You, Me, and the YSP: Dirty Rotten Kickback or A Borrower's Best Friend?

By
Mortgage and Lending with Guild Mortgage NMLS #238304

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:

  1. more accountable loan officers
  2. 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.

  1. 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.
  2. 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:

  1. 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.
  2. 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).
  3. 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:

  1. 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)?
  2. 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.
  3. 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

 

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Re-Blogged 1 time:

Re-Blogged By Re-Blogged At
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Rainmaker
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Janet Guilbault
Guild Mortgage - Walnut Creek, CA
San Francisco Bay Area Direct Mortgage Lender

Long Beach (Comment # 46) you wrote this

it doesn't necessarily require the buyer to bring more cash to the table.

and I agree.

But I also believe that will be the end result for most borrowers because of the changes (more cash to close)

I will also admit that my company has not given us the final picture of how this will all work, so it should be interesting.

Feb 11, 2011 02:02 AM #47
Rainmaker
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Janet Guilbault
Guild Mortgage - Walnut Creek, CA
San Francisco Bay Area Direct Mortgage Lender

Adam, comment #42

you wrote: What should and is being required is to disclose to the consumer what he/she is actually paying for their loan. 

Well, is that the actual rate on the loan or is that how much he had to pay over wholesale to get the rate on the loan?

You said this to Russ:

In the mortgage business what happens is that you pick the consumer good with an illusionary price tag and go to the cashier. At checkout, the price may be adjusted (using YSP) depending on how much of a profit margin an unethical person wants to make. The consumer leaves thinking they got a fair price, but did not read the fine print as to the true price.

Why is the price tag illisionary? Didn't the guy get his GFE?

You also told me this:

The only losers in this will be the mortgage people who are used to charging an individual borrower both a YSP and an Origination Fee. All others who do not practice this method of payment, it will be business as usual.

There is nothing at all wrong with charging some YSP and some origination. This practice in no way means you have overcharged or gouged the borrower.

You have bought into the fact the YSP is some sort of secret bonus income. That is not the case. It is a tool that helps give borrowers options of how to pay the loan officer, and gives the loan officer tools to fund credits.

That is like saying a car salesman cannot get an incentive from the factory to sell a certain model unless the car buyer knows EXACTLY how much the incentive is. It also assumes the salesman intends to charge the full price of the car and keep all of the incentive.

What you fail to realize is there is a guy down the street who will sell the car for less BECAUSE he also has the incentive.

 

 

 

 

 

Feb 11, 2011 02:20 AM #48
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Larry Bettag
Cherry Creek Mortgage Illinois Residential Mortgage License LMB #0005759 Cherry Creek Mortgage NMLS #: 3001 - Saint Charles, IL
Vice-President of National Production

Nice post, except for the part of "paying for our sins."  We haven't sinned.  There are folks in our industry who have sinned, but it's not us.  The government failed to prosecute under the rules and regulations that they implemented.  Consumer's sinned b/c they said, "hey, if you won't lend to me, then the guy down the stree will,"  etc, etc, etc.  The government is punishing those of us who haven't sinned b/c we working the same business as those who actually did sin.

Feb 11, 2011 02:30 AM #49
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Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

Janet...  I think you hit a homerun with this one.. I would have to say that this was your best post ever... The end result, this will hurt consumers and the gov't has no business because they don't truly understand. Then again... theory... the large banks could be behind this, such as Wells Fargo and B of A, because they have call centers in which they pay those loan officers small salaries with bonuses. Let's not fool ourselves that the large banks have a hand in this and don't care what happens. Overall, there will still be huge profits from these interest rates, just that it won't be passed down to the MLO or the consumer.

 

@ Adam - comment # 42 - you stated this... "The only losers in this will be the mortgage people who are used to charging an individual borrower both a YSP and an Origination Fee. All others who do not practice this method of payment, it will be business as usual."

