Yield Spread Premium - Consumer's Guide

Mortgage and Lending with Sierra Pacific Mortgage Loan Officer, NMLS 184479

Yield spread premiums are the current target of federal regulators, as well as many in Congress. Using loaded language such as "steering fees" and "kick-backs" and misdirected by well intentioned (I hope) but misinformed consumer advocacy groups, regulators and legislators are working to make changes to the mortgage industry that will harm consumers and small businesses alike.

The goal of consumer advocates and federal regulators is to make loan officer compensation unrelated to the terms of the loan. The false and overstated perception is that loan originators have incentives to push unwitting consumers into a loan that only benefits the loan originator, and puts the consumer into a bad financial decision.

This overstates,incorrectly simplifies and inaccurately summarizes the problem. The result is that the proposed solution (elimination of lender paid premiums to mortgage brokers) is overly complicated and will cause harm to the consumer and to the housing market.

At first it seems right not to pay the originator based on the terms of the loan. Except that the terms of the loan are the only income that the lending company receives. What else can the company use for income with which to pay the originator?

At first it seems right not to pay the originator based on the terms of the loan. The justification is found from anectodotal accounts of loan officers steering unwitting consumers from low rate loans to high rate subprime loans, and not giving the consumer the best loan for which they qualify. The examples generally offered are exagerations of rate increases of a full 2% or more.

Those examples possibly refer to moving a consumer from an FHA loan into a subprime loan. Such a switch actually makes little financial sense to the mortgage broker if the consumer were truly qualified for the FHA loan.  In general more lender paid premium is available with conventional and government loans programs that were available with subprime loans. Of course subprime loans are no longer offered anyway.

The market shut down subprime lending. The market, not regulators.

At first it seems right not to pay the originator based on the terms of the loan. The justification is found from horror stories about loan officers adding prepayment penalties and other loan features that increased originator pay and hurt the consumer.

These stories most likely refer to Pay Option ARM's, another program that the market has shut down. (Mind you the market shut it down, not regulators.) Loan originators were able to change rate adjustment margins and to increase the length of the pre payment  penalty in order to increase their premium. I believe there was a problem with these loan programs. The initial payments were often set artificially as low as 1% of the balance. Many sophisticated consumers and many of the originators and lender representatives did not themselves understand these loans or the impact of the different terms.

It was a dangerous loan program, and because of its danger it is gone from the market.

Because of the unique nature of this loan program it very well should be the focus of targeted regulation, but the problems associated with this unique and no longer available loan program should not be used to shut down consumer access to standard financing options with conventional and government programs.

Standard conventional and government loan programs do not offer those loan features.

At first is seems right not to pay the originator based on the terms of the loan. Because it would seem to raise the cost of the loan for the consumer in the form of higher interest rates. Except that not paying the loan originator the interest premium does not eliminate the interest premium. It only lets the lender retain that interest premium. The consumer still pays the same rate. It only changes who receives the income from that rate.

I intended to write more detailed explanations of how lender paid premiums work for the consumer and for the mortgage broker, and to explain the difference between a lender and a broker. This post is fairly long as it is, just setting up the issue.  The issue of lender paid premiums itself is fairly technical, which is why some people can get away with using loaded catch phrases like "kick backs" and "steering charges."

The issue is important, and while fairly technical, it is not really that hard to understand.

I will write another post to cover more aspects of this issue, vitally important to you the consumer.

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Richard Smith
NMLS# 184479 TN# 104002 GA# 28928 

Conventional, FHA, FHA 203k, HUD $100 down purchases, VA,

Rural Development ( USDA), and Jumbo Loans

Lending in Chattanooga, Tennessee and Georgia for over 20 years.

Sierra Pacific Mortgage

Cell phone: 423-280-0345 Email: Richard.Smith@SPM1.com

Visit my website to inquiry about a home loan.

Read my most recent articles in Scotsman Guide.

This blog represents the opinions of Richard Smith. The posts and comments written on the blog do not represent the opinions or positions of Sierra Pacific Mortgage. 


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