Wholesale vs Retail

Many people ask me - why would I work with a middle man when I can go straight to the source? It's a honest question that deserves an honest answer. The question boils down to a simple difference in pricing - brokers are offered wholesale interest rates by the lenders that they are approved with; banks on the other hand offer retail interest rates to consumers that come through their doors looking for a home loan. The difference between retail interest rates and wholesale interest rates can be staggering. It is this difference in pricing that makes brokers so competitive.

Additionally brokers have the ability to take your loan to any bank they are approved with which means more options to you. Moreover brokers often times are approved with lenders that do not even offer retail solutions to borrowers. What does this mean to you? Because they operate in only wholesale markets, the overhead associated with these lending institutions is substantially lower than typical banks most people consider for their financing. Because their overhead is lower, they can offer better pricing and still remain profitable. Brokers understand this and are able to use this to their clients advantage.

Another important distinction to make is when you are getting a wholesale interest rate from a broker, the broker is required to disclose all aspects of that rate including any yield spread being made. The same cannot be said for retail operations which can legally refrain from disclosing the yield spread made on a particular loan. What is yield spread? When a lender over sells an interest rate to a consumer, that oversold rate pays additional compensation because the investor understands that in overselling the rate they stand to make substantially more off that loan and are therefore willing to pay a premium. Brokers operating in wholesale must disclose this to their borrowers, retail operations do not have to. Guess how many choose to keep it to themselves? I do not know one lender that chooses to disclose yield spread to their clients when the law does not require them to. In fact lending institutions use this fact as a sales point to attract new loan officers.

This spits in the face of their clients and raises the immediate question - is this type of lending institution really looking out for their clients?

Wholesale interest rates or retail interest rates? What I find incredibly interesting about this question is for some reason people that finally come to understand the difference will still sometime search out a retail product as if their overpaying ensures they will get a better program. Couple of points on this thought. First when dealing with finance, the best program is the most cost effective program - and wholesale costs less than retail. Secondly, the loan officer you talk to in a retail bank is probably not licensed by the Department of Real Estate. Without a DRE license, they have no fiduciary responsibility to you; in fact their responsibility is to the bank, their employer. You may be a client of the bank, but that's like saying I'm a client of the IRS... who isn't a client of a bank these days in some capacity? A bank officer represents the bank, not you. A broker operating in wholesale represents you to the bank. This is a significant difference.

Point in fact if you are considering a home loan and have talked to a bank, now is the time to get in touch with a wholesale broker. You'll be glad you did.