Brokers Operating as Agents Reduce Distrust

Known as the Upfront Mortgage Broker model, the system works on the basis of transparency. Basically, the broker establishes his or her fee at the outset of the application while giving loan prospects full access to wholesale pricing.

Jack Guttentag, Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania, said he has been touting his trademarked system since 2000.

An Upfront Mortgage Broker is “one who has elected to do business in an upfront and fully transparent way,” according to Guttentag — who reportedly spent his career at various positions at the Federal Reserve Bank of New York, the National Bureau of Economic Research and, as a consultant, for HUD, Freddie Mac and Citicorp. This includes disclosing their fees to borrowers in advance and in writing as well as revealing wholesale prices to the borrower.

“The proper way to run a mortgage company is as an agent,” Guttentag told MortgageDaily.com, “and work for a set fee.”

The mortgage industry, he said, “always has adhered to the independent broker model which lends itself to deception and mistrust.”

Customers of upfront brokers should be given the wholesale loan price, receive any third party rebates and pay only associated closing costs and the broker’s fee, according to Guttentag’s Web site.

The broker’s set fee should be equivalent to the “unique value proposition” the broker can offer the borrower, according to Steve Heideman, Executive Director for the Upfront Mortgage Brokers Association, a non-profit corporation.

Heideman, who is also the president of United Mortgage Financial Group in Tempe, Ariz., said he has operated his company under the model since late 2003 and has found it to be very successful, reportedly generating about $30 million in loan volume last year with seven loan officers.

“We think it’s a better model, more economically viable,” Heideman told MortgageDaily.com. “Bottom line is we are all consumers; call it Karma, ethics and good business — it’s the way I like to do business.”

“My conversion ratio is 92 percent,” he said. “Our clients and customers feel comfortable referring others to us and we educate our customers, show them the lock forms and rate sheets — our customer knows what we know.”

Heideman, who noted his company originates prime, nonprime and hard money loans, said he charges his borrowers a one percent origination fee and $495 processing.

“I don’t want to step on any other originator’s toes,” Heideman said. “I just think that the [Upfront Mortgage Broker] model is a more economically viable model because it is more consumer friendly.”

Heideman noted that brokers using the Mortgage Loan Origination Agreement from the National Association of Mortgage Brokers, which states the broker is an independent contractor, need to explain to borrowers that they are going above and beyond the agreement by working as an agent and positioning themselves to act with fiduciary duty to the borrower.

Heideman cited less anxiety as one reason for borrowers to use an upfront model. “There is a psychological ease of knowing that they are not being taken advantage by their mortgage professional,” he noted, “because home buying is stressful enough as it is.”