I am going to semi disagree with this...  here is the reason why... I try to have a set profit margin myself for each and every deal, trying to be the same. If I am doing a $80,000 loan and I can't make upfront and back end points, because the company needs to make money also... who do you think suffers on this? Myself and the consumer. I can't make any money if I could only charge 3 pts.. and the borrower, because many loan officers and or lenders won't do this loan. Especially if the deal is hard and would take a lot of time. It's bad enough that I see the ball dropped on semi easy deals and money was left on the table. I have closed my fair share of loans that were denied by other lenders in the last 3 years. But let's be honest.. with the cost of loans, investors being picky while loans sit on warehouse lines... costs being driven up already...  and for the fact that some loans are case by case to where I will charge less or make less at the end, because I need to reduce my costs to make a deal work.. I need to make it up in other places. it's the cost of doing business. The end result would be that the call centers win and loan officers that don't know as much, get tons of deals and if half of them close, they are still happy. Just food for thought...

jeff belonger

Feb 11, 2011 02:35 AM #50
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Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
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Janet.. I just read your comment to Russ.... I was in the middle of mine, hence why I didn't see it... so we seem to be on the same page regarding Russ's comments pertaining to illusionary rates and that there is nothing wrong with making front and back end points. You make a good example... if I need to make 3 full points on the deal, but the borrower can only afford 1 pt upfront, I now can give a rate that pays me 2 on the back.... Something else that I should have added into my example.. and I am going to be writing about this now.. thanks for the discussion.. the gov't needs to see and read this exact post and these comments..

jeff belonger

Feb 11, 2011 02:38 AM #51
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Larry Bettag
Cherry Creek Mortgage Illinois Residential Mortgage License LMB #0005759 Cherry Creek Mortgage NMLS #: 3001 - Saint Charles, IL
Vice-President of National Production

Jeff....it's apparent to me that Adam #42 is not in lending.  Rather, in real estate.  He skips over the entire issue of F.L.A. which is even more intrusive to our industry than Dodd Frank.  The costs to the consumer, across the board will go up.  That is a shame.  However, we were not the sinners.  He takes his eyes off of the fact that the government had safeguards in place to begin with....

BUT THE GOVERNMENT DIDN'T ENFORCE THEIR OWN REGULATIONS,

so now they go and

CREATE MORE REGULATIONS!!!!

The simple truth is that had the government enforced what they had on the books, we would not be in this situation.  Adam says that the only losers will be those who charge both origination and YSP.  It's obvious that his knowledge is limited b/c the biggest loser will be the consumer.  Especially first time home-buyers, and those with lower loan amounts.  A lot of banks will get out of the industry, but Walmart will jump in.  Need to see the forest through the trees.  My .02 cents.

Feb 11, 2011 02:47 AM #52
Rainmaker
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Janet Guilbault
Guild Mortgage - Walnut Creek, CA
San Francisco Bay Area Direct Mortgage Lender

Larry, good call and well stated clarification. I know sarcasm is hard to pull of when blogging, but sometimes I cannot help myself.

Feb 11, 2011 03:02 AM #53
Rainmaker
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Janet Guilbault
Guild Mortgage - Walnut Creek, CA
San Francisco Bay Area Direct Mortgage Lender

Jeff B and Janet G on the same page. I am loving this.

Larry: I am glad for Adam's comment because it actually shows the line of thinking that caused us to get here (and the lack of understanding)

I often use this expression when I talk to clients: if you were looking at mortgages on the shelf, deciding which one was the best buy, this is the one you should put in your cart and buy.

Now I am picturing those loans at WalMart. Laughing!

 

Feb 11, 2011 03:10 AM #54
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Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
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@ comment #45...  the main point is that YSP will be taken away. Yes, some lenders are working on ways around this and will pay accordingly. But sorry, that was not what this post was. The main theme is the gov't stepping in and hurting rather than helping. They are a decade to late and were greedy previously.. now trying to make things right in the publics eye... but the public won't know any better until the crap hits the fan..

jeff belonger

Feb 11, 2011 03:28 AM #55
Rainmaker
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Janet Guilbault
Guild Mortgage - Walnut Creek, CA
San Francisco Bay Area Direct Mortgage Lender

I would like to thank Jeff for pointing out something that I overlooked. The guy with the little loan could easily get kicked to the curb. Around San Francisco, we don't get many little loans, but Jeff makes a great observation: little loans will no longer "pencil" for the average MLO, and that is sad.

So often when these regulations are enacted, thought is not given to what is LOST in the process. The concept of YSP is not easily understood by the general public, but "making loan officers accountable" is something everyone would applaud.

Jeff, I am looking forward to reading your post in San Diego, flying out shortly for a birthday spa weekend.

Feb 11, 2011 04:20 AM #56
Anonymous
Invisible Hand

Interesting blog and interesting (and enlightening) comments.

