Payless Loans Eliminates The Giant Game of Mortgage Whack-A-Mole

Mortgage pricing has never been simpler than it is right here, right now.

Remember that circus midway game called "Whack-A-Mole"? In that game the object was to use a mallet to hammer down stuffed animals that mechanically popped up from a series of holes in a wooden box. If you hammered them all down successfully, you would win a prize. As you may have guessed, there were invisible mechanics at work beneath the boxtop. The force of whacking one mole down would transmit invisibly to pop up the next mole. Not everybody won, to put it charitably, and the phrase "whack-a-mole" has come to characterize nearly any futile enterprise.

Getting a straight price out of a mortgage salesperson is very much like a game of whack-a-mole, in the sense that the mechanics of driving down one pricing element causes the others to pop up. And of course, after trying to negotiate a few rounds of that, it starts to become apparent to many people that the game is somewhat futile. In order to understand the behind-the-scenes mechanics of the mortgage version of whack-a-mole, one must understand how mortgage pricing is generally constructed. Luckily, it really is not that complicated.

Here are a series of fantasy illustrations to help identify whether you are playing whack-a-mole and just do not know it yet. If ours was a company that had no Prix Fixe pricing and instead had commissioned sales representatives or Loan Officers negotiating with you for final prices, it might go something like the following.

You: "I would like this nice low rate X%, and I don't want to pay many fees at all." Sales: "Sure thing. You can have that low Rate and zero Fees, as you requested. We will just need about six thousand dollars ($6,000!) for Points and the Origination." Whack-a-mole.

Or it could be something like... You: "I don't care how you do it, I just don't want to pay fees and closing costs out of pocket, and I don't want to pay Origination Points either!" Sales: "No problem. I have a nice 30 Year Fixed Rate Mortgage for you at a Rate of 9.250% and the Rebate from the Rate will cover the rest" (plus a salesperson's commission plus a tidy profit too!). Whack-a-mole.

Or this may sound familiar... You: "I see you don't charge Points, or Origination either, which is excellent, and I like your Rate today, so what's the catch?" Sales: "No catch at all. All those "mortgage charges" are free here! We only charge Administration Fees to our clients for the work we do, and just so you know, in this case they amount to about $7,000." Whack-a-mole.

See how it goes? For nearly every situation where pricing is not fixed and is instead flexible, dynamic, and negotiated, there is an escape maneuver available to salespeople that allows the basic number of dollars in the deal to be preserved or enhanced to their liking. Whack-a-mole.

You probably noticed there are truly only 3 price elements that exist in this game^†. Fees, Points, and Rate. Since Fees are often expected to be an out-of-pocket expense for a borrower, we will address this "Iron Triangle" starting with Fees.

Processing Fees are the amounts charged by retail mortgage companies (those that sell or arrange mortgages direct to consumers) to do what is required administratively to complete your loan documentation, to get the paperwork and electronic files sorted properly, then submitted and approved in such a way that the loan package would be acceptable to lenders higher up on the lending food-chain. This involves back-and-forth interaction with you, possibly real estate agents, underwriters, escrow officers, title companies, appraisers, notaries, etc. Processing is a legitimate business expense for any mortgage company. Depending on what amount is charged, it is often a nice profit center as well. Not here.

At Payless we do not charge Fees for Processing at all.
Processing as a billable item is FREE at Payless Loans and our documents reflect that.

Lender Fees are other amounts that affect many retail mortgage companies. For companies like ours that arrange mortgages, there are amounts we must pay for submitting each loan to a lender or mortgage investor. The Fees they charge to mortgage companies vary widely, not only in amount, but in what they are called. Sometimes you will see a company declare them on some of their forms as underwriting fees, administrative fees, document preparation fees, or even origination fees (do not be confused by this last one, see Origination). Sometimes the total amount varies by how large your loan is, often hitting you with an extra large charge if your loan amount is in the jumbo range. Nice eh? There are also ancillary or what are sometimes called "junk fees" such as tax service fees, flood certification fees, wire transfer fees, courier fees, and more, too many to try to list them all here. All of these sorts of fees plus Processing Fees are the so-called "800 Series" fees listed on a typical Good Faith Estimate form. People are sophisticated enough in the Internet Age to scrutinize their 800 series fees and try to come to a decision.

Payless collects only a Lender Charge, not Fees. Lender Charge is a simple pass-through cost at Payless designed to be not-for-profit; you can in fact skip paying Payless this amount and pay it directly to the Lender if you choose. The Lender Charge at Payless is a formally fixed amount and it costs you almost exactly what it costs us to submit the loan. If we pay the Lender Charge and your loan goes nowhere, the cost is our problem, not yours. Frequently, it costs us a little bit more than the amount we must collect, but to keep our approach simple, direct, and fair ( see Prix Fixe Lender Charge ), we just plain refuse to quibble about losing $30 or $50 here and there. Again, the Lender Charge is designed to be profit neutral. It does not matter what size loan you have, whether it is $100,000 or $1,000,000+, this Charge is always the same to you at Payless Loans.

We handle Fees very differently from the way things were once done.

