I am in the process of completing a mortgage application and have been working with a broker. He has locked in a rate for me through his company's in-house bank. I asked him for the name of the bank so I could research it and he said, "I don't know yet which of our in-house banks will take on the loan." That's fine but he didn't explain himself well. How do I know that his company's in-house bank won't go out of business within the year amidst the financial crisis if he can't give me a name? Does being affiliated with a large brokerage company provide me with better odds for the bank not being a dud? He also said that even if a bank does go out of business, my mortgage rate and payments won't be altered and I won't face ANY additional fees or payments as my mortgage is sold to another bank. Is that true?

L. B.
Stamford 
Connecticut

Answer:

Hi Lauren,

Your concerns and questions are certainly on the mark, given today’s mortgage climate. With such a large number of “non-conforming” lenders shuttering their doors consumers are justifiably nervous. We’ve seen some of the largest lenders (American Home Mortgage/ABC come to mind) and many, many smaller ones simply stop doing business with virtually no notice. Even Countrywide, the largest mortgage provider, recently staved off insolvency by organizing a consortium of lenders to back their funding by over $11billion. Most of these companies were not mismanaged but were caught in the “perfect storm” of the liquidity crisis, that is, they were unable to fund any additional loans since their sources of funding dried up. The credit lines from which they drew funds were either diminished drastically or completely eliminated because the default rate on the loans behind them recently shot up. This was due to the expiration of the short term “teaser” rates on many adjustable rate loans, causing many people to be in a position of not being able to make their new, higher payments. 

Currently, the mortgage market has stabilized but most programs are underwritten with tighter guidelines. If you are looking for a “conforming” loan, that is, one that conforms to Fannie Mae’s or Freddie Mac’s secondary market standards, there are plenty of available funds and capable lenders. There are also some “non-conforming” programs and lenders who offer loans in the Jumbo or Sub-prime category. What you need to look out for with those types of mortgage products is whether or not the company who funds the loan is associated with a large bank. Almost all of the failures recently were by companies that were receiving their funding through various Wall Street conduits - in essence, a private secondary market. Whether or not your broker is associated with a large mortgage brokerage is not important, but if he has access to the major banks, you should do well, provided he has multiple sources to shop your loan. 

The terminology your broker is using (in-house-bank) leads me to believe that he may not have much experience in the business. They are wholesale lenders and we shop them just like you shop us. The most important thing for you is to be funded with a major bank that is backed with deposit dollars and not Wall Street hedge funds. If your loan is subsequently sold to another bank, it is only for the servicing and will not change any of the terms of your loan. 

Lauren, I hope this has been helpful. You should be able to proceed with confidence with the right information, in hand. If your broker does not instill that confidence in you, then perhaps you should find another broker! Good luck!

Sincerely,

Brian Starratt
Mortgage Consultant
HomeQuest Mortgage
82-D Worcester St
North Grafton, MA 01536
508-839-1117 ext. 18
866-HOMEQUEST toll free
508-839-9799 fax