Wholesale Lender Email Reveals The Yield Spread Premium Lie!
Author: Rob K. Blake
Published: March 7, 2007
More Evidence Reveals the Yield Spread Premium Lie Is Real!
So as you may know my pet peeve of the mortgage industry is Yield Spread Premium (YSP) overcharging.
What is YSP overcharging?
It is how the mortgage industry makes big hidden bucks by lying to borrowers about mortgage rates…closing 90% of all loans at rates higher than required.
This is the only way a yield spread premium (ie. a lump sum of money calculated as a percentage of your loan amount) is created. Click the link above to read all about it, but suffice it to say, virtually everyone is a paying a higher monthly payment based on a rate that was artificially jacked up for no other reason than to profit the mortgage company.
Congressional Testimony
Professor Howell Jackson of Harvard Law School said in testimony before Congress,
“…borrowers are simply told that their loans will have a certain interest rate, and they never understand that the interest rate is higher than it needs to be.”
That’s a Harvard Professor testifying under oath before Congress on his findings after doing a 2 year study.
Quotes don’t get any more credible than that!
Now even though I’ve screamed about this abuse for years, many of my readers, potential clients, and others still find it hard to believe a multi-billion dollar rip-off could exist without everyone knowing about it.
Well you have to pay attention (like reading this blog..haha) to hear about it…but believe me, it is real!
More Evidence
Being a 15 year industry veteran, I recently received an email from a wholesale lender (who shall go nameless. Since they all do it, singling them out wouldn’t be fair) where you can clearly see they are pandering to the yield spread premium “hiding” crowd of mortgage originators. They even use the word “confidential” to signal the deceptive nature of not disclosing YSP.
Lenders solicit brokers with this and other YSP hiding methods to steal from you the American homeowner and they’ve been do it for years.
Mortgage Brokers Are Not Alone
And don’t think for a second, it’s only the brokers…no, no, no.
The big banks do it too. It’s called Service Release Premium (SRP), but it’s the same thing…and get this:
By Federal Law the banks are exempt from showing it to you!
Now you know who really has the power in the mortgage industry.
This Congressional testimony and lender email are two more pieces of evidence yield spread premium overcharging is real and needs to be avoided to get the best mortgage rate on your next home loan.
Author: Rob K. Blake
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I commented over on another thread about Lenox using yield spread premium to pay closing costs. I would much rather get hosed and not pay closing costs than have some shady mortgage officer take my money and put it in his pocket.
Most people don’t know that you are not just haggling with the lender, but also the mortgage officer. Mortgage officers convince you that you don’t want to have someone else pull your credit or do this or that and it is an industry where you typically don’t want to fill out applications over and over again.
I wouldn’t say that any of this is unethical in the slightest, simply that consumers don’t know it is going on. Quite honestly, if consumers knew what was happening, they would be able to understand the difference between a good person to work with and a bad one. It is that rates are not published and brokers say, “Well, it is normally 6%, but your credit score was only 680 and they charge another quarter percent because of that.”
Justin B,
Thanks for the comment.
When it comes to Yield Spread Premium overcharging, no entity is exempt from disclosing that income other than the banks…like Lenox Financial, Countrywide, Wells Fargo etc.
They used their political clout back in 1999 to change the law exempt themselves from disclosing to borrowers just how much money they make by jacking up your rate but forcing brokers to disclose the same.
Talk about an unlevel playing field!
Mortgage brokers don’t have a well funded PAC that could fight so they lost that battle.
Who do think gets more from jacking up and lying about rates pocketing overage income…the lender/banker that knows you’ll never see it or the broker that knows you could see it?
The banks of course will always get the same or more overage income…which is why they spent considerable resources to change the law.
A mortgage shopper is always better working with a local, ethical mortgage broker over any bank…period.
OK, so I call my mortgage officer that I worked with a couple of years ago on my condo. I checked my old mortgage paperwork with her and there was no yield spread premium amount in the 800’s section of the HUD-1, so I know that she actually took care of us on the mortgage. Here is what I ask–”Is there anyway that you can do a mortgage and credit me back the yield spread premium to cover closing costs? I’ll gladly pay a .25% higher rate if you credit that money back to me to pay title fees, the appraisal, etc.” She says, of course. That makes sense. BAM–no up front fee mortgage from my regular officer that I already know and trust.
Now that I know how the game works, I can negotiate how much the costs of the mortgage are versus how much of a yield spread premium I am willing to pay. If my closing costs are around $1,500, I can negotiate enough yield spread premium to cover the lender’s fees and closing costs and honestly, that should still be under the .5% markup that most lenders sucker you in with anyway. And certainly below Lenox’s 1%. My mistake was that I didn’t press Lenox to cut their yield spread premium . I could have done that if I knew it was 1% instead of .5%. I didn’t realize how much money they are making off of yield spread premium .
I still don’t believe that paying points towards a mortgage to buy down the rate is ever a good thing (because I don’t plan on living in my house for more than 3-5 years). And paying title and closing fees is the same thing. Upfront costs versus a slightly higher rate. If you are paying an out of pocket or an up front cost to do the mortgage work, the lender knows exactly how much of a rate bump it would take to get the yield spread premium to cover that. And it is minimal. And it usually is within the rate bump that they normally get anyway to put money into their own pockets. Instead of them making a yield spread premium profit off of you, I can get that money back.
I think I got suckered because for a while, we were a subprime risk and we had a huge problem trying to buy our new house. We were borderline subprime, but the broker kept coming back and telling us everything wrong with our credit score or this or that and every time it meant another .25%. And then we didn’t close on time. And this was through the mortgage company our builder forced us to use so we were stuck with no house and no place to go.
