Special offer

Banning of Yield Spread Premium is Death Knell for Mortgage Brokers

By
Managing Real Estate Broker with Howard Hanna Rand Realty License # 49FA1074963

Mortgage Brokers have a Draconian law placed upon them; banks have different rulesI originated mortgages full time for 5 years in the early 2000s. I worked for both mortgage brokers, who place loans with 3rd party lenders, and, as they are termed in New York, mortgage bankers, who are direct lenders. Up until recently, it was hard for a guy off the street to distinguish between the two- the mortgage application verbiage used and process, to the borrower, was pretty much the same. Even as a loan officer, I saw enormous parallels: the qualifying software was the same, and the rates and pay structure were similar. We either earned money on the front end paid directly by the borrower, often referred to as "points," or were paid on the back end by the lender in the form of a Yield Spread Premium (YSP) for brokers or a Service Release Premium (SRP) for bankers. The nomenclature differed, but the net effect was the same: the higher the interest rate, the higher the commission (premium). 

When the Subprime Meltdown hit in 2007 and the Financial Crisis hit in 2008, mortgage brokers carried the PR chum bucket for bad loans. Even though Ameriquest, Countrywide and dozens of other major players who were direct lenders failed, it was mortgage brokers, and their yield spread premiums that were often the culprit in both the cyber world and polite company. There were arguments over the true purpose of the YSP. 

The banking industry and major media, in their best mad as hell voices, lobbied hard for YSP to be outlawed, and this past week, they succeeded. Yield Spread Premiums are now against the law

From the Fed: 

Today, lenders commonly pay loan originators more compensation if the borrower accepts an interest rate higher than the rate required by the lender (commonly referred to as a "yield spread premium"). Under the final rule, however, a loan originator may not receive compensation that is based on the interest rate or other loan terms. This will prevent loan originators from increasing their own compensation by raising the consumers' loan costs, such as by increasing the interest rate or points. Loan originators can continue to receive compensation that is based on a percentage of the loan amount, which is a common practice.

As with many governmental "solutions," this is outwardly politically expedient but will only hurt the public in the end. Why? Because the playing field is now completely tilted in the favor of large lenders, who keep their version of YSP. Smaller lending entities who previously dealt with brokers will be elbowed out of market share, and mortgage brokers now play by rules so severely tilted against them that they will go out of business. The baby has been thrown out with the bathwater, because brokerages, for all their flaws, were serving a need the bigger banks would often not. 

The Service Release Premium, the banker's equivalent to the Yield Spread Premium, is still legal. Direct lenders get to play by their own rules now. Whether you agree with the YSP or not, banks still have the back end option with SRP. Brokers, who often had the capacity to place a loan with literally dozens of lenders, do not. Whatever abuse there was with YSP is still available to lenders in the form of SRP. The lobbyists saw to that. It wasn't enough that YSP was required to be disclosed on the HUD-1 while the bankers SRP was not; they had to kill it, and cut the jugular of brokers. Who needs competition? 

Here's how it plays out for the borrowers in 2011: If you have good credit and are a W-2 employee, youBrokers give consumers options that single portfolio lenders do not possess can call your own shots the same way it has always been. But if you are self employed, have less than great credit, or need a niche product in our diverse society, you'll have no mortgage broker to find that specialty loan. Instead, you'll have your choice between a large, monolithic lender's single portfolio and a small community bank, both of whom will scoop the cream off the top and throw the rest back, with the exception of their Community Reinvestment Act requirements. There will be no mortgage broker to find your niche product because they won't be able to operate profitably. 

Banks already adjusted to the stupid things they were doing 5 years ago. Underwriting a loan now is as hard as it ever was prior to the Federal Housing Administration's genesis in the 1930s. We are rapidly heading toward a world where large big box lenders will be like huge telecoms, with consumers choosing either their loan portfolio or renting. Smaller community banks will be there for well credentialed people, and ironically, the folks who screamed about killing those evil brokers who were opening doors the big banks wouldn't open, will lament their extinction. Who loses? You. Big banks just did an end around past their most egregious offenses and the government played Washington General defense for us. 

Happy? 

My prior posts on Yield Spread Premium

Comments (29)

Donne Knudsen
Los Angeles & Ventura Counties in CA - Simi Valley, CA
CalState Realty Services

 Thank You 

Aug 19, 2010 10:24 AM
J. Philip Faranda
Howard Hanna Rand Realty - Yorktown Heights, NY
Associate Broker / Office Manager

Angela, few people really understand this, and the banks like it that way.

