Mortgage Rip-offs and Money Savers: An Industry Insider Explains How to Save Thousands on Your Mortgage or Re-Finance

By Carolyn Warren

“Identifie[s] all the major dangers amateur real estate investors need to be aware of . . . many useful tips for getting the right price and the best financing.” —Michael Masterson, New York Times–bestselling author of Automatic Wealth
 
Mortgage Rip-offs and Money Savers reveals how the mortgage industry cheats borrowers out of billions in extra costs every year. Industry insider Carolyn Warren taps her decade of experience with lenders to expose the tricks, lies, and dirty little secrets they don’t want you to know.
 
With her expert guidance, borrowers will save tens of thousands when they avoid the traps so many consumers fall into. Having this inside information is the only way borrowers can truly get the best possible deal. This book presents that knowledge in an interesting and easy format that anyone can understand. Readers can void being victims of the mortgage industry with this invaluable resource. Instead, they’ll get the best possible rates, avoid bogus fees, and get the great deal they deserve.

• Language: English
• Publisher: Open Road Integrated Media
• Release date: Mar 23, 2011
• ISBN: 9780470487709

Book preview

INTRODUCTION

Many secrets are told over lunch—casual comments, candid confessions, things that would never be said to an outsider. Little things like slipping 40 bucks to the gal who locks in interest rates. Or big things like making 40 grand off of one deal.

This particular day, I was dining with a loan officer at Michael’s Broiler on the eighteenth floor overlooking Lake Washington and with a clear view of the Seattle skyline.

Forty grand. That’s amazing, I said, cutting another piece of my filet mignon. How did you do that?

The loan officer tapped his linen napkin to his lips and smiled proudly.

It was a 5/1 ARM with an interest rate of six and a quarter.

Aha, I responded. Perhaps I raised my eyebrows a tad, but nothing more. I understood perfectly. He had sold his client an adjustable-rate loan that had the interest rate of a 30-year fixed-rate loan. By selling the client a rate significantly over par, the officer was able to pocket a big back-end commission from the wholesale lender.

Did you broker out the loan? I asked this because I wanted to know if his client, the homeowner, had any idea how rich his loan officer was getting off him.

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Loan officers increase their commissions by giving you a higher interest rate than par.

I did it ‘in house,’ he said matter of factly.

Even better, he had a legal loophole for not revealing his windfall to the client, a windfall his client would pay for each and every month for the life of his loan. That’s the beauty of correspondent lending, he said. You don’t have to disclose your YSP [yield spread premium]. He finished up his mashed potatoes and expressed his pleasure about the absence of garlic.

How long did the loan take to close? I asked.

Three weeks. And I had four other loans last month. But this month I plan to do more.

Our lunch was almost over, but I had one last question. How long have you been in the mortgage business?

Two years. Two more and I expect to retire, he boasted.

I mentally did the math and figured he was right. Four years of charging clients for secret back-end commissions that big could net a loan officer enough to quit the business and get on with perfecting his golf game.

Unfortunately, this is not an uncommon story. I know from years of personal experience that this kind of price gouging is rampant in the mortgage industry. Charging a higher interest rate than par is just one way for loan officers to collect extra pay. Most people are aware that there are also unnecessary junk fees.

Are You One of the Savvy Consumers?

Most homebuyers or people refinancing their loans know there are financial booby traps waiting, so they’re on the lookout for scams and junk fees. Nevertheless, they’re still paying way too much. On average, homebuyers are shelling out an extra $1,225 up front, and they’re taking a higher interest rate than necessary, to boot. They’re much like the senior couple who was signing for their refinance one rainy afternoon.

As a licensed notary, my job was simply to get the papers signed properly for the loan officer. I saw that there was a $2,000 bogus discount point. (The couple wasn’t getting a discounted interest rate by paying the fee.) I also noticed there was an unnecessary $395 Processing Fee. But, again, that wasn’t any of my business, as a signing agent. The couple happily signed away. Then we got to the $19 Flood Certification Fee. Suddenly, the wife threw down her pen and said she wasn’t going to pay that $19.

Flood certification is a requirement in the state of Washington, I explained. The mortgage company must show that the property is not in a flood zone and therefore does not need flood insurance.

