To Know It is to Love It
by Kevin Melody
What is meant by the “Balance Of Power”? Put simply, it refers to the relative strength or weakness of either side in any negotiation. By strength, I am referring to an individual’s ability to turn the negotiation to his favor; weakness, of course, refers to the opposite. Do you remember my example of buying a used car from a private party? That is a good illustration of a negotiation wherein the negotiating power is relatively balanced. On the other hand, nearly any mortgage transaction is likely to be heavily weighted in favor of the salesperson. However, that is not the case at the very beginning of the negotiation.
by Kevin Melody
We’ve talked about the commission; now let’s talk about the other mortgage related fees you will have to deal with. They come in two basic categories: those that are charged by the lender, and those that are charged by various third parties; but regardless of who is charging them, they are all service fees. Do you remember that I said you will be dealing with at least eight separate people on even the simplest of mortgage transactions (a reﬁnance); and that if you’re purchasing a property it may be twelve or more? Let’s list some examples of third parties related to a mortgage loan transaction. The ﬁrst one that comes to mind is the credit reporting company. In all cases you’ll have to have a credit check done, and although the lender collects the fee, a separate company runs your credit. The lender will always want to establish and confirm a value for the property, and with few exceptions, (e.g., Fannie Mae's Home Affordable Refinance Program "HARP" and Freddie Mac's Open Access Relief Refinance) that requires the service of an appraiser. If you're a buyer, you'll be well advised to hire an inspector to check out the condition and functionality of your new home before committing to the purchase. In all cases a neutral third party will be required to handle all the legal papers (i.e., an attorney or an escrow company), and another to guarantee the title. Then there’s the possibility of a termite report and, depending on the result of the report, maybe a contractor as well. Last, but certainly not least, the trust deed or mortgage will have to be notarized and the document itself made a matter of public record at the County Recorder. That's 8 potential third-party service providers right off the bat. But that list is far from complete. The nature of the transaction may require even more. For example, if a mortgage is being paid off as a part of the transaction, you may have to pay demand, reconveyance, and wire transfer fees, and a sub-escrow will be required to handle the actual pay off. And don’t leave out the guy who will have to shufﬂe all that documentation between locations in a hurry in order to meet one of many deadlines (courier/messenger). Let’s list what we have so far:
The “Secondary Mortgage Market” is a generic term that collectively refers to all the various investors that purchase mortgage loans after they are closed. I mentioned earlier that nearly all residential mortgages will be sold immediately after closing, and that most lenders will not even make the loan in the ﬁrst place unless they already have a buyer ready to purchase it. I also said that—even if you make your payment to the institution that originally lent you the money for the entire term of the loan—in all likelihood, they have only retained the right to collect the payment and pass it on to its true owner. I’ll explain why they do this in a moment. First, a bit more about “direct” lenders.
In order to be a “direct” lender a company must have its own money. In other words, it cannot have borrowed the funds from any other source and assumed the obligation to pay them back with interest. This fact eliminates all banks, credit unions, savings and loans, mortgage bankers and mortgage brokers.
I am continually surprised by the complete and utter silence I encounter when I ask my workshop groups for the deﬁnition of the term “origination” fee. I always take an informal survey before beginning, and generally ﬁnd at least one or two individuals who have purchased multiple homes, rental properties, even commercial properties. Yet, among these allegedly experienced consumers, few have ever given me a satisfactory answer. Those who offer a response often pose it in the form of a question—as if they were guessing! Nonetheless, despite this common lack of knowledge, the concept is quite simple. The principle being applied here is plain old misdirection.
I have found that, in the realm of mortgage loan knowledge, most people ﬂoat around in a bubble that contains the concepts “rate” and “points.” Everyone seems to know what “rate” means in terms of what it will ultimately cost them, and most have heard the term “points,” but only have a vague idea of its meaning. All the other costs and fees lay beyond the walls of the bubble; they can be seen by the borrower, but they’re hazy, distorted, out of focus. This blog is designed to burst that bubble, and the ﬁrst step in that process is to clearly deﬁne the term “points.”
“Let the buyer beware” is a warning all consumers would do well to heed, especially when the product being purchased is complex and difficult to understand. This is particularly true of mortgages. For most people buying or reﬁnancing a home, the details of a Truth In Lending disclosure statement may as well be written in Hieroglyphics. Borrowers often rely on the verbal explanations of a loan ofﬁcer—who may, or may not, have their best interests in mind—simply because the charges associated with a mortgage loan are complicated and difﬁcult to understand.
Unfortunately, a home loan is generally the most expensive and lengthy ﬁnancial commitment that most people will make in their lifetimes. Therefore, a lack of understanding as to how lenders charge for their services can have a costly and long-term impact on a borrower’s ﬁnances.
More than a decade after it was first published, and despite huge advances in technology, major changes in program types and qualifying requirements and massive amounts of new legislation meant to inform and protect borrowers, this book remains relevant. That is because the theme is that the character and personalities of the people you choose to work with will always have the greatest influence on the kind of deal you ultimately get.
"A pretty receptionist greets you with a smile as you enter the ofﬁce lobby—its walls crowded with department store art, corporate licenses, framed letters from satisﬁed customers—and seats you amidst plastic plants to await your turn. Phones ring, pagers beep, Muzak ﬁlters in and out. At length, you are escorted to the “signing” room—a cramped, windowless enclosure, not unlike the kind used by police to grill criminal suspects—and seated before a tiny wooden table, upon which awaits a stack of legal-sized paper crammed to the margins with ﬁne print. Your loan ofﬁcer enters with the “signer,” handshakes and introductions are exchanged; then he leaves you alone with the stack, the signer, and your thoughts. The signer smiles and hands you a pen.
In May of 2009 I purchased a property in Mar Del Plata, Argentina. The house was long since abandoned. The yard was overgrown with weeds. Vandals had broken in and stolen everything – the ceiling lamps, the toilet and sinks, the windows and doors, even the electrical wiring. The place was a mess, not much more than four walls and a roof. It had been sitting vacant, up for sale, for more than three years before I came along.
17011 Beach Blvd., Suite 900
Huntington Beach, CA 92647
CA Bur of Real Estate - Real Estate Broker
BRE #01073061 NMLS #1409858
These materials are not from HUD or FHA & were not approved by a government agency