Before lenderama took over my career, I worked as an A-paper Account Executive for Commonwealth United Mortgage. This was the broker-wholesale division of National City Mortgage, one of the largest services of mortgages in the world. We never had the best rates or the most exotic programs. Our service was great, but the service from our competitors was very good as well. Despite these hindrances, we were able to attract a boat load of business with high quality brokerages. We were paid on profit, not volume, and let me tell you, the pay was good.
I can’t speak for every lender, but I’ve work for three, and they all shared a business practice that they would rather most brokers remain ignorant to. They offered more than one rate sheet. Different brokers received different rates (different amounts of Yeild Spread Premium for any particular rate). As an account exec, I choose who got what rate sheet. Remember, I was paid on profit, so it didn’t make sense to give everyone the best rates. Some of my brokers always got the best rates, some never got them, but most slipped in and out of the zone without them even knowing.
You might be thinking I based this reward on loan volume, and yes, that was sometimes true. More often, I rewarded brokers who’s business practices best facilitated the profit of our branch. For instance, Broker A never ran their own automated underwriting, piecemealed their conditions in, scheduled the closing on short notice and failed to fallow through on a large portion of their locks. Broker B sent in complete files, including the conditions spelled out by the automated underwriting review they already performed on their own. They scheduled closings several days ahead of time, and only locked loans that they felt would close with us. Broker B got better pricing. B’s efficiency allowed our branch to close more loans. He made us more money, so I did everything I could to keep Broker B’s. That meant they always got the better price.
New brokers always received better pricing as well. This was to encourage them to do business with us. If we found out they were Broker A’s, the better pricing went away.
When it came to working with Broker B’s, I had some stiff competition. Here in Denver, much of it came from Flagstar. They always had a better price than we did, but they pretty much guarantied that the majority of their clients were broker B’s because they didn’t offer enough service for Broker A’s to be able to work with them. Submitting loans to Flagstar meant you had to run AU. On top of that, much of the procedures and communication had to run through the web. Brokers who used Flagstar made much more money, but they needed more manpower, and the capital investment of technology to earn that extra money.
These days, the Flagstar model has become much more the norm. But I can’t help wondering if brokers would have been as willing to invest in new technology if their was no financial reward to be earned. I wonder how many brokers would go through the hassle of working with new lenders if their was no income reward to leverage. I can’t help think if Broker B’s would be as motivated to perform at a high standard if they weren’t allowed to earn any more than Broker A’s.
Every day in the market, there’s a Broker B who can offer a better or equal deal to a borrower as Broker A can, and at the same time, earn more money on that deal. It’s additionally likely that the same business practices that make them more efficient, also translate into better service for the borrower. I wish more politicians, cable news talking heads, realty agents, and John Q borrowers actually understood that. By limiting, regulating, or disparaging the amount of money a broker can make on a loan, they give brokers no incentive to innovate, take risks, or work harder. At that point, they might as well go work for Wells Fargo.
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{ 15 comments… read them below or add one }
Interesting post
Todd. Something I never considered (AE’s giving different rates) but I can see where there is some sense to it. I am for profit. It is what the system we live on is based. If you are a smaller company and you are not very profitable then you are charged more.
I don’t really see the point of doing away with mortgage brokers. Are you saying just let the wholesalers do it? I think they would create their retail side and create the services of brokers inside their own offices. So is it really doing away with it? I don’t know if that really will benefit the consumer. Will the savings get passed?
I never knew AE’s bait/switch brokers lol.
I was wondering why TBW was offering my company better rates to us than the other companies.
I would love to know the TRUE PAR rate…it seems even brokers are getting padded rates.
First, thanks for the look inside. I find this very interesting and knew it went on. Just not how.
Second, it’s why REALTORS do not have or should not have loyalty to any one lender. I keep three in stable and urge my clients to shop them. If the lender doesn’t know if they are getting the best rates at least my client can know.
Again, thanks.
Wow. I didn’t know that as an LO working for a broker (my first mortgage job) that some reps might have been giving me different pricing than the guy down the street. Most of the time we called a number and just printed the faxes out, occasionally I called my rep for a special deal or exception.
