Have you ever tried to bargain with your mortgage lenders when it comes to fees, extra charges and overages? If not, you may be paying more than you actually have to pay. Jack Guttentag, a columnist with The Washington Post, recently wrote a piece that compared the United States mortgage industry and its practices to the practices of the carpet sellers at Middle Eastern bazaars. In the bazaars, customers and merchants often haggle on the price of a carpet before making the deal and the price that a consumer pays is typically proportional to his skills at bargaining. According to Guttentag, the same practices are used in the American mortgage lending industry.
Guttentag calls this the “price of innocence.” This figure is the difference between the lender’s actual posting price and the price the customer actually pays to the loan officer. For instance, if the lender posts a price of five percent with zero points but the loan officer charges the consumer five percent and one half point, the overage, or “price of innocence,” is the one half point. The loan officer generally receives one-half of the overage.
The overage is not a new phenomenon in the mortgage industry, but it is something that has not always been a part of the deal when a borrower signs up for a mortgage loan. During the 1920s, home buyers would deal directly with commercial banks or lenders when applying for a mortgage. They would work with a salaried employee who had no incentive to sell a home because the employee did not have any discretion over who would get approved and who would not get approved. Therefore, the employee could not adjust prices or do anything else to push the home buyer’s application through nor did they have any motivation to do so. However, after World War II, the secondary market began to arise and financial institutions were not as regulated as they were before the war. This led to the creation of mortgage companies, or as Guttentag refers to them, “mortgage lenders.” Over the years, these lending institutions wanted to charge fees for a huge profit for as long as the market could bear it. Through some more less-than-ideal approaches and practices in the lending industry, we ended up with the mortgage crisis that we have now.
Bank of America has seen the error of its ways and decided to do away with charging overages to customers who are buying a new home. One of the reasons is because of the problems already described in this and Guttentag’s article. The new revisions in the Federal Reserve’s Truth in Lending policy (which forbids lenders to share overages with loan officers) has also played a role in the bank’s decision. Hopefully, other mortgage lenders will follow the example. However, you will have to do your research because most lending companies will not announce that they are no longer charging overages the way that Bank of America has done.