MortgageBlog.com

How to Clean Up the Mortgage Broker Mess:

There are a 2 simple yet powerful changes that need to take place for Mortgage Brokers to stay relevant as Congress seeks to take action against the mortgage broker industry.

Flat Fee Mortgage Compensation Model
Loan Contract

1. Flat Fee Mortgage -removing the agency problem in the mortgage business
I have believed in the concept of the flat fee mortgage since I first learned about it in 2003. This is a simple yet elegant way of doing business.
It removes the agency problem that is at the core of the mortgage broker business. (i.e. The broker’s compensation is maximized when selling the most expensive or less than optimal product to their “client”).

So what is a flat fee mortgage?
A flat fee mortgage is when the mortgage broker is a paid a flat fee for their time and expertise. This method allows the mortgage broker to truly find the best and least expensive mortgage for their client. The mortgage broker is paid a flat fee to research, find and execute a mortgage package. These can be done at wholesale rates with NO yield spread and no backend compensation from lenders. The broker quotes a fee for their time and expertise and is paid that fee and nothing more.

What the flat fee mortgage is NOT.
This is not the marketing gimmick by some of the internet lenders using TV advertisements. This is not the $395 or $500 flat fee mortgage. Those loans still have yield spread premiums and junk fees.

The flat fee mortgage we are recommending is as follows:

Fee paid to Broker
$1,500 to $3,000 fee paid to broker - fee is negotiable and depends on loan difficulty but is agreed upon in writing at the beginning of the process. Fee is not based on percentage of loan amount so low loan amounts are now much more attractive to brokers.

Wholesale rates to borrower - No Yield Spread Premium
Offer wholesale rate to borrower - no yield spread, no points on the front end or back end paid back to broker. All rebates or points are given back to borrower in form of lower fee.

No junk fees
3rd party fees are not marked up, no junk fees. All fees are passed through to borrower.

2. Loan Contract -
This is simply a contract that spells out for the borrower what they are committing to pay for the loan and explains the possible outcomes including worst case scenarios for ARM loans. This is badly needed in the industry and will become a requirement either from the industry or from the US government. The loan contract is written so consumer can read and understand the terms, 1 to 2 pages maximum.

These 2 simple ideas are needed immediately to save the mortgage broker industry before it is legislated to extinction.

Filed under: Flat Fee Mortgage, Mortgage Contract, Mortgage Marketing