She still objected, But we’re on a hill.

I said, I understand. Most people around here are. But it’s a state requirement, so there’s no way around it.

Well, I’m not paying it; $19 for nothing is ridiculous, she said adamantly.

I found it astonishing that she was happy to pay the unnecessary $2,000 and $395 fees and yet the $19 was a stumbling block she refused to get over.

Clearly, even people who are aware that scams and junk fees exist need to know which fees are fair and which are not. The question is, who’s going to tell them?

How are you going to find out what’s real, what’s fair, and what’s bogus when all the most important secrets are kept behind locked lips? The loan officers who are laughing all the way to the bank and slapping high-fives with one another behind your back aren’t going to tell you. If they’re stupid enough to take it, it’s their fault, one loan off icer said to me.

Even the many articles and books written by talented reporters who interview and research professionals in the mortgage industry can’t reveal all the rip-offs. How could these writers find out what’s going on in secret when no one is talking? Not even the loan officers themselves know everything that goes on. The wholesale lenders who provide money to the mortgage brokers have plenty of sneaky little secrets all their own.

Like what? Like bribes. And false sales. And loans for important people, who are essentially getting cuts in line ahead of other loans. Like certain documents disappearing from loan files, so a loan that got denied at first can get approved instead. This is just the tip of the iceberg, and it’s all very interesting, especially if you or someone you know happens to be buying a home or refinancing.

How to Use This Information to Save Tens of Thousands of Dollars

I wrote this book to keep you from becoming a victim to any one of the many rip-offs in the mortgage industry—rip-offs meticulously designed to steal your hard-earned money. It is organized to be a quick and easy resource, to help you can save the maximum amount of money possible:

• Part I, Chapters 1 to 8, takes you through the homebuying process, step by step. By browsing the chapter titles and subheads you’ll see what information is included there. That way you can dive right into the parts that are the most pertinent to you. This isn’t a novel, so there’s no need to read the chapters in order, unless you choose to do so.

• Part II, Chapters 9 and 10, specifically addresses refinancing, because the majority of homeowners who refinance are paying too much. What’s worse, some are putting their greatest asset at risk and don’t even know it. It’s as if they’re playing a game of chicken with their financial future.

• Part III, Chapters 11 to 16, covers unique situations, and in the process reveals some juicy secrets from inside the inner circle, meaning wholesale lending.

In addition, I’m offering these extra benefits to buyers of this book, on my personal Web site, www.AskCarolynWarren.com:

• Ask me a question and get a personal answer within 48 hours.

• Download, free, the Credit Investigation Request to easily dispute credit without having to compose a letter.

• Take advantage of a $30 discount on my Ten Point Check-Up and Personal Loan Recommendation. (I guarantee you will save at least double the $67 cost—or else it’s free.)

• Access free updated mortgage information.

What Is the Difference between Retail and Wholesale Lending?

As in other industries, mortgage lending has both a retail and a wholesale side. Retail includes banks, mortgage companies (also called direct lenders), and mortgage brokers. You can go to any of these three for a loan. If you go to a bank or mortgage company, they will use their own money. If you go to a mortgage broker, your loan officer will shop the wholesale division of these same banks and mortgage companies, as well as others that are wholesale only, to get your loan. Some mortgage brokers have their own money to lend, as well as the ability to shop wholesale. Clearly, then, a mortgage broker has the most options.

Loan officers—who also like to be called mortgage consultants or loan specialists or other fancy titles—work in banks, mortgage companies, and mortgage brokerages.

The wholesale representatives who provide their services to the loan officers are called account executives. It’s their job to help loan officers and to bring in business for their company.

My Credentials

I started my career in lending by working for a large, national mortgage company. It was a direct lender, so it had its own money and didn’t shop wholesale. After two years there, I wanted more options, so I went to a mortgage brokerage. (I also had short stints at a finance company and another big national lender—short, because I couldn’t tolerate their pricing shenanigans for long.)

I worked very hard at the mortgage broker shop for about seven years. Then, feeling that I needed to round out my career, I moved inside to wholesale lending, and spent almost two years there as an account executive. I worked behind closed doors with the manager and sales manager, underwriters, loan account manager, and the people who locked in rates, drew loan documents, and funded loans.