Thanks again for the info. Now I recognize that most of it is a simple trick like a car dealer going to the back to “talk to his boss” because they may be able to sweeten the deal a little. I don’t play those games with car dealers and am not going to ever play them with mortgage brokers again either.
A lender who sells servicing released is giving up the income from servicing and it has value. There is absolutely nothing unethical about that transaction.
I have mixed feelings about the yield spread premium disclosures. There is nothing inherently bad about yield spread premium s and in the hands of a responsible lender is used to assist borrowers who are cash poor.
If we had a marketplace free of referral networks and had more competition that truly benefited borrowers, we wouldn’t need ridiculously hard to understand disclosures.
Consumers need to shop for the best rate. Those who don’t, well shame on them.
Realtors should embrace their fiduciary responsibilities and if they choose to refer a borrower to a lender, help them select a deal whose terms benefit the borrower and not themselves.
All that said, much of this will fix itself when bad guys leave the market because their predatory products are unavailable or they’re too scared of finally being caught.
The bigger problem I see is that no one publishes rates. It is always “call us to find out” so you cannot shop between lenders. Every single one needs to pull your credit to compare and almost all of them use the same lies. Most of us don’t know a mortgage broker or officer and if we do, that is even more dangerous because we may trust that person to look out for us and not scrutinize their work.
So if the average person refinances or buys a home every 5 years, how well can they understand the mortgage process and what are the odds that they have a business relationship with an ethical person to help them? Nope, they either call Ditech or some number off of TV or go based on the recommendation of a their realtor or friend, etc. And it is a crapshoot.
I figured out how to beat the car dealerships. Never trade a vehicle. Sell your old car outright first. Then go in and negotiate the cash price. Use your own financing from a credit union. When you call a dealership and say how much is you car *** with options yyy, they say “If you want to fill out an application and let me run your credit, I think I can get you a payment right around $500 a month”. Nope, I can pay cash. What is the cash price. Then you can call every Ford Dealership in town and most of the time they can even sell you a vehicle on someone else’s lot. But car dealers have the same type of deal with their own yield spread premium money they make on the backdoor of their loans. Hence why you end up upside down in cars.
Without knowing all the ins and outs that you guys are explaining, I always felt like at least with Lenox, I didn’t pay someone $5k up front to hose me. They may have made a ton off of it, but it was yield spread premium on the backside from the bank, not up front charges that I have to pay whether I keep the loan or not.
Diane,
That ad in the post was not a “lender selling servicing”…It is an ad sent to me as a broker to enter into what would be a normal “broker to wholesaler” agreement but call it a “correspondent lender” agreement simply to avoid showing the client the yield spread premium . You may not have been able to ascertain that since I had to edit it so much. But suffice it to say, they were soliciting me to send them loans throught their new “mini correspondent program…so I could “NOT disclose yield spread premium” to use the words in the ad.
That’s deceptive and unethical…in all cases.
Justin B,
You are right…the consumer has no way of knowing what “true rates” are…in the industry we call it the “par” rate.
And without knowing the par rate how do you know whether you’re getting screwed or not?
You don’t.
This is what the Mortgage Insider website is all about. Letting everyone know their is a conspiracy to keep valuable mortgage information (including par rate information) away from the consumer so the banks and brokers can profit enormouslyy from their ignorance.
But that’s a losing proposition. The determined public will always eventually find the truth…just like you did Justin.
Here’s a trick. You can determine an approximation of the par rate using HSH.com and subtracting .5%!!!
Or can listen you our Weekly Audio Updates where we give out the par rate for the week.
But be careful Justin, when you look at the HUD1 in the lines 800 looking for the yield spread premium amount…
Remember it will only be there if your originating company brokered the loan to a wholesale lender.
Banks, net branches, and direct lenders are EXEMPT by law from disclosing yield spread premium …so Justin, if that company you used in Utah funds their own loans or is a bank…you could have still got taken!!
You are actually getting all this..and I’m really happy for you. You’ve put in the time and research, educated yourself, kept an open mind, and you are going to be a savvy mortgage consumer from here on out.
Just remember, Never do a loan with a bank or direct lender or a company who funds loans in their own name. Always use a broker.
Tell him you understand yield spread premium and know how to discover it, and won’t tolerate him enriching himself that way.
Negotiate a total compensation amount to him for his service…1% only regardless of the type of loan…that would be fair.
And ask him if he’ll work for that knowing he’ll get no “backend compensation”. Tell him you’ll want to see the HUD a day in advance (Federal law gives you that right) but even prior to that you’ll want a copy of the wholesale lender lock confirmation on the day of lock. Since any yield spread premium be would be disclosed on the lock confirmation, you’d be able to catch any attempts at yield spread premium profiteering ealier than a day before closing.
Any ethical broker would accept these terms.
Lastly, you should only be talking to the owner of the firm. Loan officers don’t usually have the ability to cut a deal like this, so go straight to the source. There are many “mom & pop” brokers like myself out there, who don’t even have loan officers ; talking to every client themselves. So it’s not hard to locate one.
If you’d like a step-by-step guide on how to locate the ethical “hidden elite” of the mortgage industry in your locale, get a cop of our ebook, called The Mortgage Advantage.
http://themortgageinsider.net/book.html
If I go to the link that you posted
http://www.hsh.com/
and simply deduct .375% off of the published rates, that should be a pretty close approximation of the par rate.
Now let’s assume that my closing costs plus the 1% commission total right at 2% (and that is because the loan is only 145k and the title fees, title insurance, and appraisal are going to run $1500 +/-). I should be able to pay essentially the par rate + .5% and that will equate to the broker commission plus the lender fees and if they rebate that yield spread premium back to me, that puts me into the loan for zero cost to the principle and accomplishes exactly what Lenox was trying to do. I can verify it up front when they do the lock, plus I can reverify it the day before closing on the HUD-1 in the 800 lines.
