Have we been in a crumbling economy in the last few years? What about a crumbling real estate economy in the last 2 years?
In my opinion, I would say yes to both questions.
In some cases, do we have too much government prevention or regulation at times? Jason Crouch wrote an excellent article the other day :
Is Congress Working to Create Yet Another Potential Hurdle to Real Estate Recovery?
In this post, Jason makes a great point about how the government seems to intervene and over regulate, thinking that it will help our economy and potentially our real estate economy. So what is it that Jason brings up and what the government wants to try now? It's eliminating the YSP, which is called yield spread premium.
I wanted to write this post because there was so much information being tossed around that was misleading when it comes to who the government is trying to shut out with eliminating YSP and the fact that a lender could just add more costs.
This post might seem boring, but if you read Jason's post, this could open your eyes even further. If you haven't read his post, please read it before you read this one.
Let's first define YSP - Yield Spread Premium as defined by wikipedia - A “yield spread premium” (YSP) is the money or rebate paid to a mortgage broker for giving a borrower a higher interest rate on a loan in exchange for lower up front costs... This “may [be used to] wipe out or offset other loan costs,..... The YSP is derived through the realization of a market 'price' for a loan that is above 100%.
Myths and Misconceptions about Yield Spread Premiums -YSP-
Major misconception - Congress in the last year has gone after YSP in general, and not just those brokers. Yes, this was true in previous years that the mortgage brokers were the main target by the larger banks, but their focus has changed 100%.
Mortgage Brokers aren't the only ones that receive yield spread premiums. Mortgage Bankers receive the same. The difference is that the mortgage broker has to disclose the YSP that they make on each loan and the mortgage banker doesn't. There are a few different types of mortgage bankers. Two examples :
Infinity Home Mortgage Company, a company where I work, we underwrite our own loans and close them in our name. But we sell the loan on the secondary market.
Mortgage companies such as Wells Fargo or Bank of America do the same as we do, except that they service their own loans. But no matter who you use, we all still have to abide by the same regular guidelines that are set out for such types of loans as FHA loans, conventional loans, VA loans, and USDA loans.
Overall, the yield spread premium (YSP) is based on how the pricing is mandated through the investors on Wall Street who sell pools of loans. Each of these pools are sold as being securitized on the secondary market. All it comes down to is who wants to sell what rate at what price or profit margin to the originating mortgage company, no matter if they are a broker or banker.
The bottom line, the higher the interest rate, the higher the rebate that the lender will receive for such mortgage interest rate. And let's not confuse this with SRP's, which are called service release premiums that banks and brokers also receive.
Misconceptions on the fact that lenders could just charge more fees
Another misconception that I read in Jason's post and in many of the comments was that if the mortgage broker or the mortgage banker couldn't charge the yield spread premium, that they would just raise the costs of the loan. Which would mean to add more lender fees and or points. This might sound good in theory and could happen, but depending on the State or the loan amount, that lender might not be able to add more costs. Or in some cases, refuse lending to that specific person based on the loan amount.
What I am talking about is what is called a high cost loan. There is a term, section 32 loans, which stated that any loan that resulted in anything over 7.99 percent in fees and costs to the borrower, that this was illegal. In the last 7 years or so, many states have reduced this on a state level and not on a federal level. Let me explain further.
In the state of New Jersey, our high cost is considered anything over 4.25 percent in total lender fees or costs. In other states such as Florida (5.00%), Pennsylvania (5.00%), and Georgia (4.99%), you can see that it varies and is much lower than the Federal Government's definition of High Cost loans.
One thing that many of you must realize is that there are some other fees that are associated with my percentage when it comes to high cost loans. Two fees that jump out are settlement/closing fees and any lawyer fees. So it's just not fees charged by the lender.
Summary : So how can this change on how some mortgages could possibly be refused to certain borrowers? Let's safely assume that every lender has a $4,500 profit margin on every loan, and this is to include all lender fees that are associated with mortgage financing.
Example : A borrower trying to obtain a $100,000 mortgage as opposed to a $300,000 mortgage.
If my high cost is 5%, that means that I can't make more than 5%, to include the closing fee associated with the title company and or a lawyer's fee. Let's say the lawyer's fee was $500. So in this example, if I was getting an additional 1 point, aka YSP, for an interest rate of 5.5%, which would keep the borrower's cost down, I would now have to charge this additional 1 point. But wait, my high cost is 5%, so that means I can't charge anything extra without going over the mandated high cost of 5%. Hey, good for the borrower, because they might get a cheaper mortgage. But what happens if the mortgage profits are driven down far enough to where it doesn't make sense for that lender to even do the deal. Then what happens to the borrower? No financing options? Maybe so....