Donne, you are welcome but I don't think it will make a difference. Politicians will do what get them re elected.

Aug 19, 2010 10:32 AM
Mike Saunders
Retired - Athens, GA

JP - very concisely written, although I am still not sure about YSP and SRP I do find that this congress and administration seem to be making rules and regulations that are tilted extremely biased towards the "too big to fail" crowd. Perhaps the fewer there are the easier for the government to take over.

Aug 19, 2010 12:30 PM
Kevin Hancock
Evergreen Home Loans NMLS 3182 - Poulsbo, WA
The Hancock Mortgage Team

Great post Phil!  I am a banker, but this whole idea of eliminating the competition seems very "anti-capitalism" to me... I don't get it.  Actually, I think I do get it, and I don't like it.

Aug 20, 2010 07:35 AM
Deborah "Dee Dee" Garvin
C2 Financial - San Diego, CA
C2 Financial

J. Philiip,  Thank you for writing this post.  The "latest" version of the fixes is just another nail in the coffin.  And, it is so vague that final interpetation is still on the table.  As a mortgage banker, our CEO has basically said "we don't know how it will all shake out".  And, I know another mortgage banker here on AR whose COO said the same thing. 

One thing for certain is the consumer will lose.  Working with first time buyers I frequently use YSP to help them buy a home.  In the future it appears that they will need to save for the costs themselves or find a seller willing to contribute.

 

Aug 21, 2010 05:35 AM
Jason Sardi
Auto & Home & Life Insurance throughout North Carolina - Charlotte, NC
Your Agent for Life

Philip - Nicely articulated, my man.  Your experience goes a long way in you "getting" it.  Good follow up commentary by Nevin as well.  Dodd & Frank should have to put on a Lender's Hat for at least a year so they "get" it as well.  Another law disguised as helping ...

Aug 21, 2010 07:50 AM
Dave Gibbs
Coldwell Banker M.M. Parrish Realtors - Gainesville, FL
Broker Assoc, e-PRO, ABR, Green

Phillip, from time to time a person (such as myself) comes across a "gem". I define gem in this case as something that has quality in both content and delivery. You did that with this blog post. Thanks. 

And we can make a difference. It is called education and that is the politician's worst enemy. The bonehead GOP'ers are going to learn that the hard way. Thank you again for taking up the mantle in this regard. You gave me both an education (i.e. YSP and SRP) and an opportunity to pass it on. I will do that, I am good in my own right. We *can* make a difference collectively and as professionals we have the opportunity (whatever the subject matter). We represent the front lines. 

And today you "doubled up" with your two posts, this one and your other discussion "2 Things Listing Agents Should Not Say On Accompanied Showings". Both were very constructive. We can all use constructive to our collective best advantage. 

Kudos from Florida buddy. 

Aug 22, 2010 06:13 AM
Mark Antonowsky
The Offer Company - Scottsdale, AZ
Associate Broker

Don't you know, "He who owns the gold makes the rules".... has nothing to do with fair. If life was fair we would own the central bank know as the "Federal Reserve" instead of a foreign contingent of robber barons and we would have debt free money.

For those of you that haven't a clue what I just said, let me invite you to watch Bill Stills new documentary, "The Secret of Oz"

http://www.youtube.com/watch?v=D22TlYA8F2E

 

Aug 22, 2010 07:36 AM
Sean Callahan
Maven Realty - Somerville, MA

Very Rockerfellian, in that competition is sin.

I have to laugh at the phrase: free market.  What's next, unicorns?

Aug 22, 2010 08:56 AM
Ginger Moore
Wilkinson & Associates Realty - Gastonia, NC

Yes, this is very sad for the smaller mortgage broker and the public.  Its gonna be either the "big bank's way, or the highway", it seems to unsuspecting consumers:)   thanks for sharing, and well said.

Aug 22, 2010 09:45 AM
Dan Jasmer
Fine Properties - Sarasota, FL
Changing the way you look at real estate

Thank you for the great explanation.

Aug 22, 2010 03:33 PM
Nick Propps, President
Statesboro Properties - Statesboro, GA
20 Year Commercial & Residential Expert

Thanks for bringing that to light Phil. I had not heard about it.

