Financial Services: Mortgage rates ‘deals’ may be come-on

Taking out a first mortgage, or even refinancing an existing one, can be a daunting task for a future or existing homeowner.

With myriad loan options to choose from, a critical part of the borrowing process is simply learning what kinds of mortgages are available and how they work.

“There’s massive misunderstanding on the part of consumers today,” says Louis Barnes, a partner at Boulder West Financial Services Inc., who also writes a weekly mortgage newsletter. “A lot of people have an antiquated understanding of the mortgage industry.

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“Modern mortgages are securitized and sold on the financial markets. The presence of a bank is usually immaterial, and getting the lowest rate does not always mean getting the best deal.”

Barnes recommends consulting friends and family who have gone through the mortgage process to find a broker with a good reputation, being aware of the tax consequences of closing costs (most refinancing costs are not deductible), avoiding points and origination fees that are paid off over the life of the loan, and asking for a no-cost quote at the outset.

It is not uncommon for mortgage lenders to advertise low rates and then say that the rates are no longer available when consumers call.

This is a common bait and switch or “loss leader” strategy, which has prompted many consumer complaints to the state attorney general’s office and the Better Business Bureau. And while this practice is not necessarily illegal (although newspapers are supposed to be screening these ads according to a prescribed set of standards), it results in consumer distrust of the lending industry. Barnes points out that rates in the loan industry are always changing, and consumers should be skeptical of advertised “attractive” rates, as they are approximations only.

Since Colorado does not regulate the mortgage industry, consumers trying to assess the reputation of lenders must look to sources other than the government.

The Colorado Mortgage Lenders Association, or CMLA, is a 40-year-old trade association that polices the mortgage industry in the state and seeks to eliminate dishonest trade practices. The CMLA has a 16-person board of directors responsible for overseeing its various committees and a four-person executive board that manages the entire organization.

Al Killeen, a principal at Highline Equitrust Mortgage Corp. and president of the CMLA, says the 350-member organization is composed of what he calls “the white hats” in the industry.

“We try to establish a code of ethics and operating guidelines that help resolve the complaints that emerge about the lending industry. It’s in our interest for the consumer to be treated fairly.” says Killeen.

“What really irks me about the use of what you might call a loss leader (misleading rate quote) is that it starts out with the premise that the consumer is to be manipulated. It’s offensive. When shopping for a lender, and this is the approach you should take when shopping around for any service professional, call several and get a feel for how they do business. Ask yourself, am I being consulted or manipulated?”

Bill Woodman, ethics chairman for the CMLA and a partner at Premier Mortgage Group, agrees with Killeen and emphasizes what he calls “the trust factor” when deciding on a lender.

“You want to be comfortable with whoever you choose to do business with . Get a good faith estimate in writing from the lender and be methodical. Since the lending industry splintered, ethics have gotten hazy. You want to be careful. Try and get a referral from someone you know well. Make sure they are experienced. A lot of what I see is general incompetence.”Woodman also suggests contacting the Better Business Bureau to see whether or not a particular lender or lending group has any complaints filed against them.

Federal Housing Administration and Veterans Administration loans are regulated and audited by the federal Department of Housing and Urban Development. Consumers might want to find out the secondary market of the new loan.

If a loan is being sold to the Federal National Mortgage Association, known as Fannie Mae, the Federal Home Loan Mortgage Corporation, or Freddie Mac, or the Government National Mortgage Association known, called Ginnie Mae, chances are the loan is being handled properly.

In addition to the Better Business Bureau and the CMLA, the state attorney general office’s business regulations unit compiles and investigates consumer complaints about the lending industry. Killeen and Woodman suggest using companies that are members of the CMA.

“Seventy percent of the complaints I get pertain to lenders who are not affiliated with us,” says Woodman. “But we encourage consumers to file complaints even if it is a CMA member.”

Formal complaints to the CMA must be submitted in writing. The CMA sends a copy of the complaint to the business in question asking the head of the company to respond. “We seek to resolve the issue,” Woodman says.

The complexities of the mortgage industry can be made less daunting by educating oneself prior to shopping for a loan. “The role of the lender is changing,” says Killeen. “With the digitized (computer-based) economy , more information than ever is available to the consumer. Our job is to help consumers filter this information and make good, intelligent decisions.”