You guys are seriously awesome. I am a savvy guy with a BS in business and tons of schooling in finance and for the last ten years, I have been getting stolen from like a guy going to a car lot that says “Compra Aqui, Pague Aqui”. I just didn’t know it. Good news is that Lenox did not leave me paying 1% over par, stuck with 5k in closing costs, and with a 3 year prepay. It could have been much worse.
I already made appts to refi since rates are at their lowest in four or five months and 5.875% isn’t bad for a par rate (that is based on 6.22% minus the .375%). Even after I pay the yield spread premium that the lender credits back, that puts my rate at 6.375 for no cost and I am at 7% now on the first on my 80-15 and at 9% on the second. Dramatic change in my payment. Same deal on my house.
Justin,
You got it! At somewhere between 6.375-6.5% there will be enough yield spread premium to cover all your “hard closing costs” and the origination fee of 1%. This is what I call a “true no cost” since it’s not overpaying the originating company.
Now that’s the way to shop for a loan!
Just remember if they aren’t a broker you won’t be able to get a meaningful lock confirmation or see the yield spread premium on the HUD1 the day before closing.
Great job!
Go through the HSH rate minus .375 on the day of lock to find your par rate …then ask your originator what his lender is paying in yield spread premium at the rate you think it should be for a “true no cost”…you’ll see just as in your calculation above…it will be very close to 2% yield spread premium …and that’s enough without over paying.
Don’t be afraid to demonstrate all your new found knowledge to your originator/broker-owner. He will be impressed and be less likely to try and take advantage.
I had another “student” who understood things as well as you do who was offered 3 jobs from the 3 broker-owners he talked to when shopping for his loan because they ere so impressed with his knowledge of the industry! Needless to say, he got the best rate available as I am sure you will too.
Don’t sweat that you didn’t know this before now. Nobody does. Sounds to me like you’ll make good use of the information with all your financing from here on out…and that will save you tens if not hundreds of thousands of dollars.
And don’t forget to inform others of this site and just ask them if they know what “yield spread premium” is? Be ready for a look of disbelief when you explain it.
Then refer them to this site, the blog and have them do a Google search on the term for more information.
I want to eliminate this kind of rip-off making yield spread premium overcharging a thing of the past. But since the banks have a strangle hold on the laws, it will be tough to get any laws changed until there is a grassroots uproar.
We’ve been doing our part for over 3 years now, but we need others out there talking about it.
Good luck in all you do.
Thanks for contributing to the blog with these great comments.
Bye for now,
Rob K. Blake,
The Mortgage Insider
Yes. I get your point. Don’t they know being a crook is out of fashion? I’d pass that ad on to HUD. They’re encouraging fraud to evade disclosure. HUD will give them a quick call and make them pull the ad.
I believe that the offering from the wholesaler is unethical, not illegal. Our industry invites this behavior throughout on a daily basis. (IE: Stated Loans) I am a Banker/Broker who chooses to discuss yield spread premium with my clients.
I am often disgusted by my loan originating peers bragging about how much they made on the uninformed client. Until the governing bodies agree to do what is right for the consumer, which in my opinion is full disclosure of yield spread premium [from all] we will always have to deal with this issue.
Additionally, if we are mandated to fully disclose, then it is incumbent upon the consumer to become more educated as to what a good deal actually is, and understand that customer service does account for something.
Stephen,
I don’t believe anyone said yield spread premium was illegal.
I’m glad you disclose your yield spread premium , but in my estimation nothing of substance will change until loan officers refuse to profit from it…and why should they if the banks are going to profit from it?
Of course, the banks since they don’t disclose will never voluntarily stop pricing their loans with it built in…where does that leave us?
yield spread premium is here to stay…and it’s every consumer for himself…ouch!
Sorry you misunderstood me…
I did not say that yield spread premium was illegal. As a matter of fact my statement was that what the wholesaler is doing is unethical.
Another respondent suggested that “being a crook is out of fashion” and “they are encouraging fraud to evade disclosure” These terms imply the illegal. I stated that their actions are unethical.
Your statement about banks, loan officers & profits hint of “two wrongs make a right”
Banks will not disclose until disclosure is mandated. When/if this ever happens, the playing field will then be level. At that point it will really be “every consumer for himself” and God help the uneducated Loan Originator.
So Lenox calls me about another property that I have that I had been waiting to hear back on for several months since my last refi. Now I know what yield spread premium is. So try this on for size:
I am doing a $145,000 loan. They tell me that the title and lender charges total $3200 for the loan plus a .5% origination fee for the lender or $3900 total.
I ask for a breakdown and tell him that I figure the title insurance is going to be roughly $600, the title company is going to charge another $300 worth of fees plus I figure that the lender is going to charge another $500 in doc prep and underwriting charges. And then we have $350 for the appraisal. That is $1750, which is reasonable. So I ask him for an estimated HUD-1 with the other $1500 in charges. He wants those $1500 plus another half a point or $750. A point an a half in lender profit. That is somewhat reasonable, but that is to pay 6.25% interest.
But get this–he quotes me a rate of 7.75% to pay no lender costs. I told first, 6.25% is well above the wholesale rate to begin with. I told him that I figure the actual costs including the lender’s point origination fee should be around $3000 and if the rate is 6.25%, then the yield spread premium off of 6.75% should cover the $3000. I asked what the yield spread premium off of 7.75% is and it is $4900. $4900 to process a $150k loan.
He would charge me at least a full percent and a half higher rate than the retail rate and all so that they can pay about $1750 in hard closing costs and pocket a cool $3200 in profit off of me.
I kept asking for an estimated HUD-1 and he kept refusing. Over and over he would not tell me where the $3200 + 700 in costs was coming from and even at that, he is not giving me the wholesale rate. Where the hell are those extra $1500 in costs?
