“A Rose by any other name would smell as sweet.”
Can a “Lie by any other name” have the same effect?
Fibs, whoppers, white lies, half-truths, etc…they are still LIES.
And while not all lies are meant to hurt you – that doesn’t mean they won’t. In a lot of cases it’s the little lies that can hurt the most. Trust me…I know what I’m talking about. I’ve told, and have been told, my fair share and I can relate.
If you’ve read our last 2 blog entries, you’ll recall we’ve covered that lying is everywhere and exists for a number of reasons, and we’ve firmly established that EVERYONE LIES!
And of course…some will deny it and will even take offense to such a statement – be careful…they are amongst the worst!
We even presented some of the lies used by unsavory Real Estate Agents, the ones who are more interested in simply locking up their commission cheque rather than acting in an ethical manner and for the benefit of their client.
We should point out that a lot of real estate agents were infuriated and felt personally attacked with that particular discussion. However, there were far more who applauded us for the post and others who indicated they will use the information in it to distance themselves from these Machiavellian types.
FYI – it’s the good guys who we’ve aligned ourselves with and them alone who we refer clients to.
They’ve demonstrated first hand they have our clients best interest at heart.
Get your popcorn ready.
Mortgage Providers lie just like the rest of the world, and the number one “half-truth” told is:
1. “You’re Pre-Approved”
Ask any real estate agent how many times they’ve heard this one before…they are likely to fall on the ground laughing, or roll their eyes in disgust because it’s all too common.
-Some of you are scratching your heads right now, going – wait a minute…how is this a lie? Perhaps if we called it a “Half Truth” it would be more appropriate than a hard “LIE”…but recall our opening statement about the “rose by any other name” and you’ll get it.-
When we issue a pre-approval, it’s similar to when the Weather Man tells us the weekend forecast is going to be fabulous! It’s more “hope” rather than “fact.” And just like the weather can change in a moment – so can the course of a Mortgage Pre-Approval.
When it comes right down to it, pre-approvals come with a lot of uncertainty and although we hand them out like candy, we do so on the hope that there will be no surprises when the deal becomes what we like to call “LIVE”.
A live deal is when all the chips are down and all parties involved have had the opportunity to review the application. The parties we are referring to are the Mortgage Broker, the Mortgage Lender, and the Mortgage Insurer.
The pre-approval just means you meet most of the requirements to be approved...but there's still work to be done.
True, at the time of the pre-approval we collect a lot of information, we verify income and employment, and even verify the down payment and crunch some numbers – BUT...
Until the deal hits the Mortgage Lender and/or Mortgage Insurers…the pre-approval means NOTHING.
Pre-Approvals are a lot like Squares of Toilet Paper...and that's exactly the use they have. Hahaha. Potty humor is our favourite!
When an applicant moves from the Pre-approval stage in to the actual Approval stage – this is where all sorts of things come to light and the pre-approval is tossed out.
- Subject Property Issues (Structural Integrity, Fire Risk, or Illegal Activity History, etc...)
- Gifted Down Payment from Foreign Funds (there are some countries where gifted funds are not permitted)
- Bankruptcy or other Financial Insolvency
- Separations/Divorces and Maintenance Orders
- Previous Mortgage Delinquency/Foreclosure
- Income Irregularities
- Court Judgment’s
- Opposing Credit Report Delinquency (Equifax vs. Trans Union)
- Qualifying Interest Rate Changes
- Industry Legislation Changes
- Etc, etc, etc…
And this is just naming the few that come to mind. It’s astonishing how many things can be uncovered once a deal goes "LIVE".
So, what do we do then? Do we change the message? We can't change the perception of the message without changing it all together. When people hear the term, "Pre-Approved", they imply and perceive that message to mean they have a "green light" and there is nothing standing in their way...and we know this just isn't the case.
Perhaps then the statement should be;
“You’re Pre-Approved…subject to further scrutiny by both the Financial Institution and the Mortgage Insurance Company as per the National Housing Act Guidelines, a Rectal Exam, Blood and Urine Samples, and Random Internal Lending Protocols.”
That’s a bit of a mouthful – but it’s a lot more factual. Okay – we are joking about the rectal exam or blood and urine samples…but the rest is certainly not out of the question!
Moving on, there are other lies that your mortgage provider may or may not tell you…and in a lot of situations they will simply something and you are none the wiser to know any different.
For instance, your mortgage provider may say this:
2. “This is the Best Rate Available”
This is a loaded statement – one that is not necessarily untrue – but certainly one open to interpretation and can very easily be exposed as a full-blown lie.
Is it the best rate available for that product industry wide (or at least accessible to them) or is it the best rate available to the client from the lender the broker is using?
To know for sure, if it’s the best rate available for the selected product – then the broker should be able to back it up by showing you the rates associated with the product from at least 5 of their lending partners. It’s not top secret information and your broker should be happy to share it with you.
Note: Mortgage brokers do not have access to all lenders. For instance, BMO and RBC Mortgages are exclusive to their own Mortgage Specialists (not to be confused with mortgage broker or associate), and are not available to any Mortgage Brokerage.
In most situations, more than you think, the Mortgage Broker can find the product you need with a handful of lenders. But not all lenders will have the same rate and/or privileges, and some lenders pay the broker better to put their clients with them rather than a competitor.
The Broker suddenly has a lot of control here and can easily manipulate their desired outcome. Dodgy Buggers! Lol.
Lost and confused about that? Let’s run a scenario to help you understand:
A client wants a 5 year fixed rate mortgage. The Mortgage Broker has the following options available to him:
Lender “A” can provide a rate of 2.59% for a 5 year fixed mortgage with 20/20 prepayment privileges with full Port and Assumption privileges and clear cut pre-payment penalties. The lender will pay the broker 80 BPS ($800.00 per $100,000.00 Mortgaged).
