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The Smell Has Returned!

The opinions expressed by columnists are their own and do not necessarily represent the views of

On April 1, 2009, we lost a lender in the mortgage industry that shouldn't have failed. They didn't offer sub-prime loans, option arms or any of the other gimmicks that haunted and hurt both the mortgage industry and the public. The company was Thornburg Mortgage, and they became a victim of the times, not, in my opinion, a contributor to the problem.


Maybe because of their demise, I became more attuned to the advertising going on, as usual, concerning the mortgage and real estate world. I simply couldn't believe what I was hearing. The lies, innuendos and misinformation that had for the most part disappeared with the onset of the crisis seem to have come slithering back. The more I heard, the more my rage grew. I have never understood what good comes from doing the wrong thing, but in former years, the trickery didn't carry as much significance as it does now.

The most outrageous of all of the advertising comes from those who tout "no cost" financing. Are you kidding me? Let us take a look at the damage this can do to the unsuspecting public and those who are not as financially sophisticated as they should be.

Some background before I discuss the problem. For years, the mortgage lenders offered loans without points and loans with points. A point is 1% of the loan balance, thus a point on a $200,000 loan is $2,000. The interest rate difference between a no point loan and a loan where you would be required to pay a point was about 1/4%. A no point loan may have been 5.5% on a 30 year fixed, and a one point loan might have been 5.25%. If you decided to pay the point, you would make up the cost by the savings between the interest payment at 5.25% and 5.5%. I generally advised taking the zero point loan because the payback was too long on a 30 year fixed, or any loan that amortized over 30 years. Brokers in those days would generally raise the rate over the no point loan to get enough rebate from the lender to pay the costs and make some profit and offer a no cost loan (the raise in interest depended on the size of the loan. The larger the loan, the smaller the raise). Obviously this wasn't really a "no cost loan", but the damage was minimal.


Since the crisis beginning in 2008, the lenders have increased the spread between no point and point loans. Today there is generally a 1/2% spread. Assume a one point loan is 4.5% and a no point loan is 5% for a conforming loan (up to $417,000) on a 30 year fixed. If you take the no point loan, you will be paying 1/2% more in interest every year instead of paying 1% (one point) when you fund the loan. It will be a major difference to the borrower as the years pass and the loan is still in force. A no point loan, therefore, is costly to the borrower.

Now let’s look at the no cost loan. We know that the broker cannot put out a no cost loan without recovering some monies from the lender (rebates) to pay the necessary cost of underwriting a loan. The rate must go up higher than a no point loan rate. You have seen the potential loss to the borrower from a no point loan transaction, so can you imagine how much greater the loss would be to raise the rate higher to pay the costs to make it a no cost loan?

To be able to fully understand this, add the cost of the loan: one point and closing costs into the loan balance and get the monthly payment. Then take the monthly payment for the no cost loan, which in every case should be higher. The difference between these payments is the additional amount you will pay monthly to save the "costs". It can be tens of thousands of dollars.


The above mentioned no cost loan should really be named the "no profit loan" and would be closer to the truth. Other less than decent advertising is "it is our money and our rules".

The only lenders who can say that and actually mean it are hard money lenders who lend on the property's value and not the borrower's credit worthiness. It is their money and they do make the rules. Short of that, most mortgage bankers have warehouse lines where they fund the loans and in turn sell them to the actual long term lenders. Not only do the actual lenders have rules, so do Fannie Mae and Freddie Mac, who insure the lenders and also the warehouse banks. Many times, the actual lender will have easier rules than the warehouse banks who fund the loan for usually less than a week before they are sold.

I also heard a broker or small mortgage banker advertise that they told the lenders that their clients wouldn't pay any lender fees and the lenders agreed. The only money the lenders make in the mortgage industry from operations is their fees. The only thing you need to know is that the rate you will get from the "no lender fees" group will be higher by at least 1/8%.

There are many differences between mortgage companies and mortgage lenders that can be pointed out, analyzed and debated which would be a real plus for the industry and the public. Rates and costs should not be included in that discussion. Allow me to list the reasons why:


1. No two borrowers have the same factors that are the basis for an interest on a loan: fico score, loan to value of the property, earnings, reserves, city, county or state location, employment, etc.
2. Type of property is significant: single family, units (2-4), condos, high rise vs. low or mid rise condos, cooperatives, etc.
3. Usage of the property: primary residence, second home, investment.
4. Type of loan: purchase, refinance, cash out. Stated income or full doc.
5. Type of lender: FHA, VA, portfolio, national, regional, hard money.
6. Size of loan: conforming, conforming jumbo, jumbo, super jumbo.

We also have the government's bailout plans for those who are in the midst of losing their houses and those who have made their payments but do not have sufficient equity. They will have rates and programs that aren't available, in general, to the retail mortgage market.

The American public who can qualify for the low interest, fixed rate loans of today have the opportunity of a lifetime. We could be facing a major threat of rampant inflation created by the enormous expansion of the money supply. Owning a house has always been a hedge against inflation; a low fixed rate mortgage will negate the interest rate increases caused by inflation. With the stakes as high as they are, avoid gimmicks and stick to proven formulas and common sense. If you do, things will work out fine.


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