The Morgage Industry’s Internal Civil War

By
Real Estate Technology with BoomTown

YSP’s have gradually made their way into the American homeowners conscious, rising from relative obscurity. While this is progress, their use in relation to their intent is still misunderstood, manipulated, and maligned. Although more consumers are now aware that YSP’s are cash rebates Lenders pay for a borrower to accept a higher interest rate than they qualify for…this hasn’t stopped Brokers and Bankers from misusing them as a tool to subjectively and unjustly enrich themselves.

 

Definition.

 Even well educated broker/bankers can’t properly define YSP’s intended purpose per RESPA letter law. As explained in the RESPA Policy Statement, yield spread premiums should be proposed “as a valuable option that permits home buyers to pay some or all of the up front settlement costs over the life of the mortgage through a higher interest rate.”

In reality, YSP’s are shrouded within the complex structure of real estate settlement procedures to principally allow mortgage brokers and bankers the ability to impose higher prices on borrowers for their direct benefit.

 

Disclosure.

Many broker/bankers will disclose YSP’s in a range of fashions, which may appear to protect the borrower, but appearances are deceiving. A prevailing practice among brokers is to enter a range of 0% to 5%, which leaves the broker with complete freedom of action, while providing the borrower with no usable information.

Other brokers won’t disclose YSP’s until closing, misleading borrowers to believe that the suddenly apparent dollar amount on the HUD-1 ‘is a fee paid by the Lender to the broker/banker for ‘delivering the borrower’. Under this explanation, payment of Yield Spread Premiums would run afoul of the first step of HUD’s test of whether YSP’s could be considered illegal kickbacks or rebates.

If the dollar value of YSP’s that end up in the broker/bankers pocket exceeds a fair value for services baseline, the transaction violates HUD’s test. What is this baseline amount? I don’t know…$3000, $5000, $10,000+ ? How could one justify $5000 in additional undisclosed compensation?

Charging broker compensation fees up-front and via improperly disclosed YSP can be viewed as a violation of TILA.

 

Depth.

85-90% of all mortgage transactions contain YSP’s.

In almost all cases, they are never presented as an option, according to true definition.

They represent the largest source of compensation for mortgage brokers.

An overwhelming majority of borrowers do not need YSP’s to pay up-front settlement costs but are never offered otherwise.

 

 

‘This abusive form of price discrimination substantially increases the overall costs to borrowers, imposing a “hidden tax” on home ownership. Unfortunately, individuals who are less educated and less sophisticated about financial matters end up overpaying the most. The misuse of yield spread premiums affects prime borrowers, FHA borrowers, VA borrowers’**…all the way down the line. Even for those with the best credit, yield spread premiums can cost many thousands of dollars in increased financing costs.

 

The oft-maligned broker segment of the mortgage origination industry bears the brunt of these facts, while bankers can maneuver with perceived impunity, since they ‘are not required’ to disclose YSP. It would be interesting to see bankers held to black letter law and operate under more transparent conditions…rather it would be interesting to see how quickly they changed their business practices. Many in the industry don’t believe it’s anyone’s business what they make via YSP incentives. Their definition states otherwise. YSP’s belong to the borrower, not the 3rd party service provider. 

 

The mortgage industry as a whole is a baseball toss away from moving to an overall transparent policy platform, via legislation, technology, or both. My $.02 says technology starts it and the legislators play pile on. At the end of the day, to not disclose has been rendered deceptive and predatory…words that have a clearly deleterious effect on doing business, whether they are legally reprimanded or not. If you think about it…to speak out against transparency in this marketplace is not the type of opinion consumers or legislators will come to appreciate.

 

The opening salvos have begun. There will be momentous battles with new weapons and strategies, but like most wars, no one comes out the clear winner, but the landscape will be changed forever.

 

 

 

 
**Proper Thanks to:

Kickbacks or Compensation: The Case of Yield Spread Premiums

By Howell E. Jackson* and Jeremy Berry**

For U.S. Senate Committee on Banking Housing and Urban Affairs.