Lender “B” can provide a rate of 2.64% for the same product…with similar privileges and penalties– but they may pay the broker 105 Bps ($1050.00 per $100,000.00 Mortgaged).
Lender “C” has a rate special the client qualifies for and the client can get a 2.54% rate with 15/15 prepayment privileges with full Port and Assumption privileges and clear-cut prepayment penalties. The Lender pays the broker 90 BPS ($900.00 per $100,000.00 Mortgaged).
Lender “D” can provide a rate of 2.49% for a 5 year fixed mortgage with only a 10% extra monthly payment privilege – Not portable or assumable – and prepayment penalties are much less clear cut and even come with EXTRA potential penalties…but they pay the Broker 110 Bps ($1100.00 per $100,000.00 Mortgaged). By the way…this particular little devil is what we refer to as a “Mouse Trap Mortgage”…we did a write up on it a while ago – click HERE to learn more!
The Broker has a lot of good options here…it’s their job – and their LEGISLATED DUTY – to make sure you are not taken advantage of.
A Good broker will take the time to explain all of your prospective options and let the client decide what's best for their unique needs.
In the example above – the broker should present the client with the Rate, Privilege, and Restrictions of each and allow the client to decide on the final product.
If left to the broker to decide – depending on their ethics and their moral compass, the client may get the product that benefits the broker more than themselves!
The best option from the above example would be Lender C. The rate is nearly the lowest and it has excellent prepayment options and privileges available to the client…at the same time, the broker receives their compensation somewhere in the middle.
In other situations, the client may have some credit insolvency issues and they may not qualify for an Insured Mortgage from the lenders offering the lowest of rates. Perhaps they qualify from a lender with higher rates but with more control over the amount of risk they can endure.
Mortgages are all done Case by Case and rarely are 2 mortgage applications the same.
Another Hot Topic of concern lately revolves around Mortgage Penalties…this is one to be extra educated on…which leads us to another possible statement of fiction or fact:
3. “Don’t worry about the Mortgage Penalty, it’s not a big deal.”
A flashing red light with sirens should go off any time a Mortgage Broker says this.
Then a SWAT team should drop from a helicopter and surround the building…well, that may be excessive – but it shouldn’t take away from the Potential DANGER of that statement.
There are only 2 scenarios when this statement is acceptable:
a. The mortgage is “Open”,
b. The mortgage TERM is coming due for maturity very soon…say 3 months or less.
Mortgage Penalties are a HUGE DEAL!
And aside from the two exceptions above – you should always pay attention to them. They can cost Tens of Thousands of Dollars!
Typically a mortgage will carry standard Prepayment Penalties – either a 3-month Simple Interest penalty or a more complex and devious Interest Rate Differential penalty.
I would love to say at this point that it was up to the Borrower which penalty they paid, however it’s not. The lender will do the math on both and the client will pay the GREATER of the two.
I know how much you love examples, so here’s an example:
Jill has a mortgage with Sneeky Bank and when she got the mortgage, Sneeky Bank gave her a 2% Discount from their posted rates. She received a 3% interest rate on her 5-year mortgage. The penalty clause stated she could pay off the mortgage earlier than the 5 years but would pay a penalty equaling the Greater of either the IRD (Interest Rate Differential) or 3 Months simple interest.
2 years has passed and Jill has accepted a job in another province and she is selling her home. Her mortgage balance is $263,000.00
She is pretty savvy and quickly figures out her 3 Month Interest Penalty.
$263,000.00 X 3.00% (Annual Interest Rate) = $7,890.00 in Annual Interest…but because the penalty is only 3 months – she divides the annual amount by 4 (because there are 4 quarters to a year and 3 months is a quarter of a year.)
$7,890.00 / 4 = $1,972.50
Jill has no idea how to calculate the IRD penalty so she calls Sneeky Bank and is told the following:
"Because she received a 2% discount from their posted rate originally – the penalty would be calculated with the same discount applied to the current 3 year posted rate, which is currently 3.39%. The 3-year rate is used because it’s the same as the number of years remaining on her current mortgage."
3.39% - 2.00% = 1.39%
Original Rate – Current Rate: 3.00% - 1.39% = 1.61%...the Interest Rate Differential.
The IRD penalty is then figured out as (Balance X IRD) X Number of Years Remaining:
(263,000.00 X 1.61%) X 3 =
Jill’s penalty would be $12,702.90…because it’s the greater of the two penalty options the lender could impose…it’s a whole $10,730.40 greater…and the Bank is happy as pie with this – Jill, not so much.
As you can see…Prepayment Penalties are a really big deal.
Any Mortgage Provider who says otherwise better be in line with the 2 exceptions above – if not – they are clearly not to be trusted and you should get a smarter broker – at that point they are more interested in their commission from closing another deal rather than the protecting the client from adversity.
By now you are probably bored and it seems we are stating nothing more than the obvious…so we’ll politely end this topic of discussion by telling you something you already know:
Everybody Lies. Mortgage Brokers, Real Estate Agents, Lawyers, Mechanics, Accountants, Grocers, Artists...and of course - YOU!
But remember...it isn't necessarily the substance of the lie you should pay attention to, but more importantly the motivation behind it.
Not all lies are meant to hurt.
The best way to protect yourself is to keep on educating yourself and keep asking a lot of questions when you don’t know something.
When all else fails, you can always get a second opinion too.
Stay classy everyone...and do your best to do something nice for someone...maybe someone you've mislead or lied to recently. It sucks to come clean sometimes - but hey, we're all guilty of the little white lie so don't panic too much - you are not alone!
Our next blog is going to be a little eye opener in to the world of Mortgage Fraud…it’s the substance of fiction – but very real.