New options add value to advisor relationships while saving clients fees.
Want to add value to client relationships? Train them to make you their first stop when they're making a mortgage decision. Not only can you provide strategic and holistic analysis, you can ensure they avoid the hefty fees they'll face going it alone in the Wild West world of mortgage brokerage. New offerings from the likes of Santa Fe-based Thornburg Mortgage, and Charles Schwab Bank in Reno, Nev., really will make your job easier.
The margin for error is just too great when
consumers make mortgage decisions in a vacuum, practitioners who are
paying attention say. "There is at least a 50% chance that clients
won't do the right thing if they go it alone," says Louis Llanes, CFA,
president of Blythe Lane Investment Management Corp. in Greenwood
Village, Col. "The mistakes can be costly, too."
Just how pricey can bad mortgage decisions be for consumers?
If they use a broker in their search for a more competitive rate, they'll be charged untold and duplicative administrative fees by both the broker and the bank that's underwriting the mortgage. These costs can easily add up to 1% or more of the mortgage amount. Consumers also pay another hidden fee, disclosed at closing as the "yield spread premium," which can cost another 1% to 2.5% of the mortgage. This fee usually indicates that the broker was able to price the mortgage higher than the lowest available interest rate.
"We saw a mortgage application from a broker who
wanted to charge an actor client like $30,000 in yield spread premium
on a $1 million mortgage," Ron Chicaferro, president of Thornburg
Mortgage, recently told advisors at the Financial Advisor
Symposium in Chicago. "Needless to say, we rejected the loan."
Turning down that loan was pretty much a no-brainer for Thornburg, which has never charged a yield spread premium. Unlike other lenders who use extra fees to pad their coffers at consumers' expense, Thornburg's fee is a flat $490. That means that an advisor's client who wanted to borrow $330,000 (the average size loan Thornburg underwrites), could save as much $5,000 to $6,000 on fees by using the Santa Fe-based mortgage bank.
"What our research shows is that 80% of clients do ask planners about mortgages about 80% of the time. The problem is that most planners don't have any advice to give. If they do anything, they send clients to a mortgage broker," says Thornburg COO Larry Goldstone. "Then the broker shops the mortgage to a number of banks and your clients end up getting investment solicitations from Chase and Washington Mutual."
As a portfolio lender, Thornburg doesn't sell client mortgages on the secondary market, it underwrites them itself and keeps the mortgages in its portfolio. That means its mortgage specialists are not stuck with the rigid underwriting guidelines that Fannie Mae and Freddie Mac impose on lenders who sell their mortgages to the two secondary market giants. "As a portfolio lender, we have great flexibility and we think that's an added service," says Goldstone. "The process is simpler and we're willing to work with folks who would be penalized by Freddie and Fannie, like someone with high assets and low income."
Thornburg, which is affiliated with Thornburg Investment Management, has made advisors a primary target market since its inception in 1992. The company will pay planners $500 for each client, though many waive the fee, Goldstone says. To assist advisors who want deeper insight into loan programs or need comparative analysis for client presentations, the company has designed its Web site, continuing education programs and loan assistance center with advisors in mind.
The company also offers another perk that leaves most other companies' offerings in the dust. Once a client has a Thornburg Mortgage, he or she can switch to any other mortgage the firm offers for $1,000. There are no new appraisal, title insurance or closing costs. There is no new underwriting process. As important, the loan doesn't restart at the 30-year mark, so clients won't be penalized just because they want to refinance.
"A mortgage is definitely part of a high-net-worth individual's overall financial plan. It's an important tool, and it deserves to be analyzed a lot more than most consumers, and likely a lot of planners, analyze it right now," Goldstone says.
The COO gives high marks to the firm's most popular mortgage-its 5/1 ARM, and its interest-only and pledged-asset mortgages, both of which are designed to allow consumers to retain more of their assets. They also allow advisors to keep more client assets under management.
The 5/1 ARM has a fixed rate for the first five
years and goes variable in the sixth. "With an interest rate of 4.8%,
after-tax the cost of funds is about 3% for people in the 40% tax
bracket," Goldstone says. The rationale for variable rates, as well as
100% mortgages is that money not sunk into a mortgage can be invested
in long-term stock market investments.
For those clients and advisors who are willing to borrow 100% and/or go with an interest-only loan, the savings month to month, annually and over a five-year period can be quite dramatic as Table 1 demonstrates.
"Of course, there is a definite responsibility with interest-only loans-namely that consumers have the discipline to invest the difference they're saving. That's where we think advisors come in," Goldstone adds. "We counsel that it's important to set aside savings, so the money is there if it's ever needed, but in the meantime can grow at higher rates."
Some of the new mortgage offerings at Charles Schwab Bank, namely its pledged-asset mortgage, works much the same way. Schwab introduced the collateralized mortgage in October in response to consumer demand, says Chief Lending Products Officer Richard Musci. "Clients told us they want to be able to buy a home without having to liquidate assets or alter their investment strategy and we've responded," Musci says.
The mortgage provides 100% financing (so there is no down payment), provided the borrower has 35% of the amount they're borrowing in nonretirement assets with Schwab. So on a $1 million house, a borrower would need to custody at least $350,000 in stocks, bonds and/or mutual funds with the brokerage house.