Comments (129)

Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans
huh?  can you explain further.... not sure what you are trying to  say and I don't want to assume. Is this a question?  A statement?  thanks
Jan 15, 2007 06:06 AM
Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans
I never said I won't do sub prime. I said....  with this model, it won't work with most sub prime deals. But then again, you never mentioned what the flat fee would be either. With that hole left wide open, this conversation isn't going any where. Think about it.....  as I have stated before....each deal is different and you will not always get true quality and sometimes the best deal under a set fee......  does it work, yes, but we are not defining anything here, just generalizing...which can make this discussion go round and round.....  been there done it.   Right Jeff C.??  lol
Jan 15, 2007 06:24 AM
Jeff Corbett
BoomTown - Charleston, SC

Yeah, things can get pretty crazy in this post real quick...

We are getting close to releasing some news about The XBroker project within the next few weeks...this will support my position better than going round again ;)

AJ...Jack was ahead of his time...there was no real way to verify the facts he laid out and brokers had no real incentive to do business the way he laid out... Transparency in Lending is an evolving business model of Jacks UMB's....

We hope to further The Mortgage Professors cause ;) 

Jan 15, 2007 07:58 AM
Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans
Jeff C, what about Jeff B?  ;o(   I did receive your e-mail...... we'll talk more later.
Jan 15, 2007 08:03 AM
Gabriel Silverstein
Angelic Real Estate, LLC - New York, NY
SIOR

I'm way late on this blog, Jeff, sorry, but whereas I am quite fine with YSPs I think the disclosure rules need to be tightened up and in cases where the mortgage broker acts as a warehousing agent there needs to be some way to call out what they get in the YSP, since it gets buried beyond the HUD-1 in that case.  Thanks for the post.

Jan 20, 2007 02:57 AM
Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans
Gabriel...... why?  match rates and fees... shop it well.....   what people are failing to realize is that you need to find someone that you can trust...... even if they showed the YSP..... it won't change the bait and switching that goes on. Use the APR as your disclosure.....  again, just my opinions. Sure, there is an issue when it comes to transparency...but you will never get rid of the liars and dishonest brokers....  bottom line. Sure, you can try.....   besides.. the YSP is one taking the risk also....
Jan 20, 2007 03:17 AM
Tom Burris
NMLS# 335055 - Baton Rouge, LA
Texas/Louisiana Mortgage Pro - 13 YRS Experience

an actual conversation i have had with a client recently. and have had very similar just like it a lot of times.

Borrower: So, how much are you making on the loan?

Me: I will be pricing this so I can obtain about 1.5% of the loan amount in fees to me. You can pay up front or in the rate.

Borrower: Whatever you think is best.

 

many people think loan officers can survive on 1%..... i even had a realtor get uppity with me for gouging 'her client' at 3 points on a $75K deal(that was hard to do)<== it wasnt her client. it was MY client.

 

 

Jan 20, 2007 09:18 AM
Jeff Corbett
BoomTown - Charleston, SC

Tom...% based commission models are ambiguous and slippery...I prefer a flat fee, established shortly after a pre-qual is achieved.  

I find that borrowers often know what questions to ask but dont know what the correct answers are...which makes the questions meaningless.  

1% on a $100k loan wont keep many originators afloat for long.

1% on a $500k loan will.   

 

...and I agree with you re: the Realtors choice of the word 'gouging'...3% @ 75k = $2250, a reasonable fee for sound services....yet another example of the inefficiency in marketing % based fee schedules...and isn't that (3%) what she charges 'her clients' too? ;)

Jan 20, 2007 09:40 AM
Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

hey Aj......  the only problem with these.......  go read the first 3 that you have links for. Each one uses such words as USUALLY not.....    sometimes......    and one person goes on to say that they have 780 lenders that they can use. NOW..... Jeff C. and I have talked through e-mails. We both know where we stand. In these cases that you present. There are still holes.....  and a few talk about rebates when it comes to YSP...but they never mention how you would know. One mentioned that their flat fee is based on a specific core of programs and might change if different.