Get this–so then he says, “Why do those costs even matter? It isn’t like you are paying any closing costs.” Right, I am just going to pay a higher interest rate for the next however many years because you screwed me into this rate by pocketing the extra yield spread premium .
It pissed him off to have me asking questions that he didn’t have a good answer for. He basically told me, go find another lender. I offered to do business with them as long as they gave me a reasonable deal. I don’t care who I do business with, as long as I am paying the right price. I know that the par rate is going to be roughly .375% off of the published average lender rates and that my closing costs plus lender fees should be around 2% of the overall value of the loan. I told him that I have my HUD-1 from the last loan Lenox did and their yield spread premium was almost $10k. And he kept saying, “But you didn’t pay any closing costs.”
I guess I feel kinda special because I called them crooks to their face and they hymned and hawed about it and didn’t have a response except–if you don’t like getting stolen from go somewhere else.
Good for you! Knowledge is power.
Justin,
That “Why do those costs even matter?” arguement doesn’t wash with an educated borrower.
An educated borrower knows there’s no “free lunch” and asks enough question to discover the hidden truth about the mis-labled “no cost” mortgage.
This is great! An actual example conversation with Lenox showing just how rate expensive the so called no cost loan is….7.75% for an “A” paper refi when you qualify for 5.75%…highway robbery!
And get this…he even lied to you about the yield spread premium at 7.75%…my wholesaler pays 4.3% at that rate.
This equals a total Lenox yield spread premium of $6230 on $145K loan amount…subtract $1750 for the hard closing costs…they net $4485!
Lenox’s net profit of $4485 equals 3% of the $145K loan amount…which is what I’ve been saying is the bank and every mortgage broker’s goal.
Not the 1% origination fee they show you on the estimate…but that plus at least 2% more in hidden yield spread premium on a loan where the borrower pays the costs by adding them to the loan amount. Of course, Lenox justs raises the rate more and gets the same 3%…supposedly wiping out those costs from those “predator” mortgage brokers!
Whose the “predator” when Lenox is making 3% on every deal closing those folks that could have had 5.75% at 7.75%?
That 2% rate spread will cost the borrower even more over a short run of 5-7 years…$10’s of thousands! And over the long run, $70K-140K, more depending on loan amount.
Justin great job on the phone with the guy. I’ve heard the same story retold to me with Lenox and others, when you start talking about “par” rates and “ysp”, loan officers get frazzled, pissed off, and do a lot of himming and hawing.
You know what they know, and they have no advantage any more. But they also know, they can’t get your business either since they can’t sell a loan at par. Their bosses won’t let them…that’s how it is at the big companies like Lenox, Countrywide, Wells Fargo…and at most local mortgage brokerage firms too.
So the only way to get an “honest” loan at a par rate is to work with a local, ethical, mortgage broker who owns the company, does not use loan officers and can cut the fair deal. There are many of these “mom & pop” brokers out there and they love to talk about the rip-off artists. And they love to work with borrowers who understand what’s really going on, someone who knows a par rate when they see one, some one who knows how rare it is to find an ethical mortgage broker who will work for 1% and not profit from rate bumping….just like me hre in Colorado.
Great job!
Keep me posted on who ends up with your loan. I’m sure everyone reading these comments will want to hear how you found your eventual provider.
My hat is off to Justin! An educated consumer is often a pleasure to work with. If you ever purchase in NJ call me!!
Imagine, if more consumers were like Justin, the riff-raff would be weened out of this business sooner then later. The unemployment roles would increase and might expirenece better interest rates. Now that cycle wouln’t be so vicious would it??
Again, congrats to Justin.
I used to work for Lenox Financial as a loan officer, so I know how the system works. Each LO is allowed to make his own deals. That means some clients get better deals than others. I was ridiculed by fellow LOs because I didn’t try to squeeze every nickle out of my clients.
I always showed each borrower the loan at the par rate and at the “no closing costs” rate, which I never bumped up more than .625 over par, and I always made it clear that the they were paying a higher rate to avoid closing costs. I did many loans at par because the no cost deal simply would not work for the borrower. So we aren’t all bad guys trying to screw everybody. I always thought I structured every deal to meet the borrower’s stated purpose the best way possible. I made half a million a year doing it this way, and I never felt like I was doing anything unethical.
One other comment regarding the par rate. I looked at several wholesalers’ rate sheets today, and could not find a one that has a .000 yield on any 30 year rate. For example, with one lender 5.875% is paying 0.208 while 5.750% is costing 0.287, so I have to allow for that when structuring a loan.
Of course borrowers want the best deal possible, and I try to do that; however, there is that need to pay the bills. They have to realize that we have to mark up something to make a profit. I’m happy to net a thousand dollars on the average deal, and I don’t think that’s unreasonable or unfair to the borrower.
Andy:
I heartily agree with you. When I was an originator we didn’t have par plus pricing but we could charge overages. I never did. I was happy with the 1/2 point I earned on each deal and wrote lots of mortgages each month. This was late 70s and early 80s. My customers were largely first time homebuyers with little cash.
Other loan officers charged two extra points - money these folks found hard to get if at all.
I originated a whole lot of FHA and VA loans and was happy to help many families become homeowners. It was a joy and I made a decent living.
BTW - Before the big explosion of affiliated businesses followed by the entry into mortgage banking by non-traditional lenders during the first refi boom, most lenders originated to make one point.
The point was split with the originator, who could charge more if they wanted. Lenders were more interested in servicing income and originations fed that profit center. Origination was a loss leader or at best break even.
Lack of real competition benefiting the consumer has changed the pricing at the point of origination as did the early prepayments caused by refi churning.
I’m hoping the origination process will settle back down with fair competition and more consumer awareness following the subprime hoopla.