If the government steps in and regulates YSP, as Jason stated in his post, this could have another major affect on our housing economy and on our economy in general.
Your thoughts?
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Copyright © 2010 by Jeff Belonger of Infinity Home Mortgage Company, Inc
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Follow me on:
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For more information on FHA loans, please go to this link. The FHA Expert
For important mortgage insight to watch for, please read : Consumers need to be aware of these Red Flags!
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Copyright © 2011 by Jeff Belonger of Infinity Home Mortgage Company, Inc
I would prefer that they just stop trying to regulate the real estate industry any farther. They have already helped with the GFE. They might want to leave well enough alone. They didn't help us out with the banking industry bailout. The more they get their tiny little brains and tiny little fingers in it, it seems to be the worse for us. Fairly soon, Google and the banks will be the realtors and we will all say, "Remember when....".
I differ on Jason's view that the government thinks their new requlations will help our economy and potentially our real estate economy. That may be the Koolaid swallowed by a few starry eyed junior congressmen but seasoned congressional veterans know the banks control their reelection dollars and if they want to be reelected they will kiss banking's sweaty ass.
The new regulations concerning YSP and the GFE are primarily moves to provide banks with additional market share at the expense of mortgage brokers and small and medium sized mortgage banks. Prior to the downturn, this group controlled the vast majority of American home loans and banks want it.
Good point about Google and the banks. Unfortunately when the real estate industry figures it out there will probably be no longer an industry.
Came over from Jason's post. A really good read. I think it's nuts. I'm not sure the Realtor community understands. I bet they'd freak out if we all went to 20% down payment required.
Jeff, we had a little meeting about the new HUD-1 disclosure rules the other day. Definitely making it a bit more uncomfortable for brokers as compared to banks.
Jeff - Thanks for the information. The following is the content of my comment on Jason's post:
"Jason - Thank you for the thoughtful post. The banning of ysp's has been in the wind for quite a while now. Obviously this would have a dramatic impact on CONSUMER CHOICE. Most, if not all, of the refinances Cari and I have done over the last year have used the ysp component to meet the needs of the client. Some no point/no fee and others a derivative thereof. Most of the politicians involved in this mess have very deep ties to our current problems in the Financial Industry (Frank, Cuomo et. al.) and abuses at HUD, Fannie & Freddie. I am certain that a lot of the problems in the credit markets were/are a direct result of OVER REGULATION to begin with. Thanks again. ~Doug"
Nothing gets me quite as upset as Capital Market Fiddling under the guise of some sort of financial market repair. Their motives are quite transparent for those of us who rely on the mortgage market for a living.
DON.... . I don't think you are the only one that wishes this... lol Seriously, Jason Crouch's post brings up a very good point, that the gov't keeps trying to help and regulate, when it all seems to backfire or just be 'wrong thinking'. They need to stop assuming... what they are trying to do now to protect the homebuyer? Some of this should had been done 5 years ago.... it's fine now, leave it alone. thanks
BILL.... . I would agree that there are some very smart congress people and that the banks control some power... but all it takes is a majority. I think the new GFE is screwed up. Who the hell did they have test these things? I think the MDIA act was excellent... but the politicians keep pushing for more and it will hurt us, not help us. Overall, I know, not think, that if congress is able to kill YSP that would affect both the banker and the broker, this will hurt the industry as a whole. Socialism is starring us in the face. thanks for your input..
MIKE.... . it's beyond nuts.... but you lost me with this comment.. "I bet they'd freak out if we all went to 20% down payment required." Who is they? The gov't? And why would they freak? Just curious..
GABE.... . could you elaborate on that? The mortgage broker always had to disclose YSP, so why is this new GFE any different for a broker? Just curious, because I would like to know what was said in your little meeting and who actually stated this. Thanks
CARI & DOUG... . Doug... what you stated in your comment to Jason pretty much hit a lot of things on the head... some of these messes go all the back to the Clinto administration, when they forced Fannie and Freddie to extend credit to more borrowers, when they opened up financing to 100%... and with debt-to-income ratios of 55%. The gov't needs to back down some in many areas... at least this is my opinion. thanks
Jeff,
thanks as always for the insightful post. Washington always seems to over correct. In all of history the market has been able to correct itself and I suspect this time, even though painful, we will be able to survive this and come out the better.
I'm not going to argue for or against banning YSP's but I am going to make one observation. Our MLS will not accept "net listings" and they are in fact illegal in most states, being deemed unethical. For those that may not be familiar with the term, a net listing is where a seller says "Get me $$$ and anything over that is your compensation. What's the difference between my taking a net listing and marketing to a buyer for the most I can get over that amount with the difference going in my pocket and a mortgage broker building a YSP into a loan???
