Mortgage originators constantly advertise that they will find "the perfect loan for you" and that they will "work hard to find you the absolute best terms". You may find, after reading the compensation agreement, ....that is bunk.
It has been said that the "devil is in the details" and in mortgage origination disclosure documents, nothing could be more true. Contractual relationships mortgage originators have borrowers sign, hidden carefully in a stack of disclosures, clearly state that there is not a fiduciary relationship but an independent contractor relationship between the borrower and the mortgage originator. The National Association of Mortgage Brokers (NAMB) defines that relationship as one of an independent contractor in its widely used loan origination agreement. Read the text in Section One of the Model Disclosure Agreement.
It kind of makes you realize that the relationship your originator has with you (the borrower) is akin to a Vegas taxi driver dropping a group of horny conventioneers off at a strip club; he charges a fare while collecting a "steering commission" from the strip club.
Let me explain by lumping origination companies into three categories:
1- Direct lenders originate loans for their own portfolio and/or securitization. These companies are not limited to but include Wells Fargo Home Mortgage, Countrywide, IndyMac, Flagstar Bank, National City, Ameriquest Mortgage, Bank of America Mortgage, Chase Manhattan Mortgage, and Washington Mutual. They do not guarantee a borrower that they will work to find them the best terms, only the terms they offer. In fact, these originators severly penalize (or prohibit) employees who "broker" a loan to another direct lender because the terms are better for the borrower.
2- Correspondent Lenders are "Mortgage
Brokers" on steroids. They look and act like brokers inasmuch as they
submit your loan package to various direct lenders but have the ability
to hide the "steering fee" as profit from selling the loan.
Correspondent lenders prepare the loan documents, fund the loan from a
warehouse line (or giant credit card that the direct lenders provide
for the correspondent), and sell the loan to the direct lender. They
generally use the NAMB disclosure form but can be persuaded to offer
you a fee for services agreement.
3- Mortgage Brokers agree to arrange a loan for the borrower with direct lenders. They offer the absolute best chance a borrower has to get a true fiduciary relationship. The way to establish that fiduciary relationship is through a carefully worded fee agreement that clearly defines the duties of the originator and the amount and form of compensation. A sample of a contract defines how lender paid compensation can replace the borrower paid compensation or augment it to pay the mortgage brokerage fee. The service offering agreement defines the contractual relationship between the originator and borrower.
Here is the truth about mortgage originators. We get paid by you (the borrower) AND the lender with whom we place the loan. There is nothing evil or illegal about that; it just hampers our ability to get you the best terms and get paid for our services. Yield Spread Premium or Lender Rebate is a form of compensation to your originator. If you, the borrower, negotiate a fee for services with the originator at application, that acknowledges that the yield spread premium or rebate is applied to that fee, you're getting an originator that is clearly working to get you the best terms; she's going to make her fee no matter which loan program you choose.
If you're a Vegas conventioneer, you will probably have a great time at the strip club the taxi driver recommended. Just be sure to negotiate his "steering fee" as a credit to the fare before you get in the cab.