As a committed free marketer, the idea of added regulation (with all the attendant costs) which limits consumer options is abhorrent. That being said, I believe this proposal will help the majority of buyers / borrowers who are currently underserved by an intentionally opaque and inefficient mortgage marketplace:

- Realtor push borrowers to affiliated (and sometimes co-owned) mortgage companies who push above market loans and prioritize profits above the best interests of the buyers.

- Lenders advise borrowers on loan types and "approved" loan amounts yet have a huge conflict of interest in that the worse (and bigger) the loan the borrower takes the more money the lender makes. (See Subprime ARMs and NINJA loans circa 2006).

- Comparison shopping across multiple lenders and multiple loan dimensions (loan term, fixed / variable, loan rate, points, speed to close, quality of lender) is complex and beyond the capability of the average buyer who is already stretched thin by the pressure of deciding on and negotiating a house purchase.

If there were more participants in the borrow / buy transaction who were willing to work to optimize the overall transaction and put the fiduciary needs of the borrowers / buyers ahead of a higher profit margin this legislation would not be needed. Unfortunately the reality is that most parties involved in these deals are incented to "pay themselves first" and "buyer beware" (see comment #12 !). As this is the reality of the marketplace, I strongly believe additional legislation is warranted.

 

Feb 11, 2011 08:25 AM #57
Rainer
18,171
Scott Swinford
Hancock Mortgage Partners - Crown Point, IN

I have to agree with Jeff and Janet on this also. I think the losers here will be the consumers if the regulations that are supposed to go into effect on April 1 are the same ones I am reading about.

I too have a "set amount" that I like to make on a loan. It is not, by any stretch of the imagination, excessive. If the loan is tough or it looks like I may need to contribute something at closing, I may try to get a little more. If it is very cut and dry and requires little attention, I may do it for less. These rules seem to take away the ability to do that and the flexability to help my clients in this way.

Personally, I am afraid of the unintended consequences such as losing a number of our fair and professional MLOs and turning the system into one that occupies a room at the local WalMart. The clients deserve to be serviced by a fair, informed, and ethical loan originator when they are ready to make what is probably the largest financial transaction of their life. If those MLOs cannot stay in the business because of all the regulations designed to protect the consumer, who will be left to protect the consumer?

Scott

 

Feb 11, 2011 09:33 AM #58
Rainmaker
158,400
Deborah "Dee Dee" Garvin
C2 Financial - San Diego, CA
C2 Financial

Janet, A complete home run on this post.  I can only say "ditto" to much of what you, Donne, Jeff and Larry have stated.  Bot Scott's comment (#58) brings up something a lot of people have not realized.  Effective Aprit 1st, a MLO cannot, under any circumstances contribute to the closing of the loan.  No paying for lock extensions, redraws, etc.  It seems pretty clear that the lenders are going to hedge their rates to cover possible lock expirations....or (sorry, I can't help myself...hehehhe) can we anticipate RE agents covering extensions???????  Ahhhh, the plot thickens!

Feb 11, 2011 12:01 PM #59
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Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

@ comment # 57 the Invisible Hand - You stated this... "That being said, I believe this proposal will help the majority of buyers / borrowers who are currently underserved by an intentionally opaque and inefficient mortgage marketplace:"

Help the majority? I think it could hurt the majority on many levels... even those that have money. Why do I say this? I believe that the buyer should keep a good amount of cash in reserves. If I had a rate of 4.75% and it was costing 1 pt on a $400,000 loan, that is $4,000. If I could sell a rate of 5% that would not cost any points, that's $4,000 more in the borrower's pocket.  At the 4.75% rate, your payment would be $2,147 and at 5%, $2,086. Only a difference of $61 a month, yet they borrower gets to keep $4,000 in their pocket. Not everyone has the cash reserves after settlement.. and you might then say, well, they shouldn't be buying a $400,000 house. But what about market areas? In some areas, you might not be able to get much for $300,000 and have a growing family, etc, etc.

Secondly.. you then stated this... "If there were more participants in the borrow / buy transaction who were willing to work to optimize the overall transaction and put the fiduciary needs of the borrowers / buyers ahead of a higher profit margin this legislation would not be needed. Unfortunately the reality is that most parties involved in these deals are incented to "pay themselves first" and "buyer beware" (see comment #12 !). As this is the reality of the marketplace, I strongly believe additional legislation is warranted."


