What's the difference between a Mortgage Broker and a Mortgage Banker?

Unless you know the answer to this, it could cost you thousands of dollars, so please consider this required reading.

I used to be a Mortgage Broker, but now I am a Mortgage Banker, so I am in a position to tell you what the difference means to you, the borrower. The question you may be asking is: can I get a better deal one way or the other?

Here is how I would answer the question - and by the way - with my present company, Ascent Home Loans, I can act in either capacity.

Mortgage Broker

As a Mortgage Broker, by law, I must disclose to you what the Yield Spread Premium is (YSP). This is known as the "rebate," and is that amount of money the lender will pay in exchange for an interest rate that is above wholesale. In technical terms, it is an interest rate with a price above 100.000.

For example, today, for a well qualified borrower, the wholesale interest rate is about 4.75% in California. That means the price is close to 100.000. Thus, the lender, say Chase or Wells Fargo, does not pay any rebate.

However, if you, the borrower, wanted to choose a higher interest rate, say 5.0%, that is known as the retail rate, and may have a price of about 101.50. Since that price is above 100.000, that difference, or 1.50%, is paid directly to the borrower. On a $400,000 loan, that would amount to $6,000.

Some borrowers may prefer that, even though their monthly payment will be higher.

It never used to be that way, but the law changed in 2010. Not many people know that. Prior to 2010, the mortgage broker could have kept that money. When I was an Upfront Mortgage Broker, our way of doing business was to give that money to you, and that is what primarily differentiated an Upfront Mortgage Broker from the more typical mortgage broker.

Mortgage Banker

Let's now turn our attention to that of a mortgage banker. As mentioned above, my company can operate either as a mortgage broker or a mortgage banker. If I use my own company to initially fund the loan, and then they resell the loan to another lender, I would be operating in the capacity as a "mortgage banker." (Note that the interest rate is most likely better when I operate as a mortgage banker, in part due to the volume we do under this channel of distribution).

Here's the deal though. As a mortgage banker, the biggest difference to you, the borrower, is that I am under no obligation to share with you what the yield spread premium is, or rebate. Further, that yield spread premium does not have to go to you, as it does under the mortgage broker model.

When I first discovered this difference, I immediately understood that the unscrupulous mortgage banker could double dip just like the old days of being a mortgage broker. By that I mean, charge the borrower a loan origination fee upfront, say one point, and then also receive the rebate on the "back end" from the lender, because the borrower, "you," got stuck with a higher interest rate than was necessary.

I hate to be the guy who tells the audience how a magician performs their tricks or illusions, but this "loophole" is huge - unsuspecting borrowers go to the big banks, like B of A, Wells Fargo, etc., and they never know what the yield spread premium is - so the compensation to the mortgage banker can be a lot more than whatever they may or may not be charging in the form of a loan origination fee.

Since I have a solid background of acting like an Upfront Mortgage Broker, and since my new company was more competitive when acting as a mortgage banker, whenever I told fellow loan officers that I would still be giving the yield spread premium to the borrower, they thought I was crazy.

Maybe I am. It just goes to show that the big banks have powerful lobbies and have kept this loophole intact - at least for now.

My advice?

Seek out a Mortgage Banker who acts like a Mortgage Broker. In other words, if you find yourself working with a Mortgage Banker, ask them if they practice like an Upfront Mortgage Banker, and will give you the Yield Spread Premium.

If they don't know what you are talking about, just have them Google the phrase, "Upfront Mortgage Banker."

Feel free to contact me with any questions.

Rick Pelleriti
www.upfrontmortgagebanker.com