Mortgage Brokers, Scams and Your Rights
This is a Tale of two Mortgage Brokers and how you can make sure you get the right one. I applied for a no-cost refinance through Sam assuming an 80/20 loan to value for my property. Sam quoted me a rate that was substantially less than the one I had and I told him to lock in the rate. I mentioned the re-finance to my mentor. He told me that I could get a better deal through his broker, Dave. I was shocked when Dave quoted me a rate that was 1/2 a point less than Sam’s at much lower loan costs. I called Sam immediately to let him know I was going with another broker. Sam broke the rate lock he had and matched Dave’s rate. He then told me that because he had broken a rate lock, I had to do business with him. I felt that I was in a moral bind and chose to continue with Sam. I called Dave to let him know. He was a bit skeptical but said nothing bad about Sam. About 3 weeks later, Sam called to let me know that we were ready to close, but that I would have to come up with $4300 dollars to close. He told me that my property did not appraise for enough money. I would later find out that he lied. The property appraisal supported a no-cost refinance at 80/20 loan to value. I wasn’t interested in the deal Sam had to offer, told him so an thought that was that. I applied for a loan through Dave. Sam began to harass me and demand $1800 dollars in commissions that he would have gotten if the deal had closed. I was prepared to ignore Sam, but he did something that was impossible to ignore:he held the property appraisal ransom. In my state, to prevent investor fraud, a property can only be appraised every 6 months. The fact that Sam was holding the appraisal ransom did not matter. My deal with Dave was not going to go through for want of the appraisal. Sam then left harassing messages on my voice mail demanding that I pay him and faxed account information where he wanted the money sent. I was in a bind. I went to the mortgage broker’s association website for my state and ended up speaking to the president of the association. He told me in no uncertain terms that Sam was not entitled to any compensation from me and asked if I wanted to file an ethics complaint with the state broker’s association. I had a better idea and told him no, not yet. Sam worked for a nationally known mortgage company with offices in just about every state. I went to their website and explained my situation on their contact page. Within 24 hours the legal department of this mortgage calculator / company got back to me. I gave them the payment instructions that Sam FAXed to me. By the end of the week, I had my appraisal. Two weeks later I closed my deal with Dave. What did the whole ordeal cost me? $360 dollars, the cost of the appraisal.
What did I learn? How mortgage brokers are paid and that I had certain rights. To protect yourself in the market place you should know and do the following:
1) Shop around for mortgage rates before contacting a mortgage broker or loan officer at a bank. That way you will know if you are getting a good rate.
2) Understand how brokers are paid:
a) points and discount fees are paid by the borrower. One point is 1% of the loan amount.
b) Yield-spread-premium. The YSP is the percentage rate over the market rate that a borrower pays for a loan. Example: the market rate or par rate for a 30 year fixed is 5%, the broker locks you in at 5.25%. The lender will pay the broker a fee for locking you in at a higher rate than was available in the market.
c) Brokers are paid when the deal closes. If you don’t close the deal, the broker isn’t paid. You should not, therefore, pay fees directly to a broker other than perhaps a token application fee and an appraisal fee.
3) You have the right to rescind the loan even after closing. The closer is supposed to inform you that you can rescind the loan at closing. Even after closing you have up to 3 business days to notify the title company that you do not want the loan. Will you incur a penalty? Yes. Rescinding a loan will likely cost you fees to the title company, the appraisal, the application fee and possibly your earnest money, but it may be the appropriate thing to do if you find out right after closing that you have lost your job or if you discover at the time of closing that your mortgage broker was paid a YSP, meaning you were locked into a higher rate than you qualified for. You can usually find evidence of a YSP on line 810 of your HUD statement. That line may have obvious wording on it like: premium paid to broker by lender.
4) Talking to a broker even locking in a rate does not obligate you to work with that broker although individual mortgage brokers may tell you that it does.
It should be clear from my story that Sam was trying to scam me. Since 2003 Dave has done 5 deals with me and would have done more, but he does not handle commercial property. But this is unusual. Most mortgage brokers do one maybe 2 deals with a borrower over that borrower’s entire economic lifetime. Unfortunately the incentive is just too great for a mortgage broker to maximize his or her commissions at the expense of a borrower and resort to extortion rather than use each interaction with a potential borrower as an opportunity to educate and build a relationship with that borrower. I cannot imagine doing real-estate business except through a mortgage broker as brokers can offer a wider range of mortgage products than a bank and using a mortgage broker saves me the hassle of approaching individual banks for a loan. I wish that I could say that Sam was the exception and Dave the rule, but given the current mortgage mess, I’m not so sure.
If you follow the above guidelines, you can avoid having your “Sam” experience. If you do run in to Sam, however, know that you do have recourse through your state’s mortgage broker’s association, the state attorney general’s office and the legal department of the company your Sam works for.
Guest Author, Ouida Vincent, MD, Real-estate Investor, Albuquerque, NM
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Mortgage Loans Refinancing: It is all about mortgage loans and mortgage refinancing for home mortgage.
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