The New York Times
June 15, 2003

YOUR HOME;
Shopping For a New Mortgage

By JAY ROMANO

WITH interest rates at historic lows, consumers are facing a seemingly ceaseless barrage of breathless offers for mortgages, home equity loans and equity lines of credit from mortgage bankers, mortgage brokers and online lenders.

While a borrower often looks for the lender offering the lowest rate, it may be helpful to consider whether an offer is coming from a broker, a banker or an online lender.

The main difference between a broker and a banker is that a broker arranges a loan between a consumer and a lender, who then typically sells the loan to investors on what is known as the secondary market. A banker, on the other hand, lends out its own money and then either sells the loan on the secondary market or keeps it in its own portfolio.

Direct lenders who keep loans in their own portfolio are able to make "nonstandard" underwriting decisions or take risks that lenders who sell all their loans on the secondary market might not take.

On the other hand, the ability to "shop around" for a client is a mortgage broker's most valuable service. And in most cases, according to one mortgage broker, the lender pays the broker's fee, not the consumer.

But, some mortgage bankers say, there is no such thing as a free lunch. "This is the mortgage broker's biggest secret," said Michael Moskowitz, president of Equity Now, a mortgage banker and direct lender in Manhattan. "They say, 'We're getting paid by the bank,' but the only reason they're getting paid by the bank is because the bank is ultimately getting paid by the customer."

Mr. Moskowitz explained that while mortgage bankers -- being the actual lenders -- charge customers directly to "originate" a loan, mortgage brokers are often paid by the lender, particularly when offering zero-point loans. That would be fine, he said, except that in practice, the amount that the broker is paid by the lender is determined by the interest rate the customer agrees to pay.

"There is no such thing as a single 'current' interest rate," he said. "Instead, there is a range of interest rates being charged at a specific point in time for a specific price."

For example, Mr. Moskowitz said, if at a given time a lender is willing to pay a broker one point -- or 1 percent of the loan amount -- for negotiating a mortgage at, say, 4.875 percent, that same lender will pay the broker one-and-one-half points for arranging a loan at 5 percent, or one-half a point for a loan at 4.75 percent.

If, however, a broker offers a mortgage to a borrower at a specific interest rate and interest rates in general then drop by one-eighth of a percentage point while the application is pending, the broker now has a decision to make: does he pass along the reduction to the customer and still get paid only one point from the lender, or does he allow the loan to go through at the higher rate? "The temptation to play the market at the expense of the borrower is huge," Mr. Moskowitz said.