Mortgage Rates Report

Steering is an ugly practice practiced by real estate agents and mortgage originators alike.  The problems lies in the compensation; incentives or bonuses often taint the advice given you by your real estate or lending agent .  These secret incentives often manifest after you've been lulled into the bliss of your home purchase and get explained away as "volume incentives" or "relationship bonuses".  They are not illegal nor should they be.   They do, however,  subvert the process of agency and bastardize the relationship between you and the professional you hired. 

 

This article will refer to different authors in the real estate brokerage and mortgage origination communities.  Spend two hours reading all of the linked articles and you'll learn how to get superior real estate representation and a mortgage professional who embraces the concept of fiduciary agency.

 

I'll start off with the disclosure that I've accepted engagements as an exclusive mortgage broker and as a mortgage originator "hustling deals".  I mostly adhere to this policy:

 

• My firm charges 1% of the loan amount plus $495 for mortgage brokerage services (lender fees and third party fees not inclusive).
• My firm charges 1.375% of the loan amount plus $1795 (inclusive of all lender and third-party fees) when acting as a principal to the transaction, funding the loan.
• My firm will charge a minimum fee of $3000 and a maximum fee of $10,000

 

Does that sound expensive?  It's really not.  In fact, I'm probably priced at the lower end of the compensation range for loan originators.  I base my compensation model to be in-line with the prime bank lenders' compensation model to its originators.  For a reader to claim that "Big Bank in America is cheaper; they offer no-cost loans" shows an ignorance of the relationship between rates and closing costs.  The first thing a reader must understand that relationship by knowing about  yield spread premium.

 

READ: Yield Spread Premium: A Tutorial For Realtors

 

I also accept engagements for mortgage origination under the "hustle theory".  In fact, most customers initially choose this method of compensation because it is how they were trained to shop for loans.  It is based on the false premise that market information available is correct.  It preys upon the misunderstanding of market information by the customer in a primary search for the "lowest rate" and a secondary search for "reasonable" fees.  Often the rate or fees are compromised to accomodate the other other. 

 

READ:  You'll Never Get the Lowest Rate

 

Personally, I despise the hustle theory and default to the transparency approach in all transactions.  It is when the agreement I make with a borrower, to adopt the transparency approach, is broken by the borrower that I default to the hustle game.  This is the ethic of reciprocity;  treat others as you would like to be treated.   When a customer defaults to the old ways of mortgage shopping, by withholding information about their shopping activities, I offer a defense of traditional mortgage origination.  The traditional mortgage originator's creed:  withhold information, confuse through industry speak, and "close" like a time-share salesman on Sunday afternoon.  Mortgage brokerage agreements are not recognized by most states so the ethic of reciprocity is the only moral protection I have with a borrower.  Break that golden rule and I don my necklace and pinky ring, splash on some cheap cologne , and  transmogrify into a Vegas cab driver with a car full of horny conventioneers.

 

READ:  How Are Loan Originators Like Vegas Cab Drivers?

READ:  Examples of Mortgage Salesmanship.  Consumer Beware.

 

Jeff Corbett, The X Broker, has talked about the need for transparency in mortgage origination.  He champions the cause in his attempt to build an anonymous mortgage search engine for consumers to better arm them with accurate market information.  Jeff argues that the "hustle" should be about the negotiated mortgage brokerage fee and devoid of the rate/fees hustle.  Jeff is biased towards a flat-fee approach to loan origination.  While I don't subscribe to the flat-fee approach, I love Jeff's advocacy of negotiated fees, in advance of the engagement, with pricing transparency.  His model allows me, as a mortgage loan originator, to aggressively shop for loan programs for the consumer without playing the hustle game at the 11th hour.  It puts the borrower and originator on the "same side of the table" so that our interests are perfectly aligned.  Repeat customers will recognize this model because I insist upon it for continued relationships.

 

READ:  The Mortgage Industry's Civil War

 

In summary, you, as a potential homebuyer, hold the power to determine your relationship with your mortgage loan originator.  I offer you this award-winning series of articles, designed to educate home buyers, about how to get home loan advice so that your mortgage costs you the least amount of money over the expected holding time:

 

How To Get The Best Home Loan - Neatness Counts When You Want a Home Loan

How To Find Your Way Through The Home Loan Jungle - Part One How To Find Your Way Through The Home Loan Jungle - Part Two Loving Your Home Loan

 

Armed with a strong pre-approval from a mortgage originator whom you trust to serve your personal interest, you must now find a real estate agent to help you in your home buying search, with that same fiduciary duty.  Again, the responsibility to find a true FIDUCIARY lies in the way you establish that real estate agent's compensation in advance of the search.  The REALTOR hustle has always been to get you to fall in love (with the home) before you negotiate the prenuptual agreement (REALTOR compensation agreement, aka Buyer's Agency Agreement)

 

WARNING:  What you are about the read is a radical breach from the traditional hustle the REALTOR cartel has supported for close to 100 years.  Side effects may include slapping of the head, queasy stomach, depression, and self mutilation. The prescription for those side effects is to take the full dosage (read the articles in their entirety).

 

Greg Swann, of Bloodhound Realty in Phoenix, advocates a negotiated fee agreement, devoid of incentives and bonuses, BEFORE the home search is started.  His basic premise is that that the incentive compensation taints the fiduciary duty of the agent.  His solution is to make the buyer acknowledge that the fees they pay for the real estate agency are truly paid by them by "divorcing the commission" through a simple accounting change.

