If you’re considering taking out a mortgage to purchase your home or refinance your existing mortgage with a bank like Wells Fargo, here are several things to consider first. Refinancing with the wrong lender could not only cost you thousands of dollars but could lead to the loss of your home. Here are several tips to help you decide what kind of mortgage lender is right for you.
Wells Fargo mortgage is a fully owned subsidiary of Wells Fargo Bank. Today Wells Fargo is the second largest mortgage company in the United States just behind Countrywide. Wells Fargo bank and its mortgage subsidiary is a darling on Wall Street and a favorite pick of mutual fund managers and investors because of their incredible profit margins. I’ve never been a customer of Wells Fargo Mortgage; however, I had a checking account with Wells Fargo Bank and I can tell you I’ve never felt more nickeled and dimed since staying at the Luxor hotel in Las Vegas.
Wells Fargo’s profit margins are so high not only because of all the fees they charge with their so called free checking accounts, but from their overpriced mortgage loans and expensive investment accounts. Because of their consumer gouging business model Wells Fargo has received negative press from several consumer watch groups, including ACORN, charging the bank with predatory lending practices. If you’re considering taking out a mortgage from Wells Fargo, Bank of America or any other bank or Credit Union, here are several compelling reasons not to.
Banks and the Real Estate Settlement Procedures Act (RESPA)
RESPA is legislation in the United States that protects homeowners from predatory lending practices by requiring mortgage lenders to disclose their profit margins and markup. The Banking Lobby spent millions of dollars in the early 90s lobbying Congress to have the law changed, and they succeeded. Banks are now exempt from the Real Estate Settlement Procedures Act.
What does this mean for you? Your bank is not required to tell you anything more about their mortgage products than the Annual Percentage Rate (APR). While separate truth in lending legislation requires banks to disclose some form of APR for their mortgage products, there is no standard method for calculating the APR or requirements for what fees must be used in the calculations. This means your bank is free to calculate the APR however they like; this limitation in the law has turned the Annual Percentage Rate into more of a marketing tool for lenders than the consumer protection legislation it was intended to be.
Let’s get back to RESPA shall we? Because your bank is exempt from this legislation you’ll never know what the bank’s profit margin is on our loan. And just where does this profit come from? Many people think that once they close on a mortgage the bank kicks back and cashes their payment checks each month to make a profit from the interest paid on the loan. This simply isn’t true. Banks make the majority of their profits by selling mortgages to investors on the secondary market. Furthermore, the bank maximizes this profit by selling loans with above market mortgage rates.
Above Market Mortgage Rates and Service Release Premium
Your bank isn’t stupid…they know exactly what’s going on in the mortgage industry and what the wholesale mortgage rate is every day. Furthermore, the bank knows exactly what mortgage rate you qualify for based on a thorough examination of your financial details. (sixteen factors to be complete) The bank determines your mortgage rate and then marks up that rate to boost profits when the loan is sold. This markup of your mortgage rate is called Service Release Premium and is the reason you should never take out a mortgage from any bank. Period.
Not convinced? Don’t ask your banker. Most bank employees have never heard of Service Release Premium and couldn’t quote you a wholesale mortgage rate if their very lives depended on it. Bank employees will show you their daily rate sheets and swear on a stack of bibles that their rates are not marked up. The problem is that bank mortgage rate sheets have Service Release Premium built into them. The only way to recognize this is to compare your bank’s mortgage rates to those offered by wholesale mortgage lenders and you can easily spot their markup.
Can You Get Wholesale Mortgage Rates?
Do you simply call up a wholesale lender and ask for a wholesale mortgage rate? Unfortunately, no. Every wholesale lender out there has a retail division that deals with the public. If you contact one of these lenders you’ll be getting the same markup of your mortgage rate that the bank adds. Does this mean wholesale mortgage rates are out of reach of the average homeowner? Of course not!
How to get Wholesale Mortgage Rates
You can take out a mortgage with a wholesale rate and avoid lender garbage fees. In order to do this you need to find a mortgage broker willing to give you access to wholesale rates without overcharging you. These brokers do exist; however, you’ll need to learn how to negotiate with them to get the deal you want.
You can learn more about negotiating with a mortgage broker for wholesale rates while avoiding junk fees by registering for my free mortgage refinancing video tutorial.
My name is Rob Regehr and I’m a personal finance writer with a chip on my shoulder for banks and brokers that take advantage of my friends and neighbors.
