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Realtors 3 Points Acceptable? Lenders 3% Commission Gouging, Why?

By Ed Brophy
Synergy Mortgage
March 3, 2007

Brian Papaccio has a great post (Real Estate Commission VS. Mortgage Points) calling into question why it's acceptable for Realtors to charge a 3% commission on the sale of home and it's gouging when a mortgage broker earns 3 points on a loan? It's a great question.

As Brian states if he has the resources and expertise to obtain financing when another lender was unable, isn't he entitled to earn the value of his services as long as Section 32 isn't violated?

On the mortgage side of things the total cost of a loan can not exceed 4.99%, this includes appraisal costs, broker rebate, points, escrow fees, title fees, recording fees, lender and broker fees along with everything else that's included in recurring and non-recurring closing costs.

Realtors on the other hand have zero limitations placed on the amount they can charge in each transaction. If you have a Seller willing to pay a 7% commission you've hit the jackpot and no one calls your charges into question or accuses your of gouging the client. You're high-fived throughout the office.

On the mortgage side of things we have points, another word for commission. In the mortgage business points are a dirty word, the first thing out of the mouths of many are "I don't want to pay any points!" That's great, if you choose not to pay any points you're putting yourself in a position of obtaining a higher interest rate. This is just one of the many items that go in to determining a clients final rate.

As Marc Blasi said "Unfortunately too many people don't really know what's going on with the other facets of the transaction, so people should probably err on the quiet side."

Unless your intimately involved in and understand the clients particular circumstances it's probably best to follow Marc's advice and remain quiet. I speak to people every day who claim to have perfect credit, never missed payments, never filed bankruptcy, etc. However, once you pull a credit report you find all the things they neglected to tell you. People are ashamed to tell you they have filed bankruptcy or they're behind in their taxes or there's a judgement filed against them. If they're not going to tell the person who's trying to get them financed what makes you think they're going to be any more honest with the Realtor?

I currently have my home listed with a Realtor who is charging 5%, in the two weeks she's had the listing she has done absolutely zero when it comes to marketing my home. I'm doing the advertising, supplying the flyers and holding open houses with the help of Realtor Friends. Am I being gouged? Isn't 5% a large chunk of change to pay to be included in the MLS?

I hand selected this Realtor because after interviewing a gaggle of Realtors she was the only one who knew the value of my home. (Before putting the home on the market I had an appraisal done to determine market value.) The Realtors I interviewed came in all over the board some were extremely low and others were trying to buy my business by inflating the price. Am I within in my rights as a client to question her marketing approach and her fees, you bet I am. Am I within my rights as a lender to question the amount she's charging? Absolutely not!

We all have different business models which require us to earn x number of dollars per deal. Who are we to question another's fees? If it falls within the realm of reasonableness it's all good. In the lending business it's better to over estimate the fees, who wants to get caught short at the closing table and risk ruining a deal?

So why is one acceptable and the other's gouging?

Ed Brophy
President
Synergy Mortgage

Toll Free: (888) 45-LOAN-5 ext. 1
Direct: (760) 409-9069
E-mail: ewbrophy@synergymortgageloans.com
Web: http://www.synergymortgageloans.com/

Posted by Ed Brophy - Mortgage Consultant on 03/03/2007 05:46 PM

Comments (11)

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11 Comments on Realtors 3 Points Acceptable? Lenders 3% Commission Gouging, Why?

Ed, I for one have no problem with how much a mortgage broker charges. If it's disclosed to the consumer and they agree then have at it. Mortgage brokers and REALTORS(R) work in a very competitive market and should be able to be paid what they feel their services are worth. It's none of my business what you charge. There is a slight difference though, in some cases. My customers know exactly what I am charging. Do yours? If they do then good for you. But I can assure you in many cases they don't have a clue. Points, origination fees, YSP and anything else the consumer is being charged should be disclosed in a way that the consumer understands it. IMO

03/03/2007 06:11 PM

by Bryant Tutas-Tutas Towne Realty, Inc

I've always looked at it this way. The Realtor has to spend lots of money advertising, lots of time with the buyer and most Realtors don't have that many transactions, so a large pay on one transaction makes sense to me.

