Ever wonder how mortgage loan originators get paid?

October 7, 2014 admin

The Dodd-Frank Bill, implemented after the real estate crisis in 2008, sets the framework for how mortgage brokers are paid. Understanding the process may help borrowers to assess how there can be a variance in the rates offered for identical home loan products.

To provide a background, under these new regulations, borrowers receive a credit from lenders, expressed as a percentage of the loan amount, based upon the rate and program that they choose. For illustration purposes, let’s suppose that a borrower is seeking a $250,000 refinance loan, has good credit, stable income and sufficient equity in the property. He approaches two mortgage brokers (Broker A and Broker B), and obtains different rate quotes from each, even though both brokers intend to send his loan to the same lender, XYZ Bank.

The Dodd-Frank Bill requires that lenders, in this case XYZ Bank, provide borrowers with a “credit” for each mortgage scenario, and that the credit must be reflective of a borrower’s specific circumstances, so that each borrower with the same credit, income, asset, and equity position be offered the same terms. For the purposes of this discussion, let’s use the hypothetical $250,000 loan above.

Under this scenario, Lender XYZ offers a rate of 4.25% for a 30 -year fixed mortgage, and provides a credit of $7,500 for the borrower to use to pay closing costs, prepaid interest, and to set up an escrow account for the future payment of insurance and property taxes. Under these circumstances, how can the rates offered by Broker A and Broker B be different?

Dodd-Frank requires that mortgage brokers set pre-determined compensation levels, based upon a certain percentage of the loan amount, for each loan that they originate. This lender compensation level is deducted from the lender credit, and the remaining funds go the borrower. Each brokerage sets its compensation level in light of the profit it intends to make on each loan, taking into consideration salaries, overhead, etc. So if Broker A has its compensation level set at 1% ($2,500 in this scenario) and Broker B has its compensation set at 1.5% ($3,750 in this scenario), a borrower would be better served to go with Broker A, and utilize the additional $1,250 to his benefit.

First Indiana Mortgage has set its compensation low to be in the position to offer its clients the lowest possible rates in the Indiana market. We encourage borrowers to shop their mortgage, and solicit written offers from mortgage providers. Visit us at www.firstindianamortgage.com to obtain a rate quote, or to learn more about the products and services that we offer.