 

Greg examines this radical accounting change, designed to better represent a buyers' interest, in a five part series of articles:

 

Part One:  How We Got Into This Mess

 

The obvious answer is for buyers to pay their own agents. If home-buyers were to pay for their own representation, they could assert much greater control over their agents. They could decide what work is to be done, when and in what quantity. And they could negotiate compensation, just like sellers do.

 

But the obvious answer turns out to be not so obvious after all. Buyers have never paid for their own representation before. Often, they do not have cash available to pay their real estate agent. And the mechanisms we have used, until now, to settle up the funds in a real estate transaction do not provide for buyers to pay their own agents.

 

Part Two:  How Buyers Can Finally Take A Seat At the Grown Up Table

 

Will the necessity of negotiating their buyer’s agent’s compensation make buyers more practical? Perhaps not. But if buyers have sense enough to bargain for compensation arrangements that align their agent’s interests with their own objectives, rather than with the seller’s, then the agent can steer them back toward reason when their minds become clouded by emotion.

 

This is important. Divorcing the commissions — the buyer pays the buyer’s agent, the seller pays the listing agent — is potentially the most significant reform that can be made today in residential real estate. But if buyers persist in acting like goofy teenagers on a carnival midway, they will continue to be — and they will deserve to be — nothing but sucker-bait for well-prepared sellers.

 

Part Three:  The Who Pays Whom Is Not As Simple As You Might Have Thought

 

This little pantomime — you borrow more to give more to the seller so that the seller can give it back to you — is how we get this sleight of hand trick past your lender. If you are offering $100,000 with a $3,000 seller-funded discount, what is the actual value of the home? It’s $97,000, right? So why is the lender giving you $100,000 in the form of a 100% loan? Because the lender is affecting to pretend to make-believe that your $97,000 offer on the home is actually a $100,000 offer. The actual flow of money — from lender to buyer to seller and back to buyer — has no physical reality. There is no actual cash changing hands. It’s all bookkeeping notations. But by dancing precisely the right steps in a financial rain-dance, the lender pretends that 97% equals 100%.

 

But, guess what? We’re not talking about seller “contributions” for closing costs. We’re talking about the exact same pantomime when it is enacted to pay the listing agent’s and buyer’s agent’s commissions.

 

Who brought every last dollar to the closing table? Who is paying everyone who walks away from that table with money in his or her pocket? Except in a short sale, the buyer pays for everything.

 

Part Four:  Divorcing the Commission Benefits the Buyer AND the Real Estate Market As a Whole

 

But how will buyers even know the difference? This is a common objection, one that is not without merit. As we discussed, buyers are often swept up by their emotions. They care about their future home, not mundane details. So how will they even know that the commissions have been divorced?

 

Because their agents will tell them, that’s how. The way things are done now, a buyer’s agent’s pecuniary interests are best served by buyers being drunk on emotion. The buyer’s agent wants to pick you up, show you some houses, get you to fall in love with one, and only then start talking about agency, representation, fiduciary duties — and compensation. Why then? Because you’re not listening. You’re in love with your new home, and you’re waiting for all this “blah, blah, blah” to wind down so you can sign a big check and move in.

 

This is not in your best interest as a buyer, but divorcing the commissions will induce your agent to have that “blah, blah, blah” conversation before you ever see a house. Why? Because your buyer’s agent will not have established that he is getting paid until he has worked out with you how he is to be paid. Will this cause buyers to be as serious as sellers already are about how much they are being charged? We can hope. But it is certain that it will cause buyer’s agents to induce buyers to talk seriously about agency, representation, fiduciary duties — and compensation — before any other work is done.

 

Part Five:  The Employer Should Have the Right To Negotiate The Compensation of the Employee

 

If buyer brokerage means anything, then it means that you employ “your” agent. But you do not employ anyone if you do not control that person’s compensation. If “your” employee can skim 20% of the value of your home behind your back, then “your” employee is a con-man and you are his mark.

 

And maybe that’s why the NAR doesn’t want to talk about this issue…

 

Here’s the way it really is: To defend that status quo — the seller allegedly paying the buyer’s broker’s commission as a split of the listing broker’s commissions — you have to defend it at its worst. Why would a builder offer a 20% buyer’s agent’s commission? To get that buyer’s agent to betray his own client. There is no other reason. And there is no other reason for any buyer’s agent’s bonus proffered by the seller or the listing agent. And, therefore, there is no other reason for any co-broke — for any payment flowing from the seller to the buyer’s representative. The seller is not paying to have his own objectives frustrated, and the listing agent knows all too well that paying a percentage of the purchase price as a buyer’s agent’s commission aligns the buyer’s agent’s interest with the seller’s, not with his own client’s interests. This doesn’t mean that the buyer’s agent necessarily will betray the buyer’s interests, but the deck is surely stacked that way, and it has never in the 100-year history of the NAR ever been stacked any other way.

 

Greg perfectly illustrates how the current system of real estate brokerage compensation can taint the supposedly unbiased advice a real estate agent offers to the buyer.  Do you notice any similarities to the mortgage transparency argument?  The glaring flaw in our respective compensation models is that sellers pay for buyers' advice, in both loan origination and real estate brokerage.  The sellers of money (lenders) deliberately taint the process with intentionally vague disclosures of originator compensation and the sellers of homes deliberately taint the process by offering secret incentives to buyer's agents.

 

Of course, the whole thing works when we work you up into an excitable state of euphoria, induced by love you feel for the spacious kitchen, the well-appointed bathrooms, and the magnificently landscaped exterior.    Once in that state, we (both real estate agents and loan originators) can quietly extract extra nuggets from you, and chalk it up to "an extra $42 per month".  After all, isn't $42 a month a small price to pay for love?

 

 

 

LISTEN TO:  Why Must I Be a Teenager In Love?

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