A Mortgage Broker’s Role in Lending
If you’ll be working with a mortgage broker, you should have an idea how the broker operates and how the broker is paid. The relationship between you, the mortgage broker and the lending institution can get confusing. But after reading this, you’ll hopefully have a better understanding of these relationships.
What’s easiest to understand is that some mortgage brokers represent borrowers but others don’t. The same broker may even play different roles depending on the transaction.
The different roles brokers play
Let’s start by examining the broker who represents a borrower. Usually this type of broker has a fiduciary responsibility to the borrower as well as an agency relationship. As for this type of broker, his or her fees will come for either of two sources. Broker fees might be paid by the borrower exclusively. Or, the broker’s fees can be paid by other sources, primarily from a lender. Borrowers and brokers can reach an agreement to establish an agency relationship. Other times, such a relationship may be established under certain state laws. Even when there is no contract between broker and borrower, and no specific state regulation governing such a relationship, the relationship still may be in force in some states.
In situations where the broker does not represent the borrower, the broker has one or perhaps several funding sources that can be accessed for the purpose of making loans available to borrowers. Access to these funding sources is possible because the broker has established a business relationship with the provider(s) of the funding source(s). These brokers do not act as a borrower’s agent. Instead, they attempt to sell mortgage products to borrowers just as other types of mortgage providers do. The broker is considered a lender’s agent when the broker has only one source of funding from which to make loans available.
When it comes to processing and closing mortgage loans, some brokers do so under their own name. When done in this manner, the loan will transfer to a lender when the loan is ready to settle. At the time of transfer, the lender will advance the amount of funding necessary for the loan. Referred to as “table-funded” loan, the broker in this transaction does not provide the capital to cover the loan; this is the lender’s responsibility. As soon as contractual obligations for the transaction are complete, the lender receives from the broker the mortgage package. A mortgage package includes items such as a promissory note, proof of insurance, the mortgage, and assignment of the rights held by the broker.
Sometimes a mortgage initiated by the broker is also closed in that broker’s name. In these transactions, the mortgage broker provides funding for the loan, but only temporarily. Mortgage brokers involved in these types of transactions usually have warehouse lines of credit available to them. Or they have their own funding. After closing, the broker will sell the loan. The role of the mortgage broker in these types of transactions is similar to that of a mortgage banker with one key difference; brokers don’t service the loans.
And then there is the process most borrowers are familiar with: the mortgage broker who works as the intermediary, or matchmaker. In these transactions brokers help borrowers complete mortgage applications. Then, based on their knowledge of the various lenders with which they have an established relationship, the broker attempts to secure funding from the lender most likely to approve the applicant. Lenders close these loans.
Compensation
Mortgage broker fees are usually, but not always, paid for by the borrower, and are based on the services provided. Sometimes a lender that funds the loan pays “indirect” fees to the broker. When a borrower pays points or fees directly, they can be paid at closing from the borrower’s personal funds, or they can be rolled into the mortgage, which increases the amount borrowed. As an alternative, the broker may offer a combination of the above options.
Typically mortgage brokers offer borrowers a choice of payment options and the option chosen affects how the broker is paid his fee. When lenders pay indirect fees to the broker, the amount paid reflects the interest rate the broker negotiated with the borrower as well as points and other direct fees that were negotiated. A borrower might choose to pay low or no points/fees and a higher interest rate. Or the buyer might choose the opposite: take a lower interest rate in exchange for paying more points and fees. When a borrower chooses the higher interest rate option, the fee the lender pays the broker will reflect the additional interest the lender will be receiving from the borrower.
The amount lenders pay brokers for the loans they deliver is set once or several times each day. Rather than offering a fixed price, lenders pay a percentage of the amount of the loan. When determining the price they’ll pay, a lender compares the interest rate as well as any other fees and points the broker charged the borrower to the amount it would be willing to pay to purchase the loan on a particular day.
The lender will also take into consideration the loan’s market price, or its value on the secondary mortgage market. Brokers typically earn higher compensation when the difference between the loan rate entered into by the borrower and the market price is higher. Other factors a lender may consider when determining compensation is the borrower’s creditworthiness, the loan type, and the rate lock period.
The mortgage broker is paid a commission for the loan by the lender according to a formula based upon the difference between the rate and points that the borrower agreed to pay, minus the prevailing market rate for a loan of that amount.
For example, if a borrower agrees to pay 2 points plus 6% for a $200,000 loan, and the prevailing market rate for a loan of that size is 1 point and 5.25%, the broker would earn a commission on the additional one point and the .75% difference between the 6% the borrower will pay and the 5.25% prevailing rate.
Finally, since more settled loans means more profit potential for the lender, lenders sometimes offer brokers a “volume-based discount.” This is basically an extra payment based on the quantity of loans the mortgage broker provides the lender over a defined period of time.