Can I rely on price quotes received directly from a loan provider

It depends on the loan provider. But if one quotes a price significantly better than all the others, you can assume that it is phony—meaning that the lender or broker has no intention of honoring it.

What's the point? To rope you in.

If you are purchasing a house, the cost of terminat ing the process with one loan provider and starting again with another becomes increasingly high as you move toward your home closing date. As your bargaining power recedes with the passage of time, you become increasingly vulnerable to various tricks for increasing the price.

Loan providers who offer phony quotes figure that once you are in the application process they have a good chance of landing you as a borrower.

I know a mortgage broker who aims to make a 1.5-point markup on all loans (each point is 1% of the loan amount), but includes only a 0.5 point markup on prices he quotes over the telephone. For example, if this broker has a quote from a wholesale lender of 8.25% and 1 point, he quotes you 8.25% and 1.5 points—a markup of only 0.5 points. If he lands you as a customer, he finds a way to recover the point (or more) before the loan terms are locked.

Brokers who practice this deceit are called "sunshine blowers" by those that don't.

How do they get away with it? Loan providers legally can't be held to a price quote. Since the market is volatile, yesterday's price may not apply today. All loan providers, including the sunshine blowers, warn borrowers that price quotes aren't firm until they are locked.

For example, suppose market interest rates rise after the initial quote, so the original wholesale quote of 8.25% and 1 point now go to 8.25% and 1.5 points. The broker tells you, "Sorry, the market has gone against us; the loan you want is now at 8.25% and 3 points." The broker makes an extra point and a half by pretending that the increase in market rates was larger than it was.

Conversely, if the wholesale quote falls to 8.25% and zero points, the broker can make his 1.5-point markup by providing you with the terms originally quoted. The broker merely ignores the decline in market rates.

You can attempt to forestall this trickery by monitoring changes in the market after you get a price quote, but probably you won't get far.

The broker will point out that your market information is general and does not accurately describe the specific segment of the market relevant to your loan. Only the broker has that information. You will probably lose this argument, because you're fighting on the broker's turf and you have a closing date on the near horizon.

It would be a different story if the broker agreed initially to share his or her market information with you. If the broker in my example revealed the wholesale lenders' price quotes, you would know exactly how the market relevant to you had changed. But then the broker would not be able to modify his low-ball markup, which is one reason most brokers keep wholesale prices to themselves. But an upfront mortgage broker will share his or her wholesale_prices with you. (See Chapter 6, "What is an upfront mortgage broker?")

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Secrets of the Credit Industry

Secrets of the Credit Industry

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