The time nears for yet one more EXTINCTION in the mortgage business: yield spread premiums will soon be considered illegal, courtesy of the Dodd-Frank Act.
Yield spread premium is when the lender pays the loan officer for doing the loan instead of (or in addition to) the borrower paying points.
You might be tempted to believe that yield spread premium is a "kickback" by reading the mainstream media. You could get the idea that ending YSP will somehow create:
- more accountable loan officers
- greater clarity for borrowers
And, maybe it will.
But at what cost?
As with most things dished up to "protect" the consumer, this ultimately will add yet one more obstacle to buying real estate in an era when consumers are cash strapped, mortgage guidelines are ridiculously strict (and getting stricter), and the entire country is waiting for a housing rebound to lead us out of the recession.
Like many professionals, an MLO (mortgage loan originator) has more than one way to make money.
- Points expressed as a percentage of the loan amount. This is charged along with the other closing cost fees. This adds to the amount of CASH the borrower will need to bring to the closing table.
- The interest rate charged to the borrower can be "marked up"resulting in the bank paying "yield spread premium" to the MLO. This adds to the payment the borrower makes as a result of a higher rate.
To simplify: An MLO can make money by charging over wholesale on his product. It isn't a radical concept to mark the wholesale price up to a retail price, but that is what is happening here. OR...
An MLO can make money by charging a fee. Or both.
You see, I have a problem with making YSP out to be some evil, secret kickback designed to rip the head off of loan applicants. If yield spread premiums are "kickbacks" then you must also believe:
- Car dealers don't get any money from the bank when they arrange your auto loan. They probably make all the money they need to on the car.
- Insurance agents must work for free since they never charge an upfront fee for taking your insurance policy. It wouldn't be fair for the agent to get paid by the insurance carrier (that would be a dirty rotten kickback).
- Travel agents must arrange crusises because it's so much fun. The cruise line can't pay the travel agent for arranging a $10,000 trip. That would be a kickback!!
Okay. Enough about how the government is picking on the mortgage industry. Those of us who remain in the business will continue to pay for our "sins" until the last MLO is driven out of the industry. Will we all feel better when the only option for getting a mortgage is walking into one of those big banks that pay salaries to clerks who spit out assembly line mortgages?
So how does Dodd Frank hurt the people who need a mortgage? Three ways:
- More cash required to close.Without the ability to get paid via YSP, the only alternative will be to charge points. Points add to the cash needed to close a real estate purchase, YSP does not. Would anyone agree with me that one of the biggest challenges in this market is LACK OF LIQUIDITY (or in the case of a refinance, LACK OF EQUITY)?
- Bye-bye lender funded closing costs. A lender can fund your appraisal out of YSP. Heck, a lender can fund 100% of your closing costs out of YSP, which how "no cost" loans are done. Without any YSP, this will not happen.
- Bye-bye flexibility. Ever hear of the cash strapped borrower that has a great income? What about the guy with plenty of cash who wants the absolute lowest rate because he is going to keep his property forever? In both of these cases, the MLO has the flexibility to arrange the loan in the optimum way for the borrower, by charging only the points, only the YSP, or some combination that will work best for the borrower.
Will life go on? Yes. Will we work around it? Yes.
Do the benefits outweigh the losses to the guy who needs a mortgage to buy a house?
Not by a million miles. Just wait and see.
Written by Janet Guilbault, Mortgage Banker for RPM Mortgage in the San Francisco Bay Area, NMLS# 238304