Ok, if I read the term “mortgage meltdown” one more time I’m gonna go find that journalist and hold his / her head under water for a while. That dead horse has created such a stink in my office I can’t take it anymore. And all these writers / politicians who think that buying a house once makes them mortgage experts are dangerous to lenders and clients–because Average Andy and Amy out there are beginning to believe that “sweeping reform” really is needed and that anyone who makes a living as a lending professional is out to rip them off, especially via deceptively evil YSPs.
Case in point: San Francisco Chronicle columnist Carol Lloyd blasts the industry for continuing to solicit business despite the “melting down” of the “feeding frenzy” (another phrase that’s ready for retirement). How dare these evil lenders continue to offer products, and expect to be paid for performing a service (Do Ms. Lloyd and her fans work for free?). She implies that California brokers are breaking disclosure laws by not advertising their YSPs, and that spreads can add “more than 1 percent to the interest rate.” Last I checked a 1 point rebate on a 30 year fixed rate loan increased the rate by 125 to 375 bps. Oooohhh. A quarter point equals $33 whole dollars a month on a $200k loan while saving the borrower $2k up front. Not a bad deal. And no one is required to advertise their spreads, only disclose them. Can you imagine if all purveyors of products had to advertise their profit margins?! If every item in a department store came with a HUD-1? That is beyond ridiculous.
So what do we tell the politicians and the public? First, there is nothing wrong with providing the service (originating a loan) for a client and getting paid by the wholesaler. That’s how salespeople earn commissions in other industries. In many cases YSPs benefit the borrower immensely. Many of mine were better able to qualify because I was able to increase their reserves by not taking a commission from them. Borrowers with shorter time-frames can really gain by taking a higher rate and lower upfront costs. Why pay to keep a 30 year rate down when you only keep the house 3 years? I have seen no evidence that commissions collected as YSP’s exceed commissions collected up front from the borrowers. And my cash-strapped first timers felt so ripped off when I got them rebate enough to take care of all their closing costs and impounds that they sent me thank you cards, cookies, and referrals.
So do your part. Educate your real estate agents, your clients, and your representatives. Make sure that borrowers don’t end up being hurt by ill-thought legislation or irresponsible journalism.
Mortgage Industry Professionals. Like what you see?
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12 responses so far ↓
1 Mike // Oct 8, 2007 at 8:11 pm
Gina, welcome to Lenderama! Love your attitude; I’m looking forward to your posts.
2 Bob Williamson, R.E. Broker // Oct 9, 2007 at 10:17 am
Outstanding article Gina !! Very insightful comments. In today’s times people always look for someone to blame when in reality they are
part of the problem !!
3 North Carolina Mortgage // Oct 9, 2007 at 10:58 am
what concerns me is that they’re trying to pass a law that till prohibit all YSP.
this is crazy! I think you’re absolutely correct that EVERYONE should disclose their profits if they have the mortgage lenders do it.
4 Karen Lawson // Oct 10, 2007 at 9:08 am
I have a significant amount of experience working with Fannie Mae’s loss mitigation programs from the mid 1980’s to late 1990’s, and found that the biggest problem with mortgage loans going bad is that people don’t take the time to understand how mortgage loans work. They don’t ask questions of potential lenders, and may not understand the big picture in terms of how mortgage rates and terms can change. Education can solve a lot of problems, and its important for the mortgage lending industry to offer consumer education, but consumers must understand the importance of knowing how their mortgage loan terms can change.Getting caught up in the emotions of buying a new home can lead common sense astray. (” I know the payments will go up in two years, but I’ll worry about that later…”) There is no one answer to solving these problems, but ethical lending and business practices allow mortgage professionals to sleep at night and to assemble and sell sound and productive mortgage loans. At the same time, consumers must realize that taking on a mortgage is a large and long term financial agreement, and that they are responsible for knowing what they’re agreeing to when signing mortgage documents.
5 Howard // Oct 11, 2007 at 6:53 am
The existence of the integrity based mortgage brokers, those who work on behalf of their clients and proceed in their client’s best interest is currently under attack. YSP allows such a broker to offer their client different approaches to the desired financing goal. It is a mistake to single out the Mortgage Broker Community as the root of all mortgage evils. Yes there were many crooks and cons attracted to the business due to insane underwriting standards, rate/margin and pre-pay based commissions being paid by greed addicted lenders and their Wall Street investors. The easy money is gone and with it went “most” of the unethical predatory mortgage brokers. Left holding the bag and reputation issues, the mortgage brokers who actually told their clients they would not participate in putting them into a dangerous loan program just because they “could” qualify. Many actually watched this consumer ignore their warnings and fund the loan with the “other” broker anyway.
The blame can be spread wide and far.
This whole thing is nuts. If the mortgage broker community is made the fall “person” it only benefits the banks and remaining lenders who would now rather not have a good mortgage broker shopping all bank and lender rates while also watching for program pitfalls on your behalf.