 •As stated above, we have NO Processing Fee, or stated another way, we have a
  Processing Fee of $0, FREE, at no added cost to you the borrower!

 •We must collect a Prix Fixe (fixed) Lender Charge of $795 which passes directly through us
  to the Lender. If you wish, we will help you write the Lender a separate check! You may also
  receive a portion back at the end.

 •Our Lender Charge is all-inclusive. Never will you see nickel-and-dime "junk fees" enumerated.

Points are a deeply ingrained concept and a mortgage industry tradition. They have made the mortgage industry literally billions of dollars over the years. They have done this out of nothing more complex than insisting upon seizing, as a required cost of doing your mortgage deal, an additional amount of money expressed as a percentage of your loan amount. Let us define `Points` cleanly so we can proceed to give examples.

• Points simply refers to a positive or negative percentage number stated by a mortgage company.
  This percentage is used to perform an important mortgage pricing calculation: it is multiplied by the loan amount to arrive at a dollar value that is added to (summed with) your loan closing costs to help create the final bottom-line closing cost figure. Points identified in different categories below are to be added together and used as a single multiplier.

How a mortgage company comes to state a particular Points number to you is highly controversial, and probably not consistently the same between companies, nor even within companies over time. It has been theorized that the reason this mechanism first became popular in the 1970s is that mortgage companies relied on the idea that people with bigger loans could afford more costs and therefore would not object. They tried it, and when borrowers did not revolt at the pricing schema that had been introduced, the mechanism took root and has persisted to this day.

Points in Origination. This is where the tradition of using percentages started in the modern mortgage industry, as above. The "Origination Fee" or an "Origination Point." The traditional amount has been "One Point" or 1.0% of the loan amount. This number has remained steady for decades, give or take a few fractions of a percent. See more below on Origination.

Points in Cost (also called "Discount"). When a mortgage company wants you to bring money into a deal, they will say that there are "X Points in Cost" or "X Points Discount." For this example let us say the X is .5, "a half-point," which means one-half of one percent (also written as 0.5%). This technique is great for salespeople. They may be uncomfortable telling you that for your $400,000 loan you need to add in $2,000 ($400,000 x 0.5/100 = $2,000) from your pocket. They will instead prefer to say "We charge `half-a-point cost` to do that deal," or even better, "there is a `half-point discount` on that rate" which does not sound all that bad in comparison. Of course you have your own decisions to make about what is and is not acceptable as a dollar amount. Funny how they position it so that your payment into a deal is somehow a "discount"! It is a discount in Rate actually, see buying down the rate below.

Points in Rebate. If you look below, you will note that for a variety of reasons, loan pricing may include negative Points (minus sign in front), and these are called Rebate Points. As usual, if there are Rebate Points, they are to be added to other classes of Points and the effect of adding a negative number is that this Rebate percentage is subtracted from the other points.

What follows next is the place from which much borrower confusion arises about mortgage pricing. You can call it the Rate-Point Scoring System. Why is it confusing? Probably because it involves mathematical operations on what newcomers see as a soup of numbers, which are derived from arcane pricing tables that change all the time. So even though the math is pretty simple, the mathematical elements involved are necessarily a moving target. This is what makes it confusing, even for experts sometimes. In such a soup, all sorts of error, and worse motives if you are cynical, may be realized. Savvy borrowers generally and rightfully have an uneasy sense when they come near this area where Points are assigned to Rates. They worry about understanding the deal well enough to determinine if it is fair, which is always a valid concern.

The straightforward idea to grasp is that the pricing elements Points and Rate are inextricably linked in the overall pricing schedules of the entire mortgage industry. This is sort of an open secret. This is also a detail of the modern mortgage industry that is inescapable. If you master understanding this crux of the matter, you will never again read an Internet banner advertisement, nor listen to a mortgage company advertisement on the radio in quite the same way.

Briefly, lenders want to buy and service mortgage loans. They want to do this at a price profitable to them. They want to offer pricing flexibility to companies like ours that arrange mortgages direct to consumers. So to meet these goals, frequently they offer a range of Rates and each of their related Points for their loan products (see table). The lenders are willing to give an amount of money back, Rebate Points as described above, in exchange for borrower acceptance of a higher interest Rate. In the converse case, the lenders will also provide a lower interest Rate in exchange for borrowers bringing additional money to the deal, Points in Cost (Discount). This is sometimes called "buying down the Rate." The table below should help make this clear.

Simply Restated from The Table:
Interest Rate goes Up, Points bring you money in Rebate.
Interest Rate goes Down, Points siphon away money in Cost.

Understand that Rate-Point Scoring is not fundamentally nefarious. Overall, lenders make the same basic amount of money, no matter what Rate you select. Their sliding-scale is designed to be essentially a wash over the first few years of mortgage ownership. You can calculate for yourself the difference between the total amount of interest payment between two rates, and the dollar difference in Points you would pay for each Rate. You will find that within a few years, the two numbers get very close to each other. This pricing mechanism is also benificent because different people have different circumstances. Some borrowers may accept a higher rate (and monthly payment) in exchange for making out of pocket closing costs smaller. Some borrowers may not qualify for their preferred loan at a particular Rate and payment, and can then choose to buy down Rate with savings until the payment is low enough for them to qualify on their income.

