Santa Cruz Sentinel
October 21, 2007
: How mortgage originators get paid
Peter Boutell, Lending a Hand
The press, the public, Congress and our presidential candidates have been hammering mortgage brokers. They have all focused on mortgage brokers while looking for a reason to explain the current state of affairs of this nation's real estate market.
Mortgage companies account for more than 50 percent of the mortgages originated each year in the United States. In California that number approaches 65 percent. The rest of the mortgages are originated at banks and savings and loans. A mortgage is said to be "originated" when a borrower completes the loan process and receives a new loan for either a purchase or a refinance. The mortgage originator is the person who meets with the borrower, counsels the borrower and reviews his loan options as well as long- and short-term costs, gathers the borrower's paperwork and then sees to it that the transaction is completed successfully.
The term mortgage broker is broadly used to identify a mortgage originator that works at a mortgage company. However, mortgage companies are divided up into two categories. A mortgage bank accepts the responsibility of originating, approving, preparing loan documents and funding loans; it then transfers the loan servicing to one of numerous lending sources. For these reasons no one can beat a mortgage bank for speed and efficiency. On the other hand, a mortgage brokerage company only originates the loan and then sends all the paperwork to a bank or mortgage banker for approval, documents and funding.
One of the reasons that mortgage companies handle the majority of mortgage originations is because they offer more mortgage options and can do it more efficiently. Banks have their own loan products to offer but cannot offer the loan products of other banks and they have large brick-and-mortar operations to support. In addition, banks are more cumbersome because most must depend on regional loan centers for their processing, approvals, documents and fundings.
Mortgage originators, whether working in a bank or for a mortgage company, get paid based on the number of loans and the size of the loans they originate. The more volume, the more income. Banks like to say that borrowers have to pay points when they use mortgage brokers but that just isn't so. Borrowers have a choice to pay points whether they use a bank or a mortgage company; the tradeoff is interest rate. The lower the points, the higher the rates.
Some news articles have mistakenly reported that mortgage brokers get paid more for originating loans that have prepayment penalties or interest-only options. Actually, mortgages that have the interest-only option cost more because investors charge more for this option. That additional cost is passed on to borrowers. Lenders often offer lower rates to borrowers willing to accept a prepayment penalty. While some mortgage originators may pocket those dollars for themselves, scrupulous mortgage originators will present the prepayment option to the borrower as a potential savings.
Origination of subprime loans has not been restricted to mortgage brokers. Washington Mutual, Wells Fargo, Countrywide as well as other banks have all been major players in placing subprime loans. While there are unscrupulous mortgage originators from both banks and mortgage companies that have contributed to the foreclosure mess that this country is facing, some 50 percent of early payment defaults can be traced to borrower misrepresentation in the loan application process. Missing one of the first mortgage payments is called an early payment default and is a precursor to foreclosure.
Borrowers must accept at least some of the responsibility by reviewing their paperwork carefully and working only with trusted and experienced professionals who have been referred to them by friends and work associates.
Peter Boutell is a mortgage consultant with a local mortgage company, Santa Cruz Home Finance |