Mortgage Contract

Mortgage Contract
Thank you for your interest in MortgageContract.com. Please read the following and then please download your copy of the Mortgage Contract that can be printed and completed for your mortgage loan.

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Buying a Home or Refinancing a Mortgage?
The process of buying a home or refinancing a mortgage can be daunting. There is no rational homeowner or first time buyer that wants to pay too much in closing costs or agree to pay an inflated interest rate.

Mortgage Brokers and Loan Officers – An Agency Problem
The loan officers and mortgage brokers are trained to make the most money possible for themselves and their companies. In economics this is called an agency problem because the broker is representing the borrower and the bank or brokerage at the same time. In economics an agency problem is defined as ” A conflict of interest arising between parties because of differing goals”. Because the mortgage industry values a mortgage loan as a bond, the loan officer or mortgage broker can have a conflict of interest when pricing rates for the customer.
The mortgage broker or loan officer could make more money when the borrower agrees to a higher than market rate creating a “yield spread premium”. Unless the borrower knows the wholesale rate of the loan he or she must trust that the loan officer or mortgage broker is offering the lowest rate possible.

Things to Know

Yield Spread Premiums
What is Yield Spread Premium?
“Yield Spread Premium, or YSP, is the cash rebate paid to a mortgage broker based on selling an interest rate above the wholesale Par rate that the borrower qualifies for.”Yield spread premium. (2006, July 26). In Wikipedia, The Free Encyclopedia. Retrieved 06:00, October 19, 2006, from http://en.wikipedia.org/w/index.php?title=Yield_spread_premium&oldid=65991178

Why do YSPs exist?
The original job of the mortgage broker was to shop the wholesale loan market to find the best combination of loan products and rates while keeping closing costs to a minimum. Brokers began to use tactics such as Yield Spread Premium (YSPs) as a tool to have the borrower get cash back at closing or to “roll the closing costs” into the loan. Simply put a YSP is created when the borrower agrees to a higher rate of interest than the market is demanding. Since a mortgage loan is similar to a bond, a bond with an interest rate higher than the market rate has a premium, a mortgage rate higher than the wholesale rate of money has a premium or “spread”. To minimize the cash needed at closing to pay closing costs for the loan the practice of creating a YSP to pay for the closing costs became a popular way to finance the closing costs as part of the loan. Learn more about Yield Spread Premiums

Free Closing Costs
This technique is still used today for the “no closing costs” mortgage. If someone claims or offers to close a loan for “free” they are likely using the YSP to cover their fees and commissions. Since the closing costs are “free” then borrowers rarely question the charges and don’t realize the shell game that is being played. Radio and TV ads aren’t free, overhead isn’t free and people don’t work for free unless they are volunteer loan officers and those don’t exist.

Teaser Rates
Teaser rates are used by many mortgage brokers and loan officers to push the borrower to make an application. Because rates are not locked until a later time, advertised rates are rarely the rates available when the borrower is ready to lock a rate. Most radio and TV ads with “too good to be true rates” are just that, they are designed to get the borrower to pick up the phone and initiate a sales call.

Good Faith Estimates – Nice but Useless
There is no legal protection for the borrower at the closing table because the GFE is only an estimate and therefore not a binding agreement of your actual closing costs. According to Jack Guttentag’s website( http://www.mtgprofessor.com) :

“Real Estate Settlement Procedures Act (RESPA), and the Good Faith Estimate (GFE) of settlement costs, developed by HUD in administering that law. The GFE is supposed to help borrowers shop knowledgeably for settlement cost services. In practice, it provides legal sanction for lenders to cheat borrowers at the closing table. It could not do this more effectively if it were deliberately designed for that purpose.” “The GFE sanctifies itemized pricing of lender fees by providing space for any expense category a lender wishes to use, while total lender charges are not shown anywhere. Further, as if to discourage borrowers from calculating their own total, the GFE intermixes lender charges with charges of third parties. Since the names of the various items mean little or nothing to the typical borrower, only the most astute and determined can figure out the total of lender charges.”