Unfortunately there are many who will listen to the politico rhetoric; believing the MBB community as a whole is corrupt and only self interested. I can understand how that has become an incorrect but widely held perception. The regulators of our industry facilitated this; there should have been more stringent licensing and background checks made prior to allowing just anyone to act as a mortgage broker. Just be careful when you walk into one of the banks now running the show for a mortgage. Keep in mind that they designed the programs that they promoted via their free sales force; the mortgage broker community.
6 Jerome Bos // Oct 11, 2007 at 8:03 am
Gina, great job!
7 jeff // Oct 15, 2007 at 5:48 pm
excellent point, for borrowers in trouble working with their current lender is the best option
8 Dana Bain // Nov 8, 2007 at 6:45 pm
Here is an example of: ”
journalist and hold his / her head under water for a while”
Two years ago when the mortgage business was booming we heard certain anecdotal stories about some loan brokers earning $1 million a year or better. Was this fact or fiction? If you have any information about millionaire brokers drop me an e-mail at Paul.Muolo@SourceMedia.com…
The reason I ask the millionaire question is tied to yield-spread premiums. Rep. Barney Frank, chairman of the House Financial Services Committee would like to do away with yield-spread premiums, which has many a broker red with rage. So what exactly is a yield-spread premium? Mortgage professionals — especially brokers — know the answer to that question but I’m not sure Joe Sixpack does. Correct me if I’m wrong but this is how YSPs work: the going rate on a mortgage is, say, 7%. The broker gets a point “upfront.” The point is disclosed on the settlement sheet. Then there’s the “back-end” fee or YSP. Even though the broker can get a loan for the customer for 7% he talks the client into a 7.5% loan for example. The client might agree to this for whatever reason. (Feel free to fill in the blanks.) Because the note rate is 50 basis points higher than the going rate the wholesaler rewards the broker for this extra “yield.” The broker is rewarded through the YSP, which is paid by the wholesaler on the “back-end.” This back-end payment is not disclosed on the settlement sheet and the homebuyer is in the dark. If the YSP was disclosed on the settlement sheet the homebuyer might look at the item and say, “What’s this for?” And the broker might answer: “Because I got you a mortgage at a higher rate.” I’m not taking sides here but this is how the debate is being framed. Are YSPs right or wrong? Should the payment to the broker be disclosed? One thing seems certain: YSPs are the lifeblood of some brokers. If they go away will brokers and the National Association of Mortgage Brokers disappear? You tell me…
9 Howard // Nov 9, 2007 at 6:45 am
Mr. Muolo is all about stirring up enough #!@&* to get a reaction, then he contacts those who react and digs for more #!@&* to write about. Muck Raker extrodinaire.
10 gina gardner // Nov 9, 2007 at 9:27 am
In the first place, the audience here isn’t “joe sixpack.” It’s mortgage professionals who don’t need a lesson in terms of art.
Explanations of YSP from various perspectives for consumers abound. Second, my profit margin is no one’s business but my own, I have one grocer down the street who charges $20 a pound for filet, another down the road who charges $14. I don’t care what their wholesale costs are and I don’t make ridiculous demands that they disclose them. I just buy the meat I feel is the best deal. I don’t mind paying extra for the better service and nicer store, but it’s my choice to exercise. As easy as it is to shop rates these days anti YSP arguments are particularly specious. The only way a borrower will pay too much for financing is by not making use of the avalanch of information already out there.
And yes, I know lenders who are millionnaires now, not one of whom worked less than 60 hours a week for years, worked every open house, attended every closing, invested in marketing, found fabulous assistants and paid them well, and adhered to the highest standards because when the boom ends it’s your loyal, happy clients who will see you through. And that’s not Pollyanna crap. I believe B-Speak refers to it as enlightened self interest.
11 Mike Volpe // Nov 9, 2007 at 12:54 pm
I think you hit the nail on the head when you said these people think they know the industry because they bought a home once.
I think that anyone who doesn’t know the name Lew Ranieri and can explain how he fits into this mortgage crisis shouldn’t be making legislation on it and I know most have never heard of him, let alone know what he did. (he created mortgage backed securities and that is detailed in the book Liar’s Poker)
Second, you are right. Somehow, the politicians think that if mortgage brokers are paid for their services that is wrong but all right for everyone else.
How would a restaurant owner like it if Congress told them that fish must be sold at cost but they can make profit in beef?
Finally, Congress has just as much fault in this mess as the rest of the players. The reason it is so easy to rip someone off is because there is so much paperwork to sign. The reason there is so much paperwork to sign is because of the endless regulations that have been created. How is Congress planning on fixing this mess, more regulation. For the consumer more regulation means,
YOU HAVEN’T SIGNED ENOUGH PAPERWORK YET!!
