to Price Your Loan
Jack M. Guttentag, now Professor of Finance Emeritus, formerly Jacob Safra Professor of International Banking, at the Wharton School of the University of Pennsylvania.
Click here to learn more about the agreement between the Mortgage Professor and Amerisave
Rationale For Using a Monitored On-Line Lender
In using an on-line lender monitored by the mortgage professor, a borrower enjoys competitive wholesale prices, which are disclosed and passed through by the on-line lender; and a standardized and reasonable markup over the wholesale price, which is guaranteed by the professor. This eliminates all potential sources of abuse.
Wholesale Prices and Markups
Like automobiles and TV sets, home mortgages have wholesale prices. These are the prices quoted by large lenders or "wholesalers" to the many thousands of smaller lenders and brokers who deal directly with borrowers. The wholesale market is extremely competitive, since there are many wholesalers and their prices are constantly being compared.
Like automobile dealers, retail loan providers formulate their own price to the borrower by adding a markup to the wholesale price.
Wholesale Price + Loan Provider's Markup = Price to Borrower
Like automobile dealers, mortgage loan providers don't ordinarily disclose their wholesale prices because that reveals their markup, which is their gross profit on a transaction.
All the abuses to which borrowers are subjected have the objective of increasing the loan provider's markup. Here are five of the most common:
Price Low-Balling: Loan providers sometimes deliberately quote a very low price in order to "hook" borrowers who are shopping. Later on, the low price disappears because (allegedly) the market changed, or the lender discovered fees that were not mentioned before, or for a dozen other reasons.
Price Omissions: Fixed-rate mortgages ordinarily have 3 price components, the interest rate, points, and fixed-dollar fees, while adjustable rate mortgages have more. Loan providers quoting prices sometimes omit one or more price components until it is too late for the borrower to do anything about it.
Markups on Third Party Charges: Some lenders add a markup to third party charges such as appraisal fees or credit report charges. The borrower is billed for these charges without knowing about the markups.
Overcharging: Many loan providers charge what the market will bear, which means that borrowers who are trusting and don't shop alternatives will pay higher markups than knowledgeable and aggressive shoppers.
Market Niche Misclassification: Borrowers are sometimes classified as belonging to a higher risk category than is in fact the case, which increases the markup. Borrowers who are erroneously classified as sub-prime get whacked twice, since the wholesale prices on sub-prime loans are higher, and markups are also higher.
The professor's remedy for these and other abuses is to standardize the loan-provider's markup at a level that provides fair compensation for the critical services they provide, but no more. In that way, the benefits of competition by multiple wholesale lenders is passed through to the borrower. This remedy has been incorporated into an agreement between the mortgage professor and Amerisave, an Upfront Mortgage Lender.