This method of scoring a given Rate by assigning Points is as reasonable a system as any that can be devised. This Rate-Point Scoring System of the mortgage industry maintains flexibility and choices for you. It bears mentioning that it also provides a mechanical basis for a giant game of whack-a-mole to ensue if you are fully unaware of what is at work beneath the game's table-top!

Some mortgage companies will compensate their sales representatives, sometimes called Loan Officers, with greater commissions derived from a percentage of the Rebate Points they can capture for their company if they are able to convince a borrower to accept a higher interest Rate. We avoid this type of sales arrangement because we believe it introduces perverse incentives into the client relationship, and it introduces the potential for substantial client dissatisfaction.

We keep only non-commissioned hourly employee processors and consultants available to answer most questions for you. Available Rates are electronically set centrally within the company by the Broker, which removes even the potential for the appearance of impropriety by a salesperson. Payless consultants can tell you only what the Broker has made available when looking up a published Rate, they have no authority to set Rate. This completely simplifies the process. No more time-consuming negotiation, no back-and-forth, no "let me talk to my manager," no "well, gee, the 30 year long bond was stronger against a weak T-bill in late trading today, so that Rate isn't available." In short, no games. See more about how we completely avoid making you use sales representatives at No Reps.

At Payless, Any Rebate Points derived from the Rate offered to you at the time of Rate Lock will be honored at closing, and some Points will be legally disclosed to you that will go to our company.

Now you have a sense of what is involved in the mechanics of mortgage-whack-a-mole. In this following illustration set, let us say that we could fictionally advertise that you could have:

"A 30-Year Fixed Rate Mortgage for 4.875% (Rate) any day of the week. Don't worry about paying Points, Points are free! All your costs are covered! It isn't too good to be true! Come on in and check us out!" Knowing what you know now, where is the big deficiency in this advertisement? Get whacking.... You hammered down Rate, you hammered down Points. Where is the stuffed animal going to pop up next? Fees. That's right. In this fantasy illustration, we could theoretically do that loan for between $25,000 and $50,000 (or other ridiculous massive sum) of out-of-pocket Fees!

Another fantasy illustration:

"We are the mortgage company devoted to service. Our Rates are low, and we take care of you like nobody else. Don't worry about paying for an appraisal or credit report, we'll do it for you. And we do it for a simple $99 Administration Fee. We'll close your loan on time and promise we will not add anything to the principal balance of your current loan. Come on in and check us out!" Here you hammered down Fees, and that is about all. Where is the mechanical mole going to pop up next? Probably Rate. In this fantasy illustration, vagueness about Rate is a mortgage company advantage because Rebate Points at higher Rates could generally cover the costs described.

One last fantasy illustration:

"We love to tell it like it is. We have flat fees for everything. Just a Flat Processing Fee for $1000. And our rate for a Jumbo loan of any type is a flat 5.500%. No other Fees apply. Come on in and check us out!" Begin hammering. You hammered down Fees, and you hammered Rate. Where is our furry friend going to pop up next? Points. In this fantasy illustration, you should know now that technically, Points in Cost are not Fees. They are a separate side of the Iron Triangle. And if the Rate given is competitive in the market, it will clearly require Points in Cost to buy that rate and pay the other expenses needed to complete the loan. A mortgage company merely has to express those costs as a percentage of the loan amount and it magically becomes not a Fee. That fact is a little more subtle than we feel people should be required to endure.

A whole generation has passed since 1978, and we think it is time for a change in this "Origination Fee" concept. We asked ourselves: Why not charge a Fixed Origination amount (Prix Fixe Origination™) instead of using a percentage to penalize people for simply having a larger loan amount? Why charge more in costs for them, especially when it costs the company about the same to do a big loan as it does to do a small one? After due consideration, we realized that there is no good reason NOT to fix the price, and we came up with the pricing listed below.

We handle Origination very differently from the way things were once done.

 •As stated above, we charge a Prix Fixe Origination™ of $1,495.

Whether the loan is $100,000 or $1,000,000+, the Prix Fixe Origination™ is always the same to you.

If you want to be sure you are getting the best deal, put a quick application in the pipeline with us for your comparison, and we believe that often you will be favorably impressed. Try Us Out. Thanks.

†There is one constraint on this claim that must be made, but made separately to avoid confusion. In the refinance case, we are speaking primarily about maintaining loan amounts at or below the payoff balance of the loan; we are not talking about adding to the principal balance in a new loan in order to cover these costs as has been an available option in the past. Outside forces essentially prevent that from happening in many cases now. Allowable loan-to-value ratios for available loans in this 2008 climate require more equity than the market often delivers, so adding to the loan amount to finance the mortgage is frequently a moot concept. More typically now, a mortgage is paid for with Rate, Points, and/or cash brought to the deal, which is what prompted the discussion of the Iron Triangle in the first place.

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