HOW DO MORTGAGE BROKERS GET PAID?
How I get paid comes up early on in a conversation with a home loan applicant.
Mortgage brokers are paid by either a consumer or by a lender, but not by both. Prior to April 2010, mortgage brokers could get paid by a combination, but the loan officer compensation rule that went into effect on April Fools Day put an end to that.
When a lender accepts a loan from a mortgage broker they pay "yield spread premium" or YSP. A mortgage broker is required to disclose to the borrower the gross amount of money (YSP) the firm is making on a transaction. This is done on the good faith estimate and in many cases additionally on other forms. Whereas the disclosure method changed, actual disclosure is not new; mortgage brokers have for decades disclosed their gross income.
Yikes! You are making that much money!!!! No, would be nice, but the company earns that much money. From that we pay operating costs and finally the originator.
While mortgage brokers disclose the gross income on a loan, bankers do not. They are not required to inform the borrower of how they are paid and how much they are paid. They can be paid on interest the loan earns, the origination of the loan and the sale of the loan in the secondary market where they receive service release premium (SRP).
Since the above information is not disclosed, it can be confusing when a consumer is comparing options. As a mortgage broker my firm's income is shown on the good faith estimate as part of the origination cost of the loan. For a banker income is NOT shown anywhere on the good faith estimate.
A common thought would be "why would I pay a mortgage broker $$$$ income and a bank zero income?". In reality the mortgage broker's income portion of the origination cost is shown, then backed out in a subsequent box. An exercise that, in my experience, most consumers find confusing.
Mortgage brokers compete with bankers for business because they can offer competitive interest rates and costs. How do they offer competitive rates?
A mortgage broker is provided wholesale pricing from lenders who want business from the broker. The benefit to the lender is they (a) have a market share they otherwise would not, perhaps due to geography and (b) they have the benefit of the market share without having to spend money for overhead, such as an actual office, personnel, licensing, insurance, supplies, taxes, etc.
How mortgage brokers are paid is simple enough to explain. What is not so simple is why there is a difference in disclosure between the banker and mortgage broker.
I can't help but compare the income question to any purchase a consumer makes. Normally a consumer shops for a product and knows what is a fair price. They don't need to be told how much money the wholesaler made on the product before it hit the retail shelf. It has no bearing on their decision. This is not unlike mortgage loans when a borrower will make a decision based on the criteria that is important to them.