There was a time when brokers were compensated entirely by borrowers. Lenders posted one rate and one upfront charge called points or origination fee, expressed as a percent of the loan amount. (One point is 1% of the loan). Brokers would add their markup to the points.

If the lender quoted 6.50% with 1 point, for example, the broker might add 2 points as his markup. The broker would then quote 6.50% with 3 points to the borrower.

At some point, I can’t remember exactly when, lenders began to offer rate/point options. For example, in addition to a "basic" combination of 6.50% and 2.5 points, they might offer 6.25% with 3.375 points, and 7.25% with zero points. Over time, the number of options grew and came to include rebates. Today, multiple options such as those below are common.

Brokers tack their markup onto a rebate, just as they do with points. Assuming a 2 point markup, for example, the broker would quote 0.3 points on an 8% loan. Of the 2 points received by the broker, 1.7 would be rebated by the lender. But the borrower pays for the rebate over time through the higher interest rate.

A survey of brokers in 1998 found that borrowers paid about three-fifths of the brokers’ compensation in points and lenders paid two-fifths in rebates. The relative importance of rebates may be on the rise. I recently acquired a data base covering 774 loans brokered in December 2000 and January 2001. On these loans, rebates accounted for about three fifths of broker income. Only one loan out of 5 had no rebate at all.

With the exception of Upfront Mortgage Brokers, information on lender rebates is difficult to get. Many conventional brokers view it as none of the borrower’s business. The Good Faith Estimate of settlement costs (GFE), which the broker provides the borrower within 3 days of receipt of a loan application, shows points as a settlement cost but rebates are shown in the margin or a footnote marked "POC" -- paid outside of closing. Many borrowers miss it or don’t understand it.

Brokers can avoid showing lender rebates altogether by "table-funding" loans. At the closing table, the real lender provides the funds needed for the broker to close the loan in the broker’s name. Legally, this converts the broker into a "lender", and the real lender into a secondary market purchaser. The sale price is based on the rebate. In the case of the 8% loan with the 1.7 rebate, for example, the broker would sell the loan for a price of 98.30% of the loan amount. In this way, the rebate is concealed forever.

Many mortgage brokers table fund for no reason other than to avoid having to disclose rebates to borrowers.

Brokers usually make more money on transactions involving rebates. This may be because borrowers don’t know how much brokers make from rebates. Also, borrowers who minimize their cash outlays may be less careful about the rate they agree to pay, which permits brokers to capture large rebates.

Borrowers can avoid overpaying for loans carrying rebates by dealing with an Upfront Mortgage Broker (UMB). UMBs set a price for their services at the outset of the transaction and credit the borrower for any rebates. The broker thus receives the agreed-upon amount on the transaction regardless of whether the borrower or lender pays it. UMBs are listed on my web site.

March 19, 2001

• Select a lender without knowing any of the lender charges except points, then try to negotiate other charges afterwards.
• Use the APR to assess the cost of different mortgages, even though you expect to be in your house only a few years.
• Allow the price to float on a home purchase transaction.