Jeff: I'm going to keep my nose out of your specialty. But, I will say that the government has not done anybody any good by getting involved. HVCC ring a recent bell? Let's just make things more complicated & costly for the consumer & say it's for their benefit. Thanks for your appreciated insight.
Jeff: Good thoughts. I don't think taking away YSP will slow the market down. The market really isn't that robust right now. What taking away YSP will do is continue the exodus of loan officers from the business. It may make it more expensive for the consumer in that the LO will charge more in origination although that's a two-headed sword as well. There will always be somone willing to undercut someone else. I do agree with you about government interference. I'm a free market guy and would like to see what would happen if things were left alone. This contraction was bound to happen. Every boom is usually followed by a downturn. Do I think it's good that there are less of us around? Obviously, it means less competition although I have seen some good people go by the wayside as they just weren't making enough money any more and were too frustrated by HVCC, the new GFE, National Mortgage Licensing, etc., etc. Thanks for the post. As always, well thought out and insightful!
So, how does obtaining a hard money loan with 3 -4 points of the loan work? If the borrower is willing to pay a higher cost to close the deal, is section 32 going to prevent him/her from securing a loan?
I'm for eliminating YSP's and giving the borrower the lowest rate possible, anything more is gouging, don't you agree?
Banks should disclose their RSP to the borrower, yet until the loans are packaged and resold, they won't know that amount, wouldn't they? Perhaps a range based upon past performance might be appropriate, however, with government regulation. compliance issues are mandated so all mortgage companies, unlike banks must adhere to the same rules and regulations, don't they?
Now to level the playing field, the government should regulate the banks and compel them to disclose their RSP and/or refund it to the borrower, shouldn't they? So has our government gone far enough?
Thank you for taking the time to write such a detailed post. Every time I read one of these, I understand a little more. But I've ALWAYS believed that the less the government gets in our lives, the better off we are anyway.
Re: Greg Schoh comment
Greg to answer your question: Let's Level the playing field. You only can make 1% of the sales Price.
It would be Illegal for you to get anything above that!
Could you run your business and the costs associated with it from that 1%- minus your commission split?
If you own the company can run your business, pay all it's expeses and pay out commission splits from the 1%?
If you can that means you would be making easily 40-70% less than what you are used to!
What kind of service do you think you will provide for that kind of money?
That is why the HVCC doesn't work- the appraisers are getting paid 50% less than what they used to getting.
So they don't go that extra step to get a real value like they did before. There attitude for the most part is: "you want a $200.00 Appraisal, here you go- This is what they look like and don't rush me"!
The bottom Line is that you get what you pay for!
Plus I can get paid on the back-end and still beat a Bank's Par Rate any day of the week!
I'm not a Broker, but these rule changes will affect us all!
I will get to everyones comment later today... but I wanted to address Kimo's comment first, comment #11.
KIMO .... . I am not trying to single you out, but because I feel I need to address your comment, because you bring up something that so many on Capital Hill agree with. You stated this.... "I'm for eliminating YSP's and giving the borrower the lowest rate possible, anything more is gouging, don't you agree?"
No, I disagree 110%... and here is why. You not only eliminate free market in a certain sense, but now you want me to work for free? Here is a great example and I had planned on writing a blog about this at the end of the week. I will be using a $200,000 loan amount.
Let's say pricing now is : 5.50% and my YSP is 1.6 pts. My SRP is 2 pts. That means that I would be making a total of 3.6 pts on the deal without any points or lender costs upfront. That is a total gross profit of $7,200. Yet, in most lending cases, even if you don't see it on paper, it costs the lender about $1,200 per loan, even the big banks such as Wells Fargo and Bank of America. It's built in one way or another. So, if I take that $1,200 out, my profit margin is now $6,000. Let's say that my company and myself need to bring in at least $4,500 total profit. That leaves me with $1,500. I can now give that borrower a lender credit of $1,500.
If you eliminate YSP, that means I can now only make $4,000 based on my SRP's. Wait, I needed to make $4,500 and I have $1,200 worth of hard costs... that now means that my profit is now $2,800 and that I now need to make up $1,700. That means I now need to charge the borrower an additional $1,700.
Now, I could cut my profit margin, which some have.. but the question is, how far does one cut it? I need to make something. Yes, we do have the problems of some lenders and loan officers that gouge people... but wait, can't they shop? yes they can and the new GFE even has a chart at the bottom of page 3, showing the borrower that they can compare costs and loans.
Overall.. what if the gov't said, hey realtor, you can now only make a total of 4%? I see some realtors that actually charge a total of 7% or 8%. Yes, 6% is standard and I see some that charge less. But this all goes back to free enterprise and shopping for the