I guess you are defending our blind government... if they would have just regulated a tad more and did more due diligence about 10 years ago, we wouldn't be in this mess. They are over-reacting for a few reasons... to make the public think that they care and are doing the right thing...  for votes... and for the large banks that want more control in some areas. This will hurt all involved and will actually get worse.  Good example.. sure, their required loan officers to get licensed and take tests. But I am hearing more problems than ever before.. some of the better loan officers got out of the business. These stupid tests were based on ethics and knowledge of regulations... only about 10% of any test had to do strictly with the knowledge of mortgages, guidelines, and so much more. I get more e-mails now than I did a year ago from borrowers that are told 5 different things from 5 different loan officers on a basic easy issue or guideline.. or one that is easy to find out the right answer. Maybe this is what those tests should have focused on.

Overall.. over-regulating is going to hurt more... it's already started to happen. You agreed with comment #12.. but if you truly understand his comment, yes, the consumer has always had the ability to shop. Part of the blame needs to be on the consumer.. because this has not changed. One can still game the system as a loan officer...but what is hurting the most.. lower prices with the lack of knowledge and deals aren't closing now. Come on, think this through... not sure if you are in the mortgage business or the real estate business... but from your answer, I can only assume that you haven't worked in the trenches at all or in the last 10 years. Not here to knock your opinion or stance... but I wrote a follow up post in regards to Janet's to give examples... Thanks to the Dodd-Frank Act, I might be called the non-profit rep. - read my opening 2 examples as to why fooling with this YSP will hurt... and then my two charts to show even more reason.  thanks

jeff belonger

Feb 12, 2011 02:29 AM #60
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Paul McFadden
Paratex - Seattle, WA
Pest Control, Seattle, WA.

Janet: Great post. One of the best I've ever read here. Sorry Jeff! Seriously, it will now cost more for the consumer to get a loan. It will also get rid of all the radio and TV advertising that was pretty effective when it came to no points and fees loans. Maybe that's a good thing. The bait and switch hurt the credibility of our business. Still, I don't think our good Senators intended to do what will now happen. Thanks again!

Feb 14, 2011 08:11 AM #61
Rainmaker
500,760
Tom Burris
NMLS# 335055 - Baton Rouge, LA
Texas/Louisiana Mortgage Pro - 13 YRS Experience
I find it humorous when people who have NO IDEA how loan officers are compensated throw out ridiculous opinions. Bottom line: Frank + Dodd = Consumers Lose!!!
Feb 14, 2011 03:35 PM #62
Rainmaker
422,488
Nevin Williams
Fairway Independent Mortgage Corporation - Cary, NC
Senior Mortgage Advisor

Janet - Frank Dodd.  Dumb and dumber. These are the morons that said there was no housing bubble in 2005.  I did a post a week ago where I gave Barney Frank the "Jackass of the decade" award for his contributions of stupidity.  They fueled the fire that caused the collapse and now they are in charge of reform.  I think Uganda has a less corrupt government than we do.

Feb 25, 2011 03:24 PM #63
Rainer
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Libby Cousins
Extraordinary Processing - Spokane, WA
Contract Mortgage Processor, licensed in WA

Wonderful post Janet! I hope that the "powers that be" give this some serious thought before it is actually implemented. I have heard that several organizations are arranging marches and may try to sue to stop it. We'll see what happens. It is very frustrating that those that are writing the regulations seem to have no working knowledge of how this will effect both originators and consumers and they are only worried about over-regulating to try to correct the mess that occurred years ago when they weren't paying attention!

Mar 02, 2011 01:00 PM #64
Rainmaker
479,929
Kevin Kueneke
Caliber Home Loans - Encinitas, CA
San Diego Mortgage Banker

I just saw one of the "big bank's" new compensation plan for mortgage loan originators.  Low hourly wage, small per loan incentive, etc.  Once the competent loan originators leave for greener and more reasonable pastures, that "big bank" will be left will unmotivated and unskilled order takers.  Doesn't it take the "big banks" 60-90 days to process a file already...?

Mar 04, 2011 06:42 AM #65
Rainmaker
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JoAnn Moore
The Mortgage Market of Delaware - Georgetown, DE
Home Loans in Delaware

Very well written post, Janet. It certainly has drawn a lot of interest.

May 29, 2012 12:10 PM #66
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