As you move down the food chain, the mortgage lender has more transactions and spend less time on each, so less money on each.

The title agents spend less time and have lots more transactions, so less money.

That's how it has worked for decades until recently.

Now you have so many loan originators chasing fewer transactions so they need to make more per deal to survive.

Now you have Realtors adding transaction fees to the commission, why I don't know.

Lots of Realtors and lenders all decided title agents were easy prey and decided to take from that pot, too.

It's all screwed up. The consumer is paying too much to support all the layers of fat to keep too many people in the business with so many hands in each other's pockets. We're facing a market correction that should readjust things and make it a little more fair to the consumer. I'm hoping so anyway. ;)

03/03/2007 07:36 PM

by Diane Cipa (The Closing Specialists®)

Great post amigo and Bryant is exactly right in his synopsis. Disclosure is gold. And clients who are well informed and know why and how you get paid are typically the ones you have for life. Everyone knows not too many people work for free, they also watch too many real estate Informertials.....and hear some relevant stories that make our industry seem a tad shady. Of course it is though, there is bad apples on every tree. Volume is key, fees come and go, returning clients never let your business die.

03/03/2007 07:44 PM

by Jason Sardi, Pennsylvania Mortgage Broker (First Choice Equity Group Inc.)

Jason, great reply to the post. Being in it for the long haul is the only way to go. I think any fee for service should be negotiable. If the customer understands the fee, and agrees that your services are worth that amount, then that is the true definition of market value. If the consumer doesn't know what or how they are being charged, then that opens a whole new can of proverbial worms

03/03/2007 07:59 PM

by Team Carroll Cranford NJ,Westfield NJ Scotch Plains NJ Real Estate (Team Carroll - RE/MAX Classic Group)

I'm not familiar with that limitation, Ed. I thought the Sec. 32 was 7.99 and California High Cost was 5.99%, both exclusive of rebate but subject to the High Cost APR test.

03/03/2007 09:10 PM

by America's #1 Mortgage Broker

It is not necessarily true that Agent's can charge what they want. They certainly can charge what they think they can get away with. But if called to task by a disgruntled Seller, there can be severe consequences, at least in my State.

In regards to fees charged my mortgage brokers and bankers, I feel that they like agents should be allowed to charge what ever they feel there services are worth. Let the market place determine their fate.

Some years back a friend of mine ( a real estate agent ) was working in a very depressed market. When most Realtors were slashing there commissions, he chose to raise his. The extra money was used for advertising over and above what other people were doing. That type of marketing caused him to quickly be sought after by sellers.

He absolutely dominated the market with higher commissions. Truly the sellers seen the value and had no hesitation in paying it.

03/03/2007 09:26 PM

by Downtown Portland Real Estate Broker~Herb Hamilton (RE/MAX Preferred Inc. Realtors)

If your agent is doing nothing than your agent is gouging at any price.

Bryant make s great point. No one ever seems to know what most mortgage brokers are charging until they are late in the process. My fees are set up front.

03/04/2007 12:58 AM

by Randy L. Prothero - Hawaii REALTOR® (Century 21 Liberty Homes)

Ed great blog brother and i agree with my not 100% but 1000%.

My origination points are disclosed up front. Those lenders who offer no pints up front are making their mone on the back end rebate.

Nobody works for free so why the hell should we?

03/04/2007 01:17 AM

by Eddy Martinez (Nationwide Funding Group)

I do both RE Sales and Mortgages and here is how I see it. When a Realtor takes a listing, depending on the market at that time, he/she has a fairly good idea of what the cost in both time and money will be. Some deal are easy, some are not, but I think it balances out. The Loan Officer can catch a client with an 800 FICO, 150K income, no debt, low LTV and will probably have to sharpen his pencil on the commission and rebate, if he can get a rebate at all, because this client can go anywhere, including online, and get it done. The next client has a 500 FICO, stated income, unpaid collections, Etc., Etc. This loan is going to be a challange even for the experienced and very time consuming. You have to charge accordingly. The time required sets the fee. Our time and experience is all we have.

