Welcome to the latest edition of my insider’s conversation series. The goal of this series is to speak to insider in a particular industry and get their viewpoints from within the industry. Our last insider took us inside the world of hedge funds. Today, we are joined by Melanie McLister from Mortgage Architects who has kindly agreed to take us inside the world of mortgages whether obtaining a mortgage, renewing a mortgage and what happens if you are in default of a mortgage. Melanie and her partner run a great blog on mortgage trends.

…of course, the disclaimers! Melanie is not giving any advice or recommendations and the information she is providing on mortgages may not apply to every jurisdiction. Please contact her directly about your particular situation.

My questions in bold; Melanie’s answers in italics…

Melanie, thanks for agreeing to participate in this month’s insider series interviews. This month we tackle mortgage financing. Why don’t you tell us a little about yourself and what your organization does?

First off, I’d like to say thanks to you Thicken.  The insider’s series is a fun idea and we appreciate the chance to participate. 

To answer your question, myself, Robert McLister (my partner and “other half”), and our team at Mortgage Architects are mortgage planners.  We identify and secure the optimal financing for our clients, and make sure the process is educational and as hassle-free as possible.

The thing that I guess separates us the most is our interest in education and advocacy.  Our overriding objective has always been to ensure people know we have their best interests at heart.  Whether we get their business is absolutely secondary because we eat or starve based on our reputation.  In fact, we often do what some in our business find illogical:  we send clients to non-broker lenders that happen to have a better offer that day.

Last fall’s HSBC Prime – 1% variable-rate special was a prime example.  We sent dozens of clients to HSBC branches and didn’t get paid a dime.  But it was the right thing to do, and that’s how we feel an advice-based business should be built.

Walk me through a typical mortgage application from a lender’s perspective. After a lender vets the initial data, what type of process do they undertake internally? How many people touch an application and who makes a call on whether to proceed to loan- is it one person or a committee?

 The process is a different with every lender, but here’s an example.

After a lender receives an application, it goes to an underwriter.  The underwriter scans the application and checks the borrower’s key details against the lender’s guidelines.  For example, if the lender’s minimum credit score for a product is 680, the underwriter will look at the applicant’s credit score to ensure this key metric is satisfied [TMW note: any credit score over 720 is considered the ideal score for obtaining the best mortgage rates].

The lender than analyzes the applicant’s credit report, job history and debt ratios to ensure the borrower can service the mortgage payments without problem.

If the main guidelines are met, the underwriter then reviews each detail of the application to check for inconsistencies or red flags.  They also do things like call the applicant’s employer to confirm employment.

If no issues are found, the underwriter might then issue a conditional approval.  The conditions of the approval will be based on things like submitting a satisfactory property appraisal and all the proper documentation (e.g.  an employment letter and pay stub).

For typical residential deals there is only one underwriter assigned to a file.  If it’s a big or complex deal, or the mortgage planner questions the lender’s decision, the file might be escalated to senior underwriters for further review.

Can you answer a question that always bugs me? Assume I am a long standing client at XYZ bank. Why do they not give me the best deal when I apply for a mortgage? I can see this happening if I approached a new bank but I bank with XYZ Bank! So much for client loyalty!

Banks have found that it is more profitable to negotiate with their customers instead of quoting their lowest rate up front.  In general, this is because bank reps have more experience and preparation in the negotiation process than the average consumer—many of whom accept the bank’s first “discounted” offer at face value.

In a lot of ways it comes down to a matter of principle.  I don’t like to badmouth banks because they’re in business to make a profit too.  Moreover, we send them a lot of business and have close friends in the banking channel. 

Nonetheless, banks are known for coming in at the 11^th hour to try and snatch clients from brokers.  They miraculously come up with “revised discounts” to their prior highball offers.  It’s a game that wastes everyone’s time.  In the end, assuming the rates are similar, who deserves the business?  A bank who knowingly tried to convince a client to take an overpriced rate, or the mortgage planner who pledged the best rate, and a fair rate, up front–and then took hours to counsel the client and put the deal together?

To dovetail on the above question, a friend of mine used to be an assistant branch manager at a bank. He had the discretion to discount the listed mortgage rate by up to 0.5% How much discretion does a financial institution have to discount the listed interest rate?

Every lender is different.  If you go through a mortgage planner, you’ll typically be quoted a lender’s lowest published rate up front.  In some cases, planners might even be able to do better than this.  Quick-close specials are a prime example.  As of today, April 14, 2008, the best deals (for fixed rates at least) are for people who are closing in 30-45 days.  These are unpublished specials available only through mortgage planners.

In most cases, Canada’s big banks have more ability to discount their rates because their rates are almost always much higher to begin with.  Their net rates, however, are usually not the best in the industry (although there are exceptions).

On the topic of rates, here’s one key point.  Always ask your broker if there is another lender who might have better rates or terms than the one they’ve recommended for you.  Some brokers deal with only a handful of lenders.  If they’ve recommended one of their preferred lenders, you’ll want to make sure they’re doing it out of benefit to you, and not because the broker is incentivized to do so.  (By the way, it is often beneficial to use a lender that your broker has preferred status with, but it depends on the case.)