I just came across this blog and quickly spotted something that I find a bit erroneous, biased and misleading. Your comment and I quote:
“Just remember, Never do a loan with a bank or direct lender or a company who funds loans in their own name. Always use a broker.”
Whatever credibility you had or think you have gets quickly lost by making a statement such as this. There are any number of direct lenders operating online that provide daily rates and fees and operate in a transparent and ethical manner. Something you should try doing yourself.
To use a broad brush to paint every loan originator outside of your recommended “mortgage broker” as being someone to avoid is ludicrous. Most of the horror stories about borrowers getting taken for an expensive ride are based on their dealings with the same breed you in fact recommend and are a part of.
Very well stated Mr. Gilly…
Mr Gilly ( and Stephen since you agreed with him) obviously have missed the point of alerting consumers to yield spread premium and SRP overcharging.
Since it was the banking and direct lender lobby that pushed for broker disclosure of yield spread premium and simultaneously to keep their SRP overage income “exempt” from the same disclosure treatment….who would you trust?
Certainly not the banks and direct lenders that have no legal obligation to disclose the overage income and currently still don’t….not at application and not at closing.
Hell banks don’t even tell their own employees what their overage income is!
Your statement, “There are any number of direct lenders operating online that provide daily rates and fees and operate in a transparent and ethical manner.” is ridiculous on it’s face.
Give me an example…I’d like to see it. I’ve been researching and writing on this topic for going on 4 years now….and I’ve never seen any “transparency” from any bank, direct lender, ever. They won’t show you a rate sheet or the SRP at the rates they quote.
Why? Because legally they don’t have to!
In fact, the only way to ever see any disclosure of overage income ( income created by upping a rate) is too use a broker since currently they are the only ones that are legally required to disclose it to the consumer.
Sure there are bad brokers out there, but a consumer educated completely on the mortgage process can protect himself from any deceptions since they eventually have to disclose all income…we educate them on how to that early in the process.
Part of that education centers around working only with brokers since you can “keep them honest” with a good education on yield spread premium and part involves even then, only working with the broker/owner since he doesn’t have to build in yield spread premium to make money.
So I suspect you are probably either a disgruntled bank employee that doesn’t even know your own bank is overcharging and not disclosing or you are an originator who works for a broker and must charge yield spread premium to make a living…which is it guys?
Care to be “transparent” and comment again letting us all know your status also giving us some examples of these mystery transparent direct lenders…or will you just make unsubstantiated claims of “ethical direct lenders” and not tell us your status?
Unless you are an A+ credit risk, every single lender will convince you that the additional .25% is because of your patchy credit history. You cannot shop around for fear of lowering your credit rating even more and it often isn’t worth the hassle.
The benefit of disclosure is that it forces honesty–as long as you are educated enough to look on the HUD-1 (which this site has educated me on).
Banks can play all kinds of games with the lock and with rates and there is no penalty on them. Brokers can do it too, but the yield spread premium is disclosed, meaning that it is significantly more difficult to bump rates.
Why would anyone choose a company or industry competitor with less disclosure requirements than one with more? Disclosure is always a plus for the consumer.
I’m having a devil of a time following how you are connecting the dots.
I made a comment about your statement that one should always use a broker and you come back that your point was alerting consumers to yield spread premium and SRP overcharging. Somehow, y0u have taken a giant leap by implying that brokers are the ones wearing the white hats in this game and everyone else is Black Bart. That sir is what I call ridiculous.
And no, I am not a disgruntled bank employee nor do I work for a broker. Having reached a goal I set, I retired at age 50. For a number of years I worked in financial services, had my own firm with staff attorney and a team of professional planners. I attained a number of degrees and designations including Certified Financial Planner and was a Registered Investment Advisor. Prior to that I was a federal special investigator and worked on a number of investigations from background to counterintelligence cases.
Because of your myopic view that anyone other than a broker should be avoided, I will not be providing names of any companies I would recommend. Their numbers are few but they do exist - it just takes time to do the proper research and you can find them.
Once again, very well stated Mr. Gilly…I have had to read and re-read Mr. Blake’s response and I too am having trouble connecting the dots…
First Mr. Blake, I am neither “a disgruntled bank employee” nor am I “a loan originator who must charge yield spread premium to make a living” I happen to be a Banker/Broker of 13yrs, and I am one who chooses to discuss yield spread premium with my clients (See an earlier response dated 3/12/07)
As an aside Mr. Blake, I thought that your response at that time was somewhat anemic. (See my response on 3/13/2007)
In your response you seem to be playing both sides of the fence with regards to your position on the issue of yield spread premium . In one instance you say that “yield spread premium is here to stay, and if banks could profit from it why shouldn’t loan originators?” Interesting…
Are you saying A) A Broker may or may not discuss yield spread premium , the choice is theirs, but a Banker would never consider discussing yield spread premium ? B) Because a Direct Lender does not legally have to discuss yield spread premium a Broker legally has to? C) A Broker can in fact make additional profit utilizing yield spread premium , because it shows on the HUD1 it is fine?
Here are a couple of questions to ponder…1) If a Broker fails to discuss yield spread premium , and profits from such failure, are they no better then the banker?
2) What if the Broker fails to explain yield spread premium then skirts explanation on the final HUD1, and profits from the yield spread premium ? Is this a broker you can trust? You are a Broker, ever been it this situation? If this scenario actually occurs does it make you a Banker (surely I jest)
In a more recent statement you assail banks for their ability to not disclose yield spread premium and essentially imply that all banks and direct lenders are dishonest. You make statements with regards to Bankers manipulating locks for a better yield spread premium . I am not sure, does this ever happen with a Broker? I think your statements are very broad and invite trouble. Would it be accurate to say the following…All Brokers have to disclose yield spread premium therefore they are honest. Pretty broad brush we’re painting with huh?