03/04/2007 12:05 PM

by David Love,CRS,GRI,SRES (Zip Realty,Inc)

Bryant: Fortunately I'm an upfront broker. All fees including ysp are disclosed on the GFE. I also supply my client with a copy of the highlighted rate sheet so they can see the rates, hits and ysp associated with their interest rate. Unfortunately many brokers don't disclose the ysp or they only disclose on the MLDS (Mortgage Loan Disclosure Statement) at the very bottom, the problem with that is the MLDS looks very much like the GFE and many consumers believe it's a copy of what they've already signed.

Diane: You justification of pay is flawed. Mortgage Brokers advertise and trust me I spend a great deal of time and money putting together marketing. As for the amount of time we put in on a loan varies greatly as does the time a Realtor puts in on a transaction. I have worked both sides of the business and the time factors are pretty much the same.

Jason: You're absolutely right disclosure is key they problem with disclosure is that there are many brokers out there who underdisclose to beat the competition. I recently lost 4 deals because the other lenders closing costs were less than mine. While at initial disclosure they appeared to be less they in fact were creatively figured. If a person is funding a loan in February and their impounding taxes they must pay the 2nd installment in full plus an additional 2 months to fund the impound account, this equals 8 months worth of impounds. On each of the GFE's the other lender was only charging them 1 month worth of impounds and 2 days worth of interest while I generally use 18 days. I tend to over estimate which results in a slightly higher initial GFE. One of the lost 4 came back to me Friday, when they got to the closing table everything I pointed out to him came true and not only did was there the difference between the two GFE's required to close there was an additional $5,000 needed.

Brian: The maximum percentage of the total loan amount for fees allowed is 4.999% for the points and fees test (this is used by most lenders).

The 2nd test which is what I believe you're talking about is the Treasury Security Yield Test. With this test the first loan APR can not exceed the treasury security yield as of the 15th day of the previous month by 8% or on a 2nd 10%.

David: You're correct our time and experience is all we have. Yes, there are those loans that are a slam dunk and then those that require extra time and work. Realtor or Mortgage Broker we should all be paid what our time, experience and the market will support.

The most important thing is that we be upfront what the cost of the loan will be. No hiding of rebates or fees. There's a lender here in town who recently got caught placing hits under discount points and has had to come up with a substantial chunk of change to buy down the interest rates to the rate the "discount points" would have put the loan at. It all goes back to the old saying "Figures never lie, but Liars always figure."

I hear Realtors say I've been in this business x number of years I know all about loans, conversly I hear Mortgage Brokers say the same thing. I have to laugh at these statements, that would be like me saying I've been a paramedic for 20 years I know everything a doctor knows and am just as qualified to perform your surgery.

The point of this post is that we should all stick within our scope of practice leave the real estate to Realtors and the loans to Mortgage Brokers. I've had one Realtor come out on the wrong side of a law suit because they took a referral from me and referred it to their referral partner who "beat" my interest rate and fees. Well they beat it until the client got to the closing table and had to come up with more cash then they planned and their interest rate was a 1/2 point higher.

Eddy: Thanks for the support. As with any business we can only charge what the market will support.

03/04/2007 12:43 PM

by Ed Brophy - Mortgage Consultant (Synergy Mortgage)

Ed...

I agree... I was on a trade show floor and met some C21 hotshots... they decided to patronize me a bit and then shot out the question, "Why do you all charge 2 points?"...

my co-worker was shy and immediately turned white... before he could get his chuckle out, I said, "Why do you deserve three??"... his cohorts got a good laugh out of my comeback and the inquisitor immediately clammed up and turned beet red

we make what the market bears and what we need to survive while still remaining fair with the borrower

03/05/2007 12:26 PM

by Boca Raton & Lake Worth Florida Real Estate Broker

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