So..my whole point, I would put money on it, if I was able to audit EVERY file, that you would not see consistency.  These are other forms of advertising to get people in. You can sit here and fight the notion everytime, sending links and such. But I have come across a company or two that has had this method and they aren't always true to what they state. And these are facts. Facts that aren't disclosed on these web pages. And not all loans will fall into a flat fee based on difficulty, hence the reason why some of these web pages have clauses stating this, but in such a manner, if you don't know anything of how the mortgage business works....  you won't know when it's explained differently.

Jan 20, 2007 02:20 PM
Jeff Corbett
BoomTown - Charleston, SC

Jeff B. makes a sound point...

DiTech has a $395 Flat Fee loan too...its a real doosy ;) The Disturbing Truth

 

There are some UMB's out there and others who employ similar practices, just not enough, and few of them market effectively. 

I appreciate these links however, I see some of my work out there   lol 

 

Jan 20, 2007 02:45 PM
Ron Avneri
Seattle, WA
Financial Professional

Hey Jeff,

 

I am a wholesale rep and my brokers have been sending me these all week.

 

 

 
Petition for "NO to HR3915"
I know you have probably seen this but just in case...
 
The U.S. House Committee on Financial Services is considering Bill H.R. 3915 as a response to the housing crisis. One of its two main provisions is to prohibit brokers from earning even disclosed YSP.   Already brokers must disclose YSP, while banks don't. Under this law, brokers may not even earn it. H.R. 3915 will eventually put most brokerages our of business - not just the few players who shoehorned unqualified buyers into risky loans.  This bill harms small lenders with niche product and limited retail operations, the brokers who find customers for those products, and the first time homebuyers and current homeowners who are renters without the options the broker channel offers.This legislation is going to committee for a vote next Tuesday and then will be fast-tracked to the House floor -- unless we stop it. We believe that any of your friends outside the industry will want to sign when they find out that the Committee is rushing this through to minimize public comment. We talked with a Committee staffer who admitted that three staffers have been working on this for months. Yet the Committee only released the proposed bill on Oct. 22. Certainly given the size, complexity and importance of this industry, the public should be given more time to comment.Please visit and add your name to the petition @ http://www.petitiononline.com/HR3915/petition.html.   If you already have, call the bill's sponsors and tell them what you think of getting the rap for a housing crisis that you didn't cause but can help solve. The bill's sponsors are:
Nov 02, 2007 09:07 AM
Michael Carter
Barton City, MI

Just a thought.  If bankers could not earn a premium why would they lend you money????? for a long term investment?? Maybe....   Right along side of a 10 year prepayment penalty. Im with you on this one. I think everyone should work for free. i'll trade my days work for that bag of apples. :)  It takes a lot of work to get a loan closed and a lot of expenses as well. If loan officers through out the Country told their clients they were required to pay 2k up front do you think as many people would purchase homes. You think the market is sluggish now?????

- sorry guys - in a hurry - didnt check spelling  - if you want details on this subject shoot me an e-mail

Jan 25, 2008 08:08 AM
Scott Johnson
Better Homes Realty Granite Bay - Granite Bay, CA

I can't let this one go...  Dude... you are so lost, it's amazing.

First of all, the analogy and math you are using is about something in the range of First Base foul line when you were swinging for centerfield.

On a typical conforming or government-backed loan, 1% in yield spread would raise the rate about 0.125% to 0.250%.  

The vast majority of borrowers are first time home buyers, and walk in wanting to do zero down, because they have no money.  ALL loans are sold into the capital markets... I don't care if it is Chase & Wells Fargo, they sell them too and retain servicing rights.  They need to recoup their capital. 

There is no money in the interest collected, no one is going to hold the loan more than a few days.  The fees are whay drives the mortgage industry, thus the current meltdown.  If banks were in it for the interest payments, they certainly have a *ssload of loans on the books and it shouldn't be a problem.  Correction, they have no new loans coming in, so no fees.

Do you work for free?   Does your employer stay in business just for their good health and public donation? I don't care if you work for a non-profit... those guys make more than anyone.

The reality is, there is a cost to being in business, there is a cost to having a bank of loan processors, there is a cost to thousands of dollars in advertising, even for a small brokerage, and there is a cost to compensating a good loan officer. 

If the real cost is about 4% on the loan to be in business, and the borrower wants something like a 3% FHA deal, and they are struggling with that, how else do we make a living for ensuring the American dream happens?