I am a Banker/Broker. I am transparent with my clients and am transparent with you. I have nothing to hide least of all yield spread premium . I am not so consumed with the licensing status of any originating sources in our industry. What I am enamored with are people who are honest, open-minded and are willing to advise their respective clients in a truthful manor. In my humble opinion the truth is this…There are good and bad originators in the industry regardless of whomever they work for. Who do you choose to be?
Stephen
Excellent post. I have a strong feeling you are among the rarified class of ethical and informed loan originators that are sorely needed but often not found.
While I find it admirable that Mr. Blake has pointed out the potential abusive problems with yield spread premium and the like, he falsely exonerates arguably the worse offenders while vilifying everyone else. By saying “Always use a broker” to me is akin to saying you can “Always trust a politician”. Both statements make about the same amount of sense.
There are a multitude of reasons why someone may choose one originator over the other and why that may be the best choice for the circumstances.
A knowledgable and ethical mortgage broker can often be the best one for the borrower to go through for their home loan. Or, they can become someones worst nightmare. However, the same can be said for a mortgage banker/direct lender. One size does not fit all.
Fortunately, the internet is helping to level the playing field. It is now possible to quickly compare rates, complete an application online and lock in a rate from the comfort of your home or office. With automated underwriting systems and new technology advances, in many cases the entire loan process can now be streamlined and expedited saving both the loan originator and consumer a considerable amount of money. I believe this trend will continue to evolve and weed out a lot of the undesirables and others not truly dedicated to this business. At least let’s all hope so.
I was going to stay out of this discussion but decided to throw my to cents in.
I’ve been in this business for over 30 years. I have been a loan originator. I have hired, trained, and managed teams of loan originators. I have managed retail and wholesale origination departments and purchased many hundreds of millions of dollars of mortgages from independent mortgage loan brokers.
My husband and I owned and operated our own mortgage brokerage until we decided it’s more fun being spouses than co-workers and that’s how I ended up in the title business.
That all said, it’s real simple. There are good guys and bad guys everywhere. There are well trained people and ignorant people everywhere. It doesn’t matter whether or not they are loan originators working for a lender or independent mortgage brokers.
As to the disclosure issue, the consumer, acting on their own behalf, should focus on the APR and the Good Faith Estimate. The APR is the most important piece of the shopping puzzle because it levels the playing field and eliminates all the toys unscrupulous loan officers can use to make their Good Faith Estimates look lower that the competition.
Now, why are mortgage brokers required to disclose yield spread premium s and SPRs but not lenders. Well, lenders by their very nature are, well, lenders - real lenders. The business of mortgage banking, servicing and securitizing are part and parcel of what a lender does.
The ups and downs and market risks associated with the business of mortgage banking is pretty complicated and not easily disclosed to the consumer in any way that would be useful or needed.
The mortgage broker on the other hand, is never engaged in the business of mortgage banking. Mortgage brokers do not or should not take market risk and do not service. It’s an aberation of the mortgage banking business that mortgage brokers as we know them today even have access to yield spread premium s and SRPs. Those items truly were part and parcel of whole loan mortgage banking transactions between lenders. Lenders selling mortgages and releasing servicing negotiated for service release premiums and yield spread premiums, really just above par pricing. This system simply reflected the movement of pricing through out each day as lenders packaged, commited, negotiated and sold mortgages.
Once wholesaling begame really popular and wholesale lenders started offering SRPs and yield spread premium s to mortgage brokers an explosion took place and now we have fifteen million mortgage brokers, most of whom make a living on very few transactions. The new style mortgage broker - new style meaning since the late 80s - uses yield spread premium s and SRPs to earn many more thousand of dollars per transaction than mortgage brokers of the past.
This practice did not go unnoticed by regulators who decided the consumer had a right to know just how much these mortgage brokers were making on each deal. I understand their concern and you have to appreciate the history of the business to understand why they added the disclosure requirement and why they did NOT include mortgage lenders.
So, unless and until the federal government has some really good way of enforcing a fiduciary requirement on mortgage brokers and thus requiring some proof that the consumer is being well served, they will instead hope to shed light on the transaction for the consumer by making sure the consumer sees the extra cash being earned and perhaps making them think.
Is it fair? I think so. Frankly, I think the business of mortgage brokerage has gotten entirely out of control. In my opinion, consumers would be better served by mortgage brokers who process considerably more transactions and make less per transaction.
Call me old fashioned, that’s ok. As people are saying, old is the “new” new. I buy that.
Diane,
Very interesting post.
You gave a number of 15 million mortgage brokers. Is that number accurate and what was the source?
I was being facetious.
Diane,
Thank God you clarified your comments to be facetious. Now that I know the post was a joke I do not have to ponder just how meaningless it was…
Diane,
After having humor in your response pointed out to me (sorry, I just missed it…), I went back and read it again. This time with the sarcasm necessary to understand the intention. I enjoyed the post and have arranged your comments in the order of hilarious to funny. Thank you for the laughs…
(a Letterman type approach may be in order!)
#1) The ups and downs and market risks associated with the business of mortgage banking is pretty complicated and not easily disclosed to the consumer in any way that would be useful or needed.
#2) Now, why are mortgage brokers required to disclose yield spread premium s and SPRs but not lenders. Well, lenders by their very nature are, well, lenders - real lenders. The business of mortgage banking, servicing and securitizing are part and parcel of what a lender does.
#3) The mortgage broker on the other hand, is never engaged in the business of mortgage banking. Mortgage brokers do not or should not take market risk and do not service. It’s an aberration of the mortgage banking business that mortgage brokers as we know them today even have access to yield spread premium s and SRPs. Those items truly were part and parcel of whole loan mortgage banking transactions between lenders. Lenders selling mortgages and releasing servicing negotiated for service release premiums and yield spread premiums, really just above par pricing. This system simply reflected the movement of pricing through out each day as lenders packaged, committed, negotiated and sold mortgages.