I don’t think my buddy would appreciate it if I showed up in his lab and started playing with the chemicals, and yet most people see no problem with naive and uneducated legislators messing around in an industry they know nothing about. Here is my definitive piece on the players in this mess and why each is or isn’t targeted…
http://www.proprietornation.blogspot.com/2007/11/from-boon-to-crisis-truth-about.html
12 Dana Bain // Nov 9, 2007 at 11:35 pm
Please find an attempt of an apology from
Paul Muolo National Mortgage News / Source Media
FYI: This is Paul Muolo’s first attempt to apologise
as noted belosw:
This Just In
By Paul Muolo
Readers: You can stop sending me emails on the ‘yield spread premium’ issue. Next weekend in my column I will clarify the issue more but first a short clarification: from what I have been told by the scores of brokers/others sending me emails, the phrase ‘yield spread premium’ does not always show up on the closing documents. Scores of brokers wrote, telling me that the phrase ‘yield spread premium’ does, in fact, show up on the HUD-1 form but on the ‘Good Faith Estimate’ form it might be called something else. (On the GFE is goes by different names, I’m told.) In general, the amount paid from the lender to the broker is included on the ‘paid on closing’ or POC line. I am sincerely sorry for the confusion my column caused. Perhaps, that’s what wrong with the entire debate: brokers, trade officials, academics and politicians refer to it as ‘YSP’ but the phrase ‘YSP’ isn’t necessarily on the GFE. Or is it? Here’s the scary part: from the emails I received it appears that half of all brokers actually explain to the client what the POC line means, while the other half do not. Of course, brokers continue to complain that mortgage bankers do not disclose their servicing-released premiums…
Then as noted below is the 2nd attempt to apologise
http://www.brokeruniverse.com/hearing/
By Paul Muolo
If you thought that yield-spread premiums might be outlawed by Congress, think again. In an interview with National Mortgage News this past week George Hanzimanolis, president of the National Association of Mortgage Brokers, said the trade group has gone over the YSP issue with Rep. Barney Frank, chairman of the House Financial Services, and believes Rep. Frank finally understands YSPs and how they benefit consumers. “He understands the need for it,” said the NAMB chief. For the full story see the Monday edition of NMN. Don’t subscribe? Call: (800) 221-1809…
As for YSPs and how they are disclosed, I didn’t get it right last week. I also got a quick education from several brokers and bankers on disclosures and how YSPs can be used for good. In total, I received 500 e-mails — most of them professional in their tone except for a certain reader who shall remain nameless. Yes, YSPs are disclosed on the HUD-1 form and on the good-faith estimate. The only thing I can say in my defense is that I’ve heard too many stories about some brokers not fully explaining (verbally, that is) the YSP to the consumer prior to closing. Last week, I spent quite a few hours interviewing brokers and bankers about YSPs, including Mr. Hanzimanolis and A.W. Pickel III, the former NAMB chief. One question I asked brokers and bankers is this: does the phrase “yield spread premium” appear on the HUD-1? Mr. Pickel and others told me that it did. So, I went out and got me a HUD-1. Lines 803 - 813 are blank and that’s where the phrase YSP is supposed to appear. “It’s typed in by the banker,” one broker pointed out. Mr. Pickel noted that the YSP language may not necessarily appear on the GFE. “It might be called ‘compensation to the broker’” or something like that, he said. A kind banker/broker named from Virginia named Roland explained that brokers don’t have much control over what goes in the “boxes” on the closing documents. Another pointed out that the mortgage banker (the funder of the loan) controls the docs, not the broker. Roland also said brokers, in general, “don’t need to be making four points on a deal.” That sentiment was echoed by others. But I will concede the argument many brokers made that YSPs (depending on how they are structured) can help consumers get into a house by reducing closing costs. The closing costs are “paid for” by the consumer paying a higher note. The higher the note rate, the higher the yield spread, which is “paid outside of closing” or POC. I have no problem with YSPs — and I hope that any fair-minded politician would feel the same. One thing seems clear: loan brokers that aren’t verbally explaining YSPs (broker compensation, take your pick) to the consumer had better start. I heard from may good brokers out there who feel their reputations — which they’ve worked hard for many years at building — are being in endangered by “bad” brokers who helped facilitate crummy YSP transactions. And finally, the chief complaint I received last week is this: why aren’t mortgage bankers disclosing their servicing-released premium?
——————————————————
Paul,
Your talking about my livelihood as well as numerous other Mortgage Professionals across the country!!!!!
Your miscommunication is totally without merit and erroneous. Regarding “This back-end payment is not disclosed on the settlement sheet and the homebuyer is in the dark. ”
Once again I have attached to this email disclosures on YSP or broker compensation that is explained and given to applicants at
time of application and also reflected on the closing document known as a HUD 1 Statement.
I would strongly suggest that SOURCE MEDIA - James Malkin ( / NATIONAL MORTGAGE NEWS DOES A MAJOR CORRECTION ON
THIS HUGE ERROR ASAP.
My original letter was faxed, email, and mailed to http://www.sourcemedia.com/contact.html
Still seam’s that Mr. Muolo (M&A) Data Editor for National Mtg News / Source Media is questioning that the compensation of a profit by a YSP etc
by the Mortgage Broker community is not being fully disclosed to the “client” as you call it up front. That is where you apparently still don’t get it….
Once again I strongly suggest that you review my attachment as I have sent you on several occasions along with a formal letter from my office requesting
a complete retraction to your major communication error. Your implying that the “client” is not informed on compensation to the Mortgage Broker.
If you did your homework and got your hands on the disclosures as I have attached above you would have never made the implication that the
“reward” as you call it would be in question.
Regards,
( Member of NAMB)
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