If the Realtor needs 3% for working out of their house, and their main expense being a cell phone, how in the heck does a bank and mortgage brokerage office stay in business making $500 a deal?

WE by default use the YSP as a tool to earn the compensation we need.   There is no "PAR" rate... I can look at 5 different rate sheets from 5 different lenders and have the variance between 6.125% and 2% in rebate compared to 6.125% and a discount cost to the borrower of 1%.

There is a value in knowing how to shop the deal... and there is a value in having the relationships from lenders that will compensate some brokers with high reputations than they will others for the same deal.

The banks earn 2-3% on each file when securtized... why shouldn't that be compensated to the team and individual that found the borrower and created the file? It's called -RETAIL-.

Do you think Walmart doesn't make 50% on everything they sell?  Those 125,000 sq foot stores don't fall out of trees...

I'll give anyone a great deal if they or the seller on the contract pays my fee.. if they don't, I'm not going to waste 3 seconds on it and their not going to be buying a home, because no one else will either.

Oct 05, 2008 02:29 PM
Scott Johnson
Better Homes Realty Granite Bay - Granite Bay, CA

Your quoting of statistics is skewed, the vast majority of mortgages are originated in California, Florida, and New York... the places with the highest cost of living in comparison to the average income of the consumer.

If you are in Bumfuck West Texas buying an $80,000 house with a $50,000 income, you may very well be able to pay a couple of points.

If you are in San Francisco, buying a $700,000 1 bedroom condo, on a $70,000 income, you probably can't afford to pay $10k in closing costs, you are probably struggling with the $23,000 down payment.

Loan officers will quote the fees and rate after seeing what the borrower can pay for.  If they have $500 in the checking account, we are not going to bother offering buy-downs.

It also doesn't matter if it is a $700,000 loan, or a $50,000 loan, it's the same amount of paperwork.  If anything, the small ones tend to be harder.   If the borrower doesn't have any money, and the loan amount is very small, to be honest, they are going to pay a very high rate, as there is nothing we can do about the hard cost of being in business.  

To date, any client will squeal at anything higher than about 1% in fees, but we realistically have a 3% revenue target to be in business. 

Oct 05, 2008 02:37 PM
Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

@ Scott from California Veterans....  you wrote this... "On a typical conforming or government-backed loan, 1% in yield spread would raise the rate about 0.125% to 0.250%."

Not once in my 16 yr career have I seen the rate change only 1/8% with a 1% in yield spread. Even 1/4% hardly ever happens. The rule of thumb in most cases is about 3/8 of a point for every 1/8% in rate.  Sure, there are some coupons that might be an 1/8 point to get to the next rate. That would be cheap for the consumer, if you pass this onto them. But if you are getting 1 ysp and your rate changed an 1/8%....  I would get a new investor.  Just my .02.

Overall, you make some good points, about the lower loan amounts. Jeff just has a different concept that he is trying to promote. In today's business, you can't operate a full office with little money.

jeff belonger

Oct 05, 2008 06:25 PM
Jon Zolsky, Daytona Beach, FL
Daytona Condo Realty, 386-405-4408 - Daytona Beach, FL
Buy Daytona condos for heavenly good prices

Wow, and it was in 2006!. What a discussion. It is way over my head, I know very little to nothing about these things, but what an incredible discussion on AR.

I thik we got way more shallow now

Sep 23, 2010 02:39 PM
Tni LeBlanc, Realtor®, J.D.
Mint Properties, Lic. #01871795 - Santa Maria, CA
Tenacious Tni (805) 878-9879

Wow did this actually happen?  I can see why Bryant remembered it -- who could forget it?

I guess the Fed had the last word though.

Apr 01, 2011 01:39 PM
"The Lovely Wife" (Broker Bryantnulls Wife) The One And Only TLW.
President-Tutas Towne Realty, Inc. - Kissimmee, FL

This...

Is certainly a blast from the past. It was also AR's first real blog war :)

It's also how many of us came to know XBroker. I'm sure I'm not alone when I say we miss him.

TLW...ROAR!

Apr 02, 2011 12:10 AM
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