#4) So, unless and until the federal government has some really good way of enforcing a fiduciary requirement on mortgage brokers and thus requiring some proof that the consumer is being well served, they will instead hope to shed light on the transaction for the consumer by making sure the consumer sees the extra cash being earned and perhaps making them think.
#5) Is it fair? I think so. Frankly, I think the business of mortgage brokerage has gotten entirely out of control. In my opinion, consumers would be better served by mortgage brokers who process considerably more transactions and make less per transaction
#6) That all said, it’s real simple. There are good guys and bad guys everywhere. There are well trained people and ignorant people everywhere. It doesn’t matter whether or not they are loan originators working for a lender or independent mortgage brokers.
#7) As to the disclosure issue, the consumer, acting on their own behalf, should focus on the APR and the Good Faith Estimate. The APR is the most important piece of the shopping puzzle because it levels the playing field and eliminates all the toys unscrupulous loan officers can use to make their Good Faith Estimates look lower that the competition.
Thanks for the smiles!!!
I knew right off the number of 15 million mortgage brokers had to be highly exaggerated and I would guess the number is probably somewhere between 500,000 to 750,000.
Anyone have different numbers of this?
If those figures are accurate, what would be the % breakdown of those who disclose & discuss (white hats) vs. those who do not (black hats)
sorry specificity neglected……
I was being facetious with the 15 mill figure. I stand by my remarks. OK now you can start laughing. Ha Ha…..
Look, there are way too many mortgage brokers out there and because of that each one has to make way too much money on each transaction.
So now we have to live with disclosures designed to show consumers that they might be getting rooked.
Perhaps a healthy dose of fiduciary medicine forced down throats by mother government will change the landscape but I doubt it.
At any rate, I think the motives of the commentors here and the author of this blog are honorable. It’s through good thrashing discussions like this one that we find truth and if my old fogie ideas seem hilarious that’s ok. At least I had a chance to throw them inthe ring.
Thanks, gentlemen.
Diane,
Who knows, you may actually be correct in your statement that there are way too many mortgage brokers. I am curious; would the elimination of bad mortgage brokers possibly include some bad mortgage bankers as well?
Interestingly enough, I entered this industry some 13 years ago with a “mortgage banker” and the sentiment was that the Title Industry was the seedy underbelly of the entire industry. Any truth to that statement or are all Title Brokers (Corporately owned & small Mom & Pop shops) seedy? Are there too many Title Brokers?
Fact is, (IMHO), the entire industry needs a major overhaul. Special interest groups with deep pockets and political connections will do their best to keep the status quo. Unfortunately, when it comes to big business, this is the American way.
Then we have the mortgage brokers, bankers, realtors, title agents/title companies, builders, appraisers, etc., which are all a part of the problem. Greed and ineptitude run rampant and there is little likelihood this will change any time soon either.
In business, one often hears the term “a few bad apples”. In the real estate/home loan industry I think it would be more appropriate to replace the word “apples” with “orchards” to get closer to the real scope of the problem.
What I think will and should evolve, will be that the players who are honest, a bit tech savvy and charge reasonable fees for the work they perform, will rise to the top while the rest of the herd begins to thin out.
I again restate the internet will be the vehicle that will drive this trend and those that embrace and know how to correctly use it, will succeed beyond their wildest dreams.
“What I think will and should evolve, will be that the players who are honest, a bit tech savvy and charge reasonable fees for the work they perform, will rise to the top while the rest of the herd begins to thin out. ”
I agree, Jim.
Stephen, yes there are way too many title agents, too. Here’s a quote from The Title Report 4-16-06 issue on the subject:
“Today, nearly 20 percent of all title agents are less than four years old, according to a recent study conducted by October Research Corp. The study concluded many new agents entered the business as lender-based title shops that relied upon the growing mortgage broker community for business. These agents are essentially a one-trick pony doing little else other than lender refi transactions and home-equity work. Many of those transactions are subprime in nature. When the market slows or gets in trouble like it is currently, those agents have little to fall back on to save their business. Alpha agents, on the other hand, are usually well diversified with builder and Realtor business.”
I think economic forces are doing a fairly good job of cleaning house across the board - mortgage brokers, mortgage bankers, and title agents. I wouldn’t be surprised to see a big title underwriter fall either.
The internet has been enormously helpful in moving all the issues forward. I’ve never seen anything quite like this before. What might have taken years is moving with incredible speed.
Just the flow of information and the means of communicating is extraordinary.
I’m sure I’m not the only one seeing government agencies and think tanks reading their blog. These folks seem to be using all resources to understand the issues.
What’s really wonderful is that they are getting the perspective from the street and not just from lobbiests and trade group representatives. I love it.
I assure you I will survive the overhaul. As a matter of fact I am looking forward to it!
Interesting that you should be picking on the banks soley. I agree that they have the PAC that made the change to to yield spread premium disclosure. As both banker AND broker, I have the unique flexibility of shopping loans either direction. Because of this I price my loans in such a way that it does not matter if brokered or the bank product. yield spread premium is not an issue for anyone who can have a frank discussion about how much they make on their clients transactions. Mainly the issue is that people who dont do enough transactions (or are greedy) cannot have that conversation up front. The Bankers should not be feared, but not necessarily trusted completely. If a borrower calls a banker AND a broker, they should be able to tell pretty quicklywhich one is being more honest.
The dirty secrets need not be dirty secrets, Loan Officers just need be honest and work for a fair wage.
Michael,
From your lips to God’s ears!
