With the media frenzy surrounding the mortgage industry, I’ve been seeing more and more articles being written in the financial publications about mortgage brokers and the mortgage industry as a whole. These journalists have been glossing over the details of our industry. While they’ve been putting out correct information they have also been omitting some of the key aspects in the role of mortgage brokers.
The number one notion people have of mortgage brokers is that all they do is shop around for you, so if you are a person who likes to shop around themselves, they don’t need a broker. This is false.
The most important feature in dealing with a mortgage broker is the difference between retail and wholesale. As a mortgage broker I have access to hundreds of loan products offered by various banks and mortgage lending institutions. These products are also offered to me at a wholesale discount!! An example would be to look at the rates a large national lender is offering directly to the public and then be able to see the rates that this same bank offers me as a mortgage broker. There is a substantial difference in the wholesale price we are offered. A good mortgage broker should shop around, find out who is offering the lowest price on a mortgage, take a portion of the wholesale discount as a profit margin and pass the rest of the discount on to the consumer, resulting in a cheaper mortgage than would have been available through a retail outlet.
While big banks don’t mind the negative press mortgage brokers receive, they realize that a good portion of volume is originated through brokers. Big banks love brokers because we deliver mortgages to them at no cost and that is the reason why they offer us a wholesale discount. In order for a large lending institution to write mortgage loans they need to lease a space, furnish it, set up communication systems and hire employees which all cost a lot of money. In order to make this business profitable for them, they then need to charge you the consumer a retail rate that builds in enough profit to cover these costs. Here is where the mortgage broker comes in to play.
We the mortgage brokers incur all the costs with originating mortgages. We lease the space, buy the phones and pay for all the marketing costs associated with our origination business. We bring in the customer, structure the loan and deliver this loan to the designated bank without them paying a dime( except maybe the marketing money they spend to attract wholesale business).
Big lending institutions realize we are not their competition, rather we are business partners. The big banks fight one another to attract our business because the wholesale side of the industry can be very profitable. If times slow down they don’t need to worry about laying off employees or paying rent on spaces that are no longer in use because they have no overhead in conjunction with wholesale business. Voila, wholesale discount to brokers.
A good mortgage broker is able to set a fair profit margin that allows them to make money while still offering a discount on the mortgage being offered directly to consumers. If a mortgage broker was greedy, their profit margins would be too high and would result in a mortgage that was more costly than if you just went directly to a retail outlet.
This wholesale Vs. Retail scenario is probably the most important aspect to using a mortgage broker. There are many other advantages to using brokers and I will be detailing them in my upcoming posts. Just remember this, go to you local convenience store and look at the price of ketchup, then go to one of those large wholesale food discounters and compare prices. You now understand the difference between retail and wholesale.