rule, therefore: Do not respond to solicitations.
Good brokers are financial planners: Mortgages should fit properly into a household's overall financial situation and goals, which often involves challenging questions. Here is an abbreviated list of important ones:
· What is the best type of mortgage for this borrower?
· How much should the borrower put down?
· Should the borrower pay points or receive rebates?
· Should the borrower raising cash take a second mortgage or do a "cash-out" refinance?
· Should the borrower putting less than 20 percent down buy mortgage insurance, take lender-pay insurance at a higher rate or take a piggyback second mortgage?
· Will it pay the borrower to refinance?
· Should the borrower consolidate other debts in a refinance?
· Should the borrower use available cash to pay down debt, pay points or make a larger down payment?
There is no single conclusive test of a broker's skills as a financial planner, but there are clues in how the broker responds to your questions about these or similar issues.
A good sign: The broker indicates what the answers to your questions depend on -- as an example, whether you should pay points depends heavily on how long you expect to have the mortgage.
An even better sign: The broker mentions an analytical tool he will use to answer the question, such as a specific calculator or spreadsheet.
A bad sign: The broker gives you an answer right off the bat.
Good brokers are good listeners. Every borrower has a unique set of needs, capacities and preferences. Unless the broker extracts this information at an early interview, the risk is high that the broker's recommendations will not fit. The shrewd borrower can tell a lot about the broker from that interview.
A good sign: Before offering any opinions, the broker quizzes you about your financial status and plans.
A bad sign: The broker pretends to know what mortgage type you need, or the answer to any other issue that may be vexing you, without having learned anything about you.
Good brokers will act in your interest in dealing with the lender and third parties. They will guarantee the lender fees presented to you in the good-faith estimate, preventing any fee escalation. And they will seek out the best possible prices for third-party charges like title insurance.
Some brokers have special arrangements to pass discounts to their clients, while others select providers who give brokers the best Christmas presents.
A few questions to ask:
· Will the broker guarantee that lender fees won't be higher at closing?
· Are the title charges competitive? How does the broker know this?
· Will the broker guarantee that third-party fees won't be higher at closing?
· What the broker's total fee be, including any payments received by the lender? Will he put this in writing?
· Will the broker give you a copy of the rate-lock statement as soon as it has been received from the lender.
A good broker operates transparently. The broker who keeps you in the dark is the one most likely to sacrifice your interests for his payday.
Next week: More about what makes a good mortgage broker.
Jack Guttentag is professor of finance emeritus at the Wharton School of the University of Pennsylvania. He can be contacted through his Web site,http://www.mtgprofessor.com.
© 2008 Jack Guttentag
Distributed by Inman News Features