Call this part 2 in my rant on the misperceptions of the mortgage industry. Again, I’m speaking to consumers and YSP Haters. I do not originate mortgages. Honestly I don’t care if YSP exists or not. Loan originators will find another way to do business, and lenderama will help them down the path.
I worked as a sales representative for three different lenders. We were the ones writing those YSP checks. While many YSP haters will tell you that fee is only supposed to be used to help borrowers pay down their closing costs, that would be news to just about every sales rep I ever met who worked for a lender. Here’s the top five REAL reasons why lenders pay brokers Yield Spread Premium.
The cost of employment - Why hire a loan originator when you can just pay a contractor (broker) to originate for you? Hiring a staff of loan officer’s is more expensive than you think. You have to train them, most of them wash out, and for every good LO, there’s a demand for a processor to to package their files. Lenders save a lot of money by not hiring all these people, but they also realize that the broker has assumed these costs. So they offer YSP to help compensate them.
The cost of marketing - How many advertisements have you ever seen for Taylor Bean and Whitaker? If your a consumer, you’ve likely never heard of them. TB&W doesn’t have a big advertising budget. Instead they pay Mortgage Brokers to deliver loans for them.
Tough deals - It wasn’t that long ago that people actually got declined for many loans. When I cut my teeth as an LO back in the early nineties, it was very common that we turned away business. It wasn’t that a loan couldn’t be done, it’s just that it was going to take two or three times as much work and it was twice as likely to fall though. It wasn’t worth it. Loan originators are paid on commission, the best way to make these loans more worthwhile is to increase the reward.
Profitability - It’s easy to bag on the broker for collecting a YSP, but the real money maker is the servicing lender who collects more interest, every month, for the life of the loan.
Competition - Lender A has good products and service, and so does Lender B. So why switch? One way to get a broker to move from A to B is to pay them more. YSP is the easiest way to do that.
That’s it. YSP was never designed to help consumers. If it were, lenders would simply require that YSP be used that way. They do in certain types of loans. They don’t in nearly all others. You might look at that list and conclude that the customer is obviously loosing in the deal. But what you haven’t stopped to consider is that lenders can operate more efficiently by working with a broker. As a result, they can offer a broker a far lower base interest rate.
So yeah, the broker is padding his pocket, but the end result is still a rate that’s competitive, or often better than what a retail lender or banker can offer.
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{ 6 comments… read them below or add one }
I wholeheartedly agree and I’m not a mortgage broker!
What I disagree with is the guys that used to call us and scream at us for showing the YSP in the instructions and/or wanted us to hide it or even drop it off of the HUD1. If they had been honest with their customers and explained their value and the benefits of the new loan, there shouldn’t be an issue with the cost of the loan. OTOH, I hate asshats that don’t want to pay a broker their commission, be it a real estate broker, a stock broker or a mortgage broker. Y’all provide a service and deserve to be paid.
I’m sorry, Todd, but you are incorrect when you say, “YSP was never designed to help consumers.”
You cut your teeth as a LO in the nineties. I cut my teeth as a LO in the seventies. We were writing those YSP checks in the eighties and very few at that.
Now before you get your dander up, I will acknowledge that the concept of the YSP morphed into what you describe, so I’ll not argue that you are wrong about the current YSP definition as it has been sold to lenders and brokers.
I’m just poking my two cents in here to make sure everyone DOES know that the YSP is a secondary market pricing mechanism. It’s just part of the see-saw of pricing around par that is the daily life of a secondary market manager.
In ye ole days, retail mortgage brokers just didn’t get involved with SRP or YSP. Notice I said retail.
The mortgage broker who faced a consumer and acted as an extension into the marketplace for mortgage bankers made their money in the discount points or origination fees.
The wholesale origination machine introduced YSP into the hands of retail mortgage brokers as a tool to be used to off-set closing costs because retail mortgage lenders, namely banks, were offering such products.
Look how successful BOA is right now with their no cost mortgage. THAT’S the reason YSP entered the toolbox of the retail mortgage broker.
It morphed into an entitlement.
Jillayne is right on when she says the the world is weary. The mortgage broker establishment must realize that YES, everyone knows that there are good mortgage brokers and bad mortgage brokers but they can’t control the bad guys without putting it to the good guys.
I’m in the same boat. I’m a title agent. Most title agents are incompetent referral machine slaves and many of them are crooks.
All of my business plans have had to be altered to walk the walk of a good guy being pushed and shoved by the market dynamics and regulatory backlash caused entirely by a bunch of freakin low lifes.
Do I like it? Can I change it? No. No.
I have to surf this wave and adjust to survive and I will because I know that in the end there is a demographic that wants and needs my services.
So, I humbly suggest that mortgage brokers simply acknowledge that it’s not about hating YSP so much as it is clarifying the bottom line for consumers in a way that they can understand.
The ball in this game is the consumer’s safety and we just have to accept that that is where all eyes should rest.
RESPRO and NAMB and ALTA and NAR, et al., will try to spin the final rules but nobody will find happiness here. We’ve all been dealt cards in the final round of a game that has been going on now for years. The casino is getting near quitting time and the dealer is grouchy and the wait staff just wants to go home. It’s not an environment conducive to tactics which seek to delay the game.
The sport at this point is one of massaging nuances because the weary want to go home. Little things might be doable. Big stuff, like the new GFE and closing script and new HUD-1 ain’t gonna change.
Go into this round asking for a delay of game and you’re likely to get nothing. Go into the round saying, great job but maybe we can work out this little detail, and you are much more likely to get an agreement and get on with all of our lives.
We need closure here. We need a program that everyone can rally around and just get back to business.
I think the good guys will have no problem here, they’ll adjust. The bad guys will comply or leave the business.
Todd, you are once again Spot on, I wish I could have wrote the post but you expain it so clear. And Diana you as well have some great posts. the good brokers or originators will always be around because they can spell it out to the borrower, the other guys are just triing to work the system and they will not be here for long im sure.
As a broker in the nineties I never had a client gripe about YSP when it was disclosed on the HUD-1. If they closed a loan with me it was because my pricing was competitive and my service was red-carpet. I never told them up front that I was getting a commission but come on, they couldn’t have thought that I was working for nothing. And I offered them several rates and pricing options — paying fees, not paying fees, and having me absorb some of the prepaid items too. If the deal was fair that was all that mattered.
These YSP haters are just trying to get borrowers worked up over something they never had a problem with. YSP rabble-rowsers’ strategy is to establish themselves as the only “honorable” ones out there, rallying around the consumer and “educating” him. It’s just a cheap marketing ploy.
Whenever I had a borrower — who I otherwise got along with and knew I was giving a good deal — get a little over-zealous negotiating with me I asked him / her one question: do YOU work for free? No? Then why would you expect ME to?
Gina great comment, we as originators we do not work for free. It does really make me mad when threw the process the borrower never once says a thing about the rate or YSP because he thinks he/she is getting a good deal but once they see the HUD its like the sky fell and everyting changed they are still getting the same great deal that they thought they were getting only there is now YSP and so they think they are getting taken for a ride when nothing has changed.
I’m still going to have to disagree with you Diane. The main closing costs that were being deferred by YSP in the eighties were the 2-3 discount points that brokers were charging for their commission.
Either way, this was just a way to pay the broker. In the early nineties, rates plummeted so far and so fast that brokers found they could pay closing costs, pay themselves, AND refinance a client’s loan for a lower rate than they had before.
Brokers spun YSP as a way do no cost loans, but that’s not the reason it was created.
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