Aug 23, 2010 02:37 AM
Justin Ross
Stapleton Mortgage LLC - Denver, CO

...I'd probably have to disagree with a great majority of this post and comments. YSP hasn't gone to the broker since January 1st 2010. It has been a credit to the borrower for almost 8 months. The only way a broker can get paid is fully disclosing Origination fees to the consumers at the onset of the GFE. My interpertation of the whole thing is that now mortgage brokers will be on the same page disclosure wise as mortgage bankers. Currently Mortgage Bankers DO NOT have to disclosue SRP to borrowers. I'm getting the exact opposite. My colleagues are loving the proposed even playing field.

Aug 23, 2010 04:47 AM
Robert Amato
Bob Amato of Empire Home Mortgage Inc - East Meadow, NY

WOW!! Alot going on here.

Stapleton- interesting that you say there is no YSP. I never thought of it that way. Are you a broker or banker?

Nevin, Phil- I thought that they had to put this Law into concrete when they returned from their summer recess so there is still some issues that need to be ironed out and clarified. I believe The National Association Of Mortgage Brokers (NAMB) will have their Lobbyists pounding the halls of the Capitol to point out all of the points mentioned here.

To all the brokers on AR- you need to join NAMB. They need your fees to help keep us in Business. It is $300/year and they send out e mails weekly about what is going on on the mortgage business. They also employed Lobbyists to help support our cause.

Aug 23, 2010 10:44 AM
Michelle Francis
Tim Francis Realty LLC - Atlanta, GA
Realtor, Buckhead Atlanta Homes for Sale & Lease

J Phillip, 

Love this detailed description from an insiders point of view.  Boy does the government scare me, all sides of it!  Glad I have good credit, but this will continue to impact the housing recovery!

All the best, Michelle

Aug 23, 2010 11:20 AM
J. Philip Faranda
Howard Hanna Rand Realty - Yorktown Heights, NY
Associate Broker / Office Manager

Stapleton- I don't follow you.  The playing field hasn't been leveled, it has been tilted even more toward the lenders. I can't tell if you are a lender or broker- your web page doesn't seem to indicate. 

Robert- there are some details to be ironed out but the bank lobby is running roughshod over the broker lobby. 

Nick- you're welcome.

Ginger, that is the way I see it. 

Dan, you're welcome. 

Mark-interesting take. 

Sean- there is no free market and there hasn't been for 70 years. 

Dave, thank you very kindly. 

Jason, thanks for noticing. 

Deborah, that consumers will lose is a certainty. 

Kevin, I don't like it either. 

Mike, we are headed toward a market with half a dozen big box lenders and a few community banks and table funders, but the table funder will all end up selling the loan to the big lenders.  

Aug 23, 2010 11:21 AM
J. Philip Faranda
Howard Hanna Rand Realty - Yorktown Heights, NY
Associate Broker / Office Manager

Michelle, anyone who isn't A-1 credit is in for fewer choices and more hassles. 

Aug 23, 2010 11:22 AM
Justin Ross
Stapleton Mortgage LLC - Denver, CO
...my apologies. Not very active around here but I'm working on it. I'm a mortgage broker. I have not received YSP since January 2010. I can only be compensated by charging my borrower some form of origination fee i.e. Mortgage broker fee, admin, etc. however I'd like to label it. I MUST disclose this. The borrower can choose to offset this or any additional fees by choosing an above PAR interest rate. But again, this is the option of the borrower and has to be redisclosed to them at the time of lock. The borrower knows my compensation throughout the loan process. On the flip side bankers do NOT have to fully disclose the SRP. The borrower does not know what the originator stands to make in it's intirety. Today a GFE from a broker compared to that of a banker will look totally different to the consumer all the while being the same. (possibly depending on desired commission). When banks have to start disclosing completely, I believe the playing field to be leveled. Lots of brokers feel the same. In addition FHA will be available to ALL originators come September. It will be up to the lender to sponsor the originator as it is currently done with Fannie and Freddie. This even further levels the playing field. I'm not at all discouraged. I welcome the challenge. (pardon brevity and typos. on my iPad)
Aug 24, 2010 04:21 PM
J. Philip Faranda
Howard Hanna Rand Realty - Yorktown Heights, NY
Associate Broker / Office Manager

Stapleton,

Around here, brokers are either closing or becoming banks. Are you sure SRP is required to be disclosed in the new law? Because my information is that banks love the new law, and their not being required to disclose SRP was always part of their perks. 

Aug 24, 2010 04:39 PM
Ellen Caruso
Daniel Gale Sotheby's International Realty - Glen Head, NY

Just saying hello, I remember how you came to my defense as a result of comments on my blog. Thanks again, and much success to you!

Aug 26, 2010 02:41 PM