6 mortgage rip-offs to avoid

By Liz Pulliam Weston

Given how easy it is to get skinned on a mortgage deal, it's amazing anyone ever buys a home.

But buy we do -- and then refinance, and refinance again. Our ignorance of how the mortgage process works and the many ways mortgage pros rig the system in their favor lead many of us to pay far more than we should.

However, the more you know about common mortgage rip-offs, the better armed you'll be to negotiate a good deal. Here are some of the most common ways that mortgage lenders and brokers dupe their customers, and what you can do to avoid being taken:

I'm not going to honor your rate lock.

When interest rates are volatile (and when are they not?), it can be smart to "lock in" a rate so you don't face a higher payment if rates rise during the time it takes to process your loan paperwork. A lock is a commitment by a lender to provide a specific rate for a specific time, often in exchange for a fee.

A lending officer or broker may imply, or even state, that you've got a lock. But a verbal promise is worthless.

"Get it in writing from the lender," advised mortgage expert Diane St. James, a consultant and underwriter who runs ABC Mortgage Consulting. "If you end up going to an attorney, you'll want to have something on paper."

Even if you get a written commitment, though, you're not out of the woods.

You know how the cops on "Law & Order" sometimes "lose" suspects' paperwork to keep them jailed a little bit longer? Unethical lenders do something similar if they don't want to honor their commitments. It's called "running out the lock," or delaying the loan's closing until the lock expires and you're faced with accepting a higher rate.

"If rates go up, they run out the lock," explained Michael Moskowitz, president of Equity Now, a New York-based mortgage lender. "If rates fall, they honor the lock."

How can you protect yourself? Some suggestions:

• Get referrals. Find out which companies your friends used and whether they were happy with the service they got. Picking a broker or lender at random, using phone books or advertisements alone is just asking for trouble.

• Check them out. Look up their complaint records with the Better Business Bureau and your state regulators. (Brokers and lenders are typically regulated by state departments of real estate.)

• Get your paperwork in on time. Don't give them excuses to stall.

• Raise Cain. If it looks like your lock will expire before your loan is funded, demand to speak to a supervisor and mention you're going to complain to state regulators if your lock isn't honored. You also might suggest your attorney is going to get involved. Kicking up a real fuss may be enough to convince them to stop playing games, at least with you, Moskowitz said. "Why pick on you," Moskowitz said, "when there are a lot of other people to pick on?"

I'm getting a bonus for putting you in a more-expensive loan.

This little scheme can work a lot of different ways, but here's one of the more common ways it plays out:

You call a broker and are quoted a rate of 6.5% with no points on a 30-year fixed rate mortgage. By the time you're ready to lock in, the lender's rate has dropped to 6.25%. But the broker doesn't tell you that, and instead locks you in at 6.5%. As a 'thank you' for selling the more-expensive loan, the broker gets a payment of a couple thousand dollars from the lender, and you get stuck with higher payments.

Amazingly, this is usually legal as long as it's disclosed in your paperwork -- but you typically don't get the notice until your loan is about to close, and the disclosure is usually buried deep in the legalese.

Lender payments to brokers for selling higher-cost loans are known as "yield spread premiums," and they're incredibly widespread. One Harvard University professor who has studied the issue, Howell E. Jackson, estimated that these premiums affect 85% to 90% of borrowers and average $1,850.

Brokers insist this is a legitimate way to do business and cover their costs. But consumer advocates say, at the very least, that they should be better disclosed.

The best way to protect yourself from the most egregious overpayments is to do lots of footwork:

• Know what a competitive offer looks like. The loan savings calculator at MyFico.com can give you a rough idea of what rates to expect, given your credit scores, while quotes from online sites like ELoan and LendingTree can give you detailed information on the going rates and fees.

• Get all your quotes on the same day. Rates change constantly, and a quote that's good today probably won't be comparable tomorrow. Also, rate-shopping over an extended period can hurt your credit score.

• Ask lots of questions. If you're working with a broker, the National Consumer Law Center recommends you demand to know how much the broker is making from the lender as well as from any fees you might be paying. It's best to get this information upfront and in writing. Avoid a broker who's double-dipping: getting a fat premium from the lender as well as fees from you.

You'll never get the low rate I advertise.

If you've done your footwork, you should be able to tell when a rate is too good to be true. If a lender is offering a rate considerably below the competition, there's going to be a catch like high hidden fees, a teaser rate that quickly expires or super-high credit standards that few borrowers will meet.

Continued: Beware 'negative-amortization' loans

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