Do Borrowers Win When Lenders Compete?
Some loan auction sites or loan aggregators have helped consumers shop among lenders and mortgage brokers. Unfortunately class action suits have been and are being filed against large marketing companies that advertise services designed to remove the need for loan shopping. These lawsuits claim false advertising from a service where lenders are supposed to be competing for the best rate. These lawsuits claim this may not be the case as competing lenders may not be actually be competing and the rates shown on some rate quote web sites are not actual rates offered to any borrowers. Additionally some of the largest competition sites have marketing budgets of millions of dollars each month for tv, radio and web advertising. These costs can ultimately passed on to the consumer in the form of higher closing costs or rates which means the consumer is paying more than the market to cover the additional “costs of competing”.

Trigger Leads – Borrowers in the BullsEye
Once the borrower makes application and consents to have their credit pulled they will still be under seige from mortgage companies, marketing companies and banks via a technique called a Trigger Lead. Trigger leads are created and sold by the Big 3 credit reporting companies; Equifax, Experian and TransUnion.
Most consumers know that these companies make their revenue tracking and selling credit information about consumers to lenders, banks, credit card companies et al.
Trigger Leads are a relatively new product that allows companies to buy the names of consumers that have had their credit report pulled by a mortgage company or bank within the last 24 hours. Each day a list of consumers that have had a credit pull performed is sold to marketing companies, banks, mortgage companies and others and the consumer is then fair game as they have now “triggered” the attention of many other providers that will seek to call, mail or email the consumer about their mortgage needs. To avoid this consumers can opt out of the pre-screen process by going to
www.optoutprescreen.com/
Consumers must allow at least 1 week before you allow your credit to be checked.

How much should a Mortgage Broker be Paid?
Clearly the mortgage broker or loan officer should not, and will not work for free. The borrower wants, needs and deserves a trained, knowledgeable professional to guide and assist the borrower through such an important financial transaction. The mortgage broker or loan officer should be compensated for their time, expertise, effort and ability to negotiate wholesale rates.

The borrower deserves excellent service at a fair and reasonable price. Loans for borrowers with low credit scores, self-employed borrowers and other types of borrowers can require more time therefore those borrowers should expect to pay a little more for extra consultation, credit cleaning or other work that may be needed to get a mortgage loan ready for closing.

How to Avoid Predatory Lenders
The following actions may be warning signs that you are dealing with a lender that is seeking to use tactics deemed as “predatory”:

lender asks you, your employer or your co-borrower to make false statements regarding income
interest rates are based on anything other than loan amount, loan to value and credit score(s)
high prepayment penalties
lender fees are financed into the loan by increasing the loan amount or bumping up the interest rate (marketed and sold as “no closing costs” or “refinance for free” loans)
loan comes bundled with credit insurance, life insurance or disability insurance
loan officer advises a loan amount that is more than think you can afford
loan officer offers a rate less than 2% interest rate for initial year
loan officer pushes flex payment or pick a payment loans

Mortgage Contract – A Win/Win Solution
The agency problem of the mortgage broker can be solved with a mortgage contract. The mortgage contract removes or states the maximum YSP that the mortgage broker or loan officer can receive and states that the mortgage broker will be paid a fee, either in a dollar amount of percent of the loan amount. The borrower will be made aware of the wholesale cost of the money at the time the loan is locked and the borrower’s rate will be based on the wholesale cost of the funds. Using the mortgage contract the borrower and the loan officer or mortgage broker can openly discuss rates and fees and both parties will be able to work together to complete the mortgage loan.

Benefits of the Mortgage Contract

Fair to both the borrower and mortgage broker
Loan Officer or Mortgage Broker is fairly compensated for their time and expertise
Bad credit borrowers are safe from predatory fees
Loan Officers are protected from accusations of predatory fees
No need for borrowers to waste time rate shopping
Wholesale rates are disclosed to the borrower
No fee surprises at closing table
Agency Problem removed – both parties working together
Borrower not likely to walk away from transaction after hours of time invested by mortgage broker/loan officer
Official HUD Approved document

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