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Mario , Home Buyer in San Francisco County,...

I was speaking with a mortgage broker who told me that consumers cannot get the wholesale rates direct from banks. Is this true?

Asked by Mario , San Francisco County, CA Thu Jan 7, 2010

He said that only other institutions, like his, could do this. So the rate he quoted me on my 30 year fix was a bit higher than the wholesale rate. In order to get the rate down, I would then have to pay the morgage broker a point at 1% of the loan to do this. Is this true?

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Thanks Steve...you just gave away our yield spread premium secret..oh, never mind, the government did that..haha..Mario: That broker is pulling your chain. Retail rates aren't that much worse and sometime better than wholesale. Kind of think of it this way: Retail charges you $10 for an item. Wholesale charges $5 for the same item. Now, you talk to a loan officer and the Retail store charges you $9 for the item. The wholesale store charges you $9 for the item. You're getting the same product for the same price. The difference is that the wholesale loan officer will make more money on the transaction than the retail loan officer. I do loans all the time with no point attached. Instead, as Steve illustrated, I get paid from the yield spread. I hope I was able to completely confuse you.
0 votes Thank Flag Link Fri Jan 8, 2010
Hi Mario,

The mortgage broker you spoke with is correct. Wholesale lenders do not deal directly with end consumers.
"Wholesale rates" are those quoted by wholesale lenders to mortgage brokers and smaller (a.k.a., correspondent) lenders via "rate sheets."

The rates that are quoted to you by a mortgage broker/banker are tiered. For example, let's assume you need $300K in financing on a standard 30Y loan. Assume that today the rate sheet showed the following tier structure:

%Rate Broker Commission% or Buy-down Cost
4.250 1.544
4.375 0.938
4.500 0.480
4.625 0.081
4.750 (0.258)
4.875 (0.498)
5.000 (0.821)
5.125 (1.055)
If the percentage after the rate has brackets around it “( )” it's the commission being offered by the Wholesaler. Conversely, if there are no brackets it’s the Wholesaler’s fee to "buy down" the rate. (NOTE: this hypothetical pricing example is over-simplified. There can be many more price adjustments that must be accounted for such as LTV, credit score, etc.)

Now, a loan broker/banker will typically earn at least 1% on a transaction. There are two ways for this to occur:
1) The loan broker has to select a rate where the lender pays the commission, or
2) The buyer pays the commission via points.

Using the example "rate sheet" above, this would result in you would receiving a 5.125% rate in the first case and a 4.625% rate in the second case along with a small additional lender fee of $243 [.081/100 x $300K ].


Since you appear to be a new home buyer I'm going to bring up a very important topic. There is a BIG difference between a Pre-Qualification and Pre-Approval. If you are looking for accuracy void of surprises you MUST be Pre-Approved, not Pre-Qualified. For the important differences see: http://www.Steven-Anthony.com/default.aspx?pp=39377

There are three primary conduits that you can use for your financing (retail, bank, and broker). I have been a Banker, and I am now both a Mortgage Broker and Realtor. I wrote on the differences between Retail, Mortgage Banker, and Mortgage Broker here:
http://www.trulia.com/voices/Home_Buying/What_s_the_advantag…
(Be sure also click on the web reference link to review “Rate Shopping – How to do it Right”)

In the link above I commented how Mortgage Brokers reduced their number of financing sources (this was due to wholesalers requiring certain volume). While choice suffered, a benefit of this consolidation was the higher loan volumes created through reduced funding channels, which allows for volume-based pricing adjustments that can make certain brokers more competitive than a direct lender.

My suggestion WOULD NOT be a retail bank, since you will only be exposed to their mortgage rate for the loan product you desire. Mortgage Bankers/Brokers will have multiple funding channels that offer the product you are looking for, and it’s the job of the loan officer you choose to find who's offering the best pricing out of that group.

Best, Steve
0 votes Thank Flag Link Thu Jan 7, 2010
Hi Mario,

Wholesale and retail loan rates are based on a matrix of percentages and basis points. Depending on what the market dictates there will be a "par" rate where me, as a Mortgage Banker or Broker makes nothing, typically this rate costs a point and typically every .125 or .25 higher in rate will give you a "Yield Spread Premium" as a broker or "Rebate" as a banker. Brokers must disclose YSP and bankers do not have to disclose rebate as HUD considers it a gain on sale. Basically this means that if you buy a rate .25 higher

My company is a bank and brokerage so I see both sides and this is the biggest over site on HUDs part in my opinion. You never know what the gargantuan monster bank is really making off you but the Mom and Pop Broker shop (whats left of them) must disclose every penny (I digress).

For you to have access to a wholesale rate for yourself you would have to be DRE licensed along with other licensing now.

From my experience the broker side can get you a lower rate but there are a lot of brokerages that are heavy on the junk fees and points. First Priority Financial is the largest brokerage in the nation and our sheer volume allows us to get rates lower than most competitors if you want an accurate rate quote.
Web Reference: http://www.garrick.biz
0 votes Thank Flag Link Thu Jan 7, 2010
Yes he is correct, it does not mean that you can not get the same rate from a bank. A bank might have there retail rates identical to what you can get from the broker, this is something you just have to shop around for. From what I have incountered you should try and find a lender or broker you feel will work for you and do the best job possible. When you compare loans make sure you are comparing apples to apples If one lender is offering you a loan with a lower rate but charging you several points and other fees you might be better off with a lender that is not charging you any points and has lower fees. Also remember that rates right now are extremely good and when they go up they will go up quickly. If you have any questions about real estate feel free to give me a shout.

Troy
0 votes Thank Flag Link Thu Jan 7, 2010
Hi Mario,
The banks have retail departments that meet you when you walk in or call in to get a loan. The rate you receive in this situation could be as good as the rate from a independent broker. My experience has been that you will be quoted a higher rate from the "retail" side of the bank.
Most major banks have a wholesale side that competes with the independent brokers. Sometimes these bank mortgage consultants can match or beat an independent broker. Interesting, I can get wholesale from Bank of America, Chase and Wells Fargo and Citgi Bank and often will beat the rate quoted to a client from the bank itself.
An independent broker as contrasted to a bank will have many sources for loans that come from other "non-bank" lenders. They can offer you more choices. Options are usually beneficial for you as a consumer.
If you have an honest loan broker/mortgage consultant, you stand a good chance of getting a better rate than you would get dealing with a wholesale or retail side of a bank.
The bottom line is that a lender and mortgage consultant and a bank will make a reasonable fee from your refinance process. This is only fair since they do a hard and long process to provide you with a loan for your property.

There are new Good Faith Estimate requirements which helps to level the disclosure of costs and fees for your new loan. Banks have an advantage in that their profits on your loan do not have to be disclosed.
They may be making as much or more than an independent mortgage consultant but where a mortgage broker must show you every penny they charge, the bank can still hide a big chunk of their profit on the transaction.
My advice is to find a mortgage consultant you trust and stick with them. You will do better that way.
If you would like to discuss this further call me 707-540-4511.
Best of luck and Happy New Year!
0 votes Thank Flag Link Thu Jan 7, 2010
Yes. What he is telling you is that the bank is able to offer the broker a wholesale rate, which helps the bank do more business while allowing the broker to offer a competitive price (win-win). For instance, the bank offers you the same rate at the same cost as the broker does.
Wholesale rates are not offered to the public, by definition.
Points are used to buy rates down. A one point fee to get your rate to what you are referring to as the wholesale rate is not unusual. Conversely, you have the option to pay no points by accepting a slightly higher rate.
0 votes Thank Flag Link Thu Jan 7, 2010
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