During this decade, I also served as a licensed notary public and worked freelance, signing loans for many companies, on call.

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Am I going to be in your book? a loan officer asked when I told him I was writing about mortgage rip-offs.

I won’t reveal names, I answered.

Oh, good! he replied, obviously relieved.

Then one day I’d had enough. I knew it was time to expose the secrets and share vital information with the public that had been hidden for too long. I decided that the best way to get this information out was in a book; and I confided in one of my friends—a processor and underwriter for many years—what I was planning.

Be careful what you say, or you could lose your job, she said. Wise counsel. But I didn’t want to be careful about what I said. I wanted to tell all. So I respectfully submitted my resignation and got to work on the book you’re holding now.

PART I

EIGHT-STEP GUIDE TO GETTING THE BEST RATE AND PROTECTING YOURSELF FROM MOST COMMON SCAMS

CHAPTER 1

Step 1: Boost Your Credit Rating and Prequalify

Unless you just won the lottery, you need a good credit rating. Without it, you’ll be at the mercy of higher rates, bigger fees, and fewer options. Or worse, you could find yourself sitting on the curb with all your belongings piled up next to you, and nowhere to go. That’s exactly what happened to a family I’ll call the Happys. The Happys were so happy they’d found their dream home, they made an offer, signed an agreement, and gave notice to their landlord. They weren’t worried about a thing—not even their credit—because they had a prequalification letter for financing in hand. They were happy, too, because the builder was going to get the home finished just before Mrs. Happy was due to have her baby. But, alas, their financing hit a snag when the lurid details of their credit came to light. Consequently, their prequalification could not be turned into an approval. Frantic, they went online and shopped every lender imaginable, but no one would grant them a loan.

Why won’t anybody take a chance on us? wailed Mrs. Happy. We’re good people, and I’m about to have a baby!

What she failed to realize was that the mortgage business is not about taking a chance on good people. You can be a saint from heaven and still get denied if your credit report is ugly as hell. The mortgage business is all about making money for its investors, and these investors want to invest their money, not gamble with it.

Perhaps your landlord can let you stay longer while you clean up your credit? I asked, being one of a long line of loan officers she’d come begging to.

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Mortgage companies have to pay their investors. They can’t afford to gamble on people with good intentions and a poor payback history.

"No, he’s already rented it out to someone else for next month. We have no choice but to get out, and we have absolutely nowhere to go. I’ve got my entire house packed in boxes, ready to move, but I can’t seem to find a loan. I didn’t think our credit was that big a deal." Ignorance about credit does not equal bliss.

Last I heard, the Happy family was anything but, as they were forced to move three states away to bunk up with the wife’s dad. You might think this story is ludicrous, but it’s true, and some version of it happens to someone every day. That’s why you must take care of your credit as your first step; otherwise, your prequalification letter won’t be worth the ink it took to print, and you could find out what it means to be homeless.

005 NOTE

If you know your credit is outstanding, you can skip ahead to the shaded box titled, Look Who’s Selling Your Credit behind Your Back! You’ll want to know about this slimy practice and what you can do to prevent it from happening to you.

What Credit Score Do You Need to Buy a Home?

If you want a conventional loan with the lowest rate, you need a score of 620 to pass lenders’ automated underwriting programs (defined below). I’ll explain how this works and mention some exceptions. If you don’t need this information, skip ahead to How Lenders Rate Credit.

Lenders pull a trimerged credit report that contains data from the three credit bureaus (Equifax, Experian, and TransUnion) with a credit score for each. Your numeric scre comes from a complex algorithm based on at least 40 components from the information in your credit file. It’s an industry-specific score that’s been created just for mortgages. The purpose of the score is to predict how risky it will be for a lender to extend you credit.

Mortgage companies go by the middle score. If your scores are 560, 589, and 650, your score is considered to be 589, for example. Other rating factors include the following:

• Lenders do not average your scores together.

• Each person has his or her own score; married couples do not share a score.

• Your scores will vary with each bureau, because not all creditors report to all three bureaus.