But this parallels the same debate we’re having about what consumers deserve to know about our rebates. I guess wholesalers have the same right to price as they see fit, I have the right to shop for the best deal for my clients.
If I don’t think I should have to disclose my profit (YSP) to my borrowers it would be pretty hypocritical to require wholesalers to do that for me.
In NV, banks lobby (often successfully) to make it much harder and more expensive for brokers to do business, by limiting advertising and forcing disclosure that they the banks do not give. My position (unfettered capitalist that I am) is that anything that restricts competition is bad for business and society. Any disclosure required for brokers should apply to banks.
And I don’t want to work for Wells Fargo.
Rob - I’m just saying that if you are going to over regulate YSP, then there’s no point to being a mortgage broker anymore. So much of the general public thinks getting rid of YSP is the solution. They haven’t thought out the consequences.
NCML - Think about this, even the individual wholesale branches (within the same company) may get different rates than other branches around the country. It’s all based on risk and profitability. There’s no such thing as a TRUE PAR rate.
Chris - Shopping is the best advice in the world. It’s just important to remember to focus on how much the loan will cost, and not how much the broker is earning. Think of it this way. If Walmart could sell you the same roll of toilet paper for less money than Target, and still manage to earn more profit, you’d still buy the TP from Walmart right?
Gina - Do you remember how when you called up the “rates on demand” line, you entered in a password? That wasn’t just a password, it was an account number that told the system what rate sheet to send you.
I know that not all lenders do this. Maybe only a few do. I know New America, Washtenaw, and Commonwealth all operated this way because I worked for them.
Your point is well taken. In fact, I really don’t care what the broker makes…one way or the other.
I only care about what rate my buyer pays in comparison to what they could have paid.
Bingo!
Todd, the only troubling thing is that while the AE is hyping me for biz, talking ‘relationships’ he’s screwing me and my clients with higher rates. Come on, if you could make more on the deal and still see biz from that broker, why drop the rates? (of course, you’ll never know how much you lost because Wells was (.25) better that day.)
Jeff, If I can make more money off of you without loosing your business, I should do it. If you can find as good as service from someone with better rates, you should stop doing business with me. On top of that, if you can find a more profitable way to work with a lender who provides even less service, but a far better price, you might want to do that as well.
There’s a million different business models based on a ratio of price, service, and the cost of business. Over-regulating YSP will stifle the markets ability to evolve.
I agree witth both Todd and Chris.
Am I getting wht is good for me?
That is what I was saying over Damp City Guide. I can only last one or two post there and then I have to go.
I will let everyone in on a secret. I am a for profit corporation.
Good stuf here Todd.
Very interesting, Todd. I’m so glad to read this before Thanksgiving… both of my sisters are Wholesale Mortgage AEs who call on me for biz… hmmm… I wonder which rate sheet I get!
I do know there’s a difference between what Mortgage Brokers receive and Correspondent Lenders with some wholesale companies.
Great stuff, Todd.
By the way, there is a name for Broker B; it’s called a correspondent.
But, of course, it’s hard to be a banker
I am glad to see other “truths” being revealed as people need to be aware of what is really going on behind the scenes.
I can tell you definitively that mortgage originators and brokers would NOT pay for the technology. I invented and still offer the lowest priced and most accurate subprime engine in the world. At under $30 a month, it is ridiculously cheap. But, most brokers/originators think they know who has the best loans. HA! No one can tell you that, definitively. A couple of months ago I ran a script to see what rates were available in 2005 when so many ARMs were written. In almost EVERY case, there were 30 year fixed loans available at better pricing than ARMs when people were sold ARMs. I hope that answers your question. Next, we have a consumer version that shows the consumer the best par available from our database of dozens of lenders. Now, they don’t have to rely on cheap know-it-all originators to sell them something that will hurt them, later. If the originators had used our tool when it was introduced, we wouldn’t have this debacle we now have. We never advertised “make more money”, like most pricing products do. We advertised “find the best rate for you client”.
T-
Good job. It’s about time you wrote something that attracted a lot of comments!
I’d surmise most mortgage bloggers would fall into Broker B.
P
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