The Greatest On-Going Scam in American Business Today — PART 1 - By: Andrew Bloom, Posted on: 2007-02-11

Despite the best efforts of Federal and State regulators for the industry, there continues to exist today a scam that defies all common sense and logic. Year after year hundreds of millions of dollars are taken from the unsuspecting masses of homeowners. This problem has layered all sorts of lies and deceipt until no one knows which way is up anymore.

I’ll not beat around the bush —- there are only two ways that a bank, lender, mortgage broker, loan originator can make money. TWO ways — that’s it.
1. Fees charged up front (in a refinance — these fees are financed)
2. The WORSE they make the terms of the loan, the MORE money they make.

You didn’t read that wrong, and I’m prepared to dispute anyone who say’s otherwise. I’ve owned numerous mortgage companies over the years and I whole-heartedly welcome anyone who would like to challenge me on this point.

Where the deception and what I call a “scam” lies is from all of the Mis-Information that lenders tell people. For the Up-Front fees charged, typical deceptions range from a “standard” loan origination fee (since it is expressed as a % — what makes the fee standard?) to “Junk” fees which are line item charges where no actual service is performed (such as a “doc prep” or “admin” fee).

The second way they make money is far more damaging though. By making the TERMS of the loan worse… they will make more money. The worse the terms the more money. Examples here are higher interest rates, higher margins, pre-payment penalties, balloons, etc…

The greatest tradgedy is that unless you are “in the business” you will probably never realize the extent of the damage inflicted upon you in the name of greed, until perhaps it is too late. This compensation is supposed to be disclosed (by brokers NOT not by lenders). Because of this many direct lenders will advertise a “Flat Fee Loan” at something ridiculous like $495. What they don’t have to tell you is how much they are making on the back-end (which is the term used for #2 above). And remember, the worse the terms, the more they make on the back-end. Brokers are supposed to disclose that information and the vast majority do. However, because verbage like SRP and YSP are used that show up in parenthesis and not represented as a line item charge — most people don’t really give it any thought.

Let’s switch gears for just a moment. The real estate industry — the realtor side, not the mortgage side — charges people a “standard” 6% commission. Over the years there has been a fair amount of up-roar over it. After all with the price of real estate today, is 6% (or $24,000) really a fair commission to pay for a $400,000 home? As preposterous as it is, at least they are setting a price. No hidden fees, no “junk” fees, no way for them to make even more by changing the terms of the deal somehow.

Why can’t the mortgage business be operated in this manner? “I’ll provide you with a loan for $x” should be the mantra.

Let me make this very clear and simple for you, if a lender tells you they will make $2,500 in commissions then they could charge it all as an up-front fee which means that you will automatically get the best interest rate available. The terms of your loan will be the absolute best available because the lender CAN’T make anymore money per your agreement with them. For the more sophisticated consumer they could opt for $0 in up-front fees knowing full well that they will have to sacrifice getting the best interest rate —- but they will know that once $2,500 in commission is reached, that’s where it will stop.

Using this method —- no one can EVER claim that they were taken advantage of. However, there are some issues in mandating this change of practice. It is all very do-able and I’ll explain how to practically make this happen in Part 2.

Article Source: http://www.southerncaliforniarealestateagent.com/submit-real-estate-articles

With over 20 years experience in real estate / mortgages, Andrew Bloom has agreed to reveal the ONE true way to get the best deal. Get the FREE "Ultimate Mortgage Shopping Guide" found at the Spam-Free site www.freeloanadvice.net You are free to re-print this article but only if the resource box remains intact. Copyright 2007 andrew bloom

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