So, the lesson to be learned is to ask your broker which financial institution they are preferred with in order to get the best deal. In other words, not all mortgage brokers have the same access to the same lender…Let’s talk about the top three things someone can do to make sure they obtain a mortgage for the first time.

 These are very general but here goes…

1.      Maintain excellent credit and a pristine repayment history

2.      Be prepared to put more money down, or get a co-signor, if you cannot qualify with the downpayment you had planned.

3.      Use a mortgage planner to identify the lenders that have the most lax qualification criteria for your circumstances.  Mortgage planners are also very good at preparing applications properly the first time, so as to meet lenders guidelines, and avoid needless red flags.  This is important because once a lender turns you down, it’s very hard to convert that decline into an approval.

I believe on your blog, you mentioned that a staggering percentage of people never ask for a lower rate when they renew a mortgage. How much money are they leaving on the table? Is the discount on a renewal that significant?

Many lenders often send out renewal letters with “discounted” renewal rates.  However, these rates are almost always higher than you could find by having a mortgage planner shop around for you.  The difference depends on the lender but I’ve seen cases where a client’s renewal offer was over 1.25% above the going rate at the time.

Just as importantly, there are always new products in our industry.  It’s very likely that a new mortgage has come out with even better features and perks than your present lender can offer.

I don’t want this next question to imply that you or I are supporting anyone defaulting on mortgage payments because we are clearly not but let’s address a reality today- what should someone do to minimize their “damage” when they start to fall behind on mortgage payments? Should they pay something rather than nothing?  Can a mortgage broker help someone in this situation? If so, how?

This is best decided on a case-by-case basis.  I would strongly advise a person in this situation to contact a mortgage planner first to evaluate potential solutions.  Refinancing or a getting second mortgage is sometimes a solution if you have the equity.  Or, if you have fallen onto hard times (e.g.  Become ill and cannot work) your lender or insurer may be able to create a “workout plan” with you.  Genworth’s Default Management program is one such example.

This is really a last resort however.  In Genworth’s case, they will not consider a workout plan if the following apply (quoted from Genworth’s guidelines):

·         When borrowers have the capacity to make payments and there has been deliberate default or mismanagement.

·         When borrowers are uncooperative and unwilling to resolve the situation.

·         When it is unlikely that borrowers will be able to return to making regular principle, interest and tax payments within a reasonable time (i.e. 6 to 12 months).

·         When borrowers have sufficient liquid assets such as RRSP’s, investment certificates, etc. These funds must be applied towards the mortgage payments prior to obtaining assistance from Genworth’s Default Management program.

In general, if you miss a mortgage payment your options diminish considerably.  Therefore, never avoid the pain of facing the problem.  Always act proactively and focus on finding a solution.

Two quick observations about that list: (i) attitude does matter when you are in trouble- it appears if you are willing to “play ball” with lenders, you may have a better chance of negotiating a good deal in hard times; and (ii) you have to show you are willing to bail yourself out too by putting some skin in the game. You can’t expect the lender to do all the work for you

I know you can’t speak for an industry but there has been a lot of criticism in wake of the subprime meltdown that mortgage brokers encouraged low income borrowers to obtain unsuitable mortgages. Do you have any comments to this and is the solution more regulation as some have suggested?

I’m guessing you’re referring to U.S. mortgage brokers.  To date, there have been few such improprieties evident in the Canadian brokerage industry.  Canadian brokers are governed by different rules and lending guidelines.  The difference between the American and Canadian mortgage industries is therefore night and day.

 As for U.S. brokers, the whole process obviously needs to be (and is being) reviewed by regulators.  In some case, more regulation may be the answer.  In others, borrower education is the key.

Last question- tell me why someone should hire a broker rather than do it themselves?

 Here are 10:

1.      Mortgage planners generally charge nothing to plan a typical residential mortgage (they are paid by the lender the client chooses)

2.      Professional mortgage planners always know who has the best deal, out of dozens of different lenders.

3.      Mortgage planners can fill out and manage all the paperwork for you, saving you a boatload of anxiety and hassle.

4.      Some clients–especially subprime clients–have a greater chance of getting approved through a mortgage broker, who can properly structure their application [TMW note: “subprime clients” and “subprime mortgages are two different concepts.  One does not necessarily equate the other.]

5.      Good mortgage planners help clients develop strategies that minimize interest and reduce amortization time.

6.      Professional mortgage planners are impartial.  They owe allegiance only to the client, not to any particular lender, a branch manager, or to shareholders.  In addition, most planners rely on referrals.  Their future success is closely linked with doing a great job for their clients.

7.      For tough deals, mortgage planners can sometimes suggest valid creative financing methods to get deals done.

8.      Mortgage planners are typically only a phone call or email away.  If you need advice, it’s often a heck of a lot easier to call your broker than to try and reach a lender.

9.      Mortgage planners just do mortgages.  As a result, they’re excellent at counseling borrowers on all the various mortgage procedures, the current interest rate climate, the latest and greatest products, and the best type of mortgage terms to choose.

10.  Mortgage planners do all the negotiating for you, saving you one of the most stressful parts of the process.  They also often get faster responses on applications because they have existing relationships with many lenders.

 
Thanks for your time and valuable insight Melanie. Melanie’s blog is listed above  and here is her  related mortgage site.