The real cost of mortgage steering could be tens of thousands of dollars over the life of the mortgage loan and could even make the difference between winning and losing an offer on a home.
It may seem super innocent. A mortgage lender offers to pay for a real estate agent’s marketing or offers the agent a desk in the lender’s office. In return, the real estate agent exclusively sends buyers to that mortgage lender, which may have terms less favorable than those of other lenders.
No problem here, right? Wrong. The real estate agent is certainly allowed to refer buyers to a lender, but not in exchange for anything of monetary value. Especially not when that preferred lender charges higher fees and interest rates than what the buyer could get elsewhere.
Guess why the preferred lender is charging high lender fees and rates? Well, someone has to pay for that real estate agent’s marketing and office space (aka kickbacks). That someone is the unsuspecting buyer.
A real estate agent has a lot of influence over a real estate transaction, and unfortunately, many have taken advantage of this trust, costing home buyers thousands of dollars and, in some cases, even the home of their dreams.
Consumers are protected against mortgage steering by the federal Real Estate Settlement Procedures Act (RESPA).
What Type of Loan Are You Looking For?
How Does RESPA Section 8(a) Define Mortgage Steering?
“RESPA Section 8(a) prohibits kickbacks for business referrals involving a federally related mortgage loan. RESPA Section 8(a) prohibits the giving and accepting of kickbacks (e.g., cash or other “things of value” as defined in RESPA and Regulation X) pursuant to any agreement or understanding to refer settlement service business or business incident to a real estate settlement service in connection with those loans. 12 USC § 2607(a).”
Some agents participate knowingly, while others are unaware they are breaking the law. Neither is excusable, and the buyer suffers in both cases.
Online Lenders Expose Local Mortgage Steering
Mortgage steering has become more obvious now because many online lenders post their mortgage rates publicly on their websites. Buyers in need of a mortgage can go to an online lender’s website; generate their own rate quote, including any lender fees; start an application online; upload any supporting documents; and even lock in their rate. Online lenders have driven the cost of mortgage loans way down by empowering buyers to be their own loan officer. This has exposed much of the collusion between lenders and real estate agents to steer business.
The Cost of Steering
Assuming the real estate agent’s preferred lender charges a rate about half a point higher and $3,500 in lender fees, let’s calculate the cost to the buyer over time on a 30-year fixed mortgage with a loan amount of $450,000.
| Agent’s Preferred Lender | Competitively Priced Lender | |
| Interest Rate | 4.5% | 4.0% |
| Lender Fees | $3,500 | $0 |
| Loan Term | 30 Years | 30 Years |
| Principal Amount | $450,000 | $450,000 |
| Monthly Principal Payment | $2,280.08 | $2,148.37 |
| Total Interest Paid | $370,830.20 | $323,412.78 |
| Total Fees & Interest | $374,330.20 | $323,412.78 |
| This chart uses assumptions for comparison purposes and should not be considered a rate quote. Please click here if you would like pricing with current interest rates. | ||
From here, it’s simple math. The cost of the loan from the real estate agent’s preferred lender is $374,330.20, and a loan from a more competitive lender is $323,412.78. That’s a difference of $131.71 per month, or $50,917.42 over the life of the loan.
How Buyers Can Protect Themselves From Mortgage Steering
The best way buyers can protect themselves is to get multiple quotes from different types of lenders and be sure to get a fully underwritten approval letter when you start shopping. If you are comfortable with completing your own application online, use an online lender, which may offer lower fees and rates. If you prefer to work face-to-face with a local lender and want to visit their office or have them come to your home, be aware there is generally an inflated cost for this level of service. That cost may prevent you from qualifying for a higher loan amount. If you are not comfortable with completing your own application online, then working with someone face-to-face may be a better option for you despite the cost.
In Conclusion
If a real estate agent isn’t open to other options when it comes to lenders, the agent may be knowingly or unknowingly steering to a less advantageous loan option. Even if the real estate agent is a friend or relative, he or she may be steering to a local, preferred lender, possibly out of a sense of obligation to the lender in return for office space or marketing. The reality is, whether real estate agents are steering maliciously or as a result of malpractice, they are participating in illegal activity and not putting buyers’ best interests before their own.
Report Mortgage Steering
If you think you may have been a victim of mortgage steering, please contact the real estate licensing office for your state or report a RESPA violation to the Office of RESPA and Interstate Land Sales.