Michael,
I take it you work for a “net branch” when you say you can either go “either direction”. Which means you can “hide” the overage when you “banker” a loan but must disclose the overage when “broker” a loan…so let me guess how often do you “broker”…uh, never, right? ( Unless your “bank” rate sheet is ridiculously high…at most net branches and “real” banks that’s true…see below)
All things being equal, If “bankering” gets you more money with less “hassle”, then that’s what you’d do, right?
Which is why I say, “Never use a banker”.
Plus are you implying that the telemarkeing boys at Lennox or Countrywide are even told what the “real” or “total” overages are with their “in-house” rate sheets? Of course, not! They are given a Company rate sheet that tells them only part of the overage at each rate being shown…if they really knew the “total” overages their bank was making…they’d all ask for a raise or a bigger comission split!
Bankers, bank employees, or net branch originators can’t disclose what they can’t see! You can’t disclose when you “banker” a loan what you can’t see either. You may with the “banker” rate sheet you get, find that “brokering” the loan is better for the customer, and that’s great because it forces you into a conversation with the client. But for every 1 of you, there is a 100 who go the other direction…
Once again, the big banks need the 3 total points…if I had their overhead, I would too.
But that’s exactly my point: Banks are not the low cost provider of 1st mortgage money in the US…it’s a fact.
The banks themselves knew this fact which is why they spent so much time, energy, and money getting the law changed back in 1999 to exempt them from “total” compensation disclosure laws that the brokers were forced to comply with.
When you are making 2/3 of your income from overage, you certainly don’t want anyone to see it, right. And if the customer won’t ever see it, do think that income stream will grow? Hell, overdraft charges have gone up 400% in 10 years, and banking customers actually get to see that charge. If they aren’t bashful there, they sure as hell aren’t going to be bashful on a charge the customer will never see!
Given these facts…wise consumers should never use a banker for 1st mortgage financing….period.
You took what I wrote a little wrong, I think. I work Brick and Morter, not Net Branch. I agree that the folks at CW and Lenox and several other lenders here ( Seattle) are hiring “monkeys” to take applications at huge fees.
I actually straight broker (not net or correspondent) about 70% of my transactions because I values my clients and I don’t need to hide anything on what I make.
Normally I tear apart the average brokers because I am working for about 1pt (.75%-1.25%) on every deal no matter which way it comes in (upfront or yield spread premium ).
I think that if someone is a true “Loan Officer” they know the cost of the money. If they are any good or if they truly care about their clients, they come to work for someone like me or someone like you. If they are not true Loan Officers, GET OUT of the business and quit making the job harder.
I just dont like being painted with the same general brush and lets not forget that there are a lot of bad brokers out there also.
In the end, I still maintain it comes down to the ethics of the loan officer, whether they be Banker or Broker.
ps. our bank doesnt do checking, just savings and cds. To our advantage also, we can make exceptions and judgement calls that Brokers cannot when we use our internal products (a service that a broker cannot provide), instead of begging someone else’s underwriter at some investor.
Your point of “a lot of bad brokers out there” is certainly not wasted here.
I probably spend more than half my time bashing the bad broker! yield spread premium overcharging, bait n switch, selling the wrong loans etc.
I’ll definitely agree with you there.
However, I will have to disgree when you say, “I still maintain it comes down to the ethics of the loan officer, whether they be Banker or Broker.”
and here’s why: The above statement as I’m sure it applys very well to you…it doesn’t translate at all into the actual marketplace.
And since this blog and website are designed to help consumers, a statement like that just muddys an already muddy pond.
The average consumer doesn’t run into Mike Brown …he runs into the like of the “monkeys” (if I can steal your phrase) in the big banks…and you’ve already admitted they charge “huge fees”.
With that said, a consumer can learn here how to work with a broker like us and get a 1% point loan at a true par rate…all he has to do is stay on track and read!
Thanks for your contributions…look forward to anything you can add on your Seattle market or other happens in your neck of the woods.
Justin B,
I operate a whoelsale mortgage company and have done so for quite some time. Before you give your “mortgage guy” too much credit for no making yield spread on you you need to understand another dirty secret. He may very well be a correspondent lender. I won’t go to into all the details, you can Google correspondent lending to get a better understanding, but the point I am trying to make is that if he is a correspondent lender, he is NOT required to disclose yield spread to you, the borrower. I don’t either way if your “mortgage guy” is correspondent but if he is he might have made 2 or 3 point yield spread off of you without having to disclose it!
Tom,
Thanks for trying to help out Justin B…but if you had read the whole conversation you’d have noticed part of one of my very early post to him that read as follows:
“But be careful Justin, when you look at the HUD1 in the lines 800 looking for the yield spread premium amount…
Remember it will only be there if your originating company brokered the loan to a wholesale lender.
Banks, net branches, and direct lenders are EXEMPT by law from disclosing yield spread premium …so Justin, if that company you used in Utah funds their own loans or is a bank…you could have still got taken!!
You are actually getting all this..and I’m really happy for you. You’ve put in the time and research, educated yourself, kept an open mind, and you are going to be a savvy mortgage consumer from here on out.
Just remember, Never do a loan with a bank or direct lender or a company who funds loans in their own name. Always use a broker.
Tell him you understand yield spread premium and know how to discover it, and won’t tolerate him enriching himself that way.
Negotiate a total compensation amount to him for his service…1% only regardless of the type of loan…that would be fair.
And ask him if he’ll work for that knowing he’ll get no “backend compensation”. Tell him you’ll want to see the HUD a day in advance (Federal law gives you that right) but even prior to that you’ll want a copy of the wholesale lender lock confirmation on the day of lock. Since any yield spread premium be would be disclosed on the lock confirmation, you’d be able to catch any attempts at yield spread premium profiteering earlier than a day before closing.
Any ethical broker would accept these terms.”
Any direct lender incorporates your advice on “correspondent lenders”. And Justin B got it a little later in the thread as well.