The loan officer or a loan processor inputs your application into a specific lender’s computerized underwriting program. This program, called automated underwriting or desktop underwriting (DU), reads the information, looks at your credit, and spits out a verdict lickety-split, as follows:

• Accept. This means you’re approved as long as a live underwriter looks over your paperwork and agrees that the figures you’ve provided match your pay stubs and other information. The program also provides a list of the documentation that is required for the final approval, which is done by a real underwriter.

• Review. This means the computer isn’t certain and wants a live underwriter to make the call. If you get a review, your loan will go in line and may take a few days to get the verdict. So if you’re wondering, Why is it taking so long for me to get an approval when my neighbor got one in an hour? this could be the reason.

• Denied. If the computer turns down your application, your loan off icer may appeal the decision or go to a different wholesale lender. (If your loan officer works for a bank or direct lender, then he or she has only that lender’s own loans to pick from and can’t shop around for you like a broker can.)

006 NOTE: EXCEPTIONS

Nonconforming (or subprime) lenders don’t follow these rules, because they have different investors and their own guidelines. They’ll accept credit scores lower than 620. One lender takes your highest credit score (rather than the middle one) with a 10 percent minimum down payment and a higher interest rate.

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The credit score is an index of risk. It is an unbiased indicator of whether a consumer will repay a loan on time. Scores range between 400 and 850, approximately.

If your score is 620-plus, lenders will look to see if you have any other factors that could cause a denial, such as a recent bankruptcy, foreclosure, judgment, or tax lien. It’s something of a pass/fail system with computerized underwriting (called automated underwriting or desktop underwriting). Whether your score is 620 or 720, you pass, and that means you are eligible for the best interest rate of the day. The conventional 30-year fixed-rate loans don’t have a better interest rate for people with higher scores, as long as automated underwriting gives you an accept.

008 NOTE

If you’re getting a Stated Income loan or other nonconforming loan, then your score will make a difference in your interest rate, up to about 720. This is called risk-based lending.

If your score is 720 or higher, you can take your choice of the loan smorgasbord. If your score is 800 or higher, you’ll have loan officers exclaiming over you and treating you like a rock star.

Here’s a general guideline of how lenders rate credit scores:

Additional Notes about How Lenders Rate Credit

Tax Liens and Judgments. Public records (liens and judgments) must be paid off prior to or through closing the loan. For example, if you have an IRS tax lien that shows up on your credit, it will have to be paid before your home loan can record and fund. This is because the tax lien would be in first position on the title to your property and the mortgage would be secondary. A mortgage company cannot take a second position to a tax lien or a judgment because that would put them in financial jeopardy.

Consumer Credit Counseling. Many lenders regard being in a debt-consolidation program—such as Consumer Credit Counseling, Solutions, and other similar nonprofit organizations—equal with being in a Chapter 13 bankruptcy, because they look at it as a self-made debt reorganization bankruptcy. Most lenders will require that you complete and be out of the debt counseling program before they will approve your home loan. Some require a length of time to pass for the reestablishment of good credit thereafter.

It is my opinion that there are two better solutions for burdensome debt: (1) negotiate payments and settlements with the creditors yourself, or (2) file a Chapter 7 bankruptcy and get the ordeal over with in a few months rather than draw it out for years. (Again, this is my personal opinion. Consult an attorney for legal advice.)

Collections and Charge-Offs. Just because a credit card company writes off a bad debt and stops harassing you, doesn’t mean everything is okay now and you can ignore it. Often, an unpaid debt is charged off, and then sold to a collection company.

A collection company buys a bundle of bad debts for pennies on the dollar. Then it goes to work to collect. It may add on its own fees and may continue to charge interest, causing your balance to rise higher and higher as time goes on. Even if you don’t agree that you owe payment to this third party, if it’s on your credit report, it’s a factor in calculating your score and getting a mortgage. (Read how to handle collections and charge-offs on page 11, under Nine Steps to Boost Your Credit Rating.)

Bankruptcy. Your mortgage broker can shop the subprime wholesale lenders to find you the best loan available for people who have had a bankruptcy discharged just yesterday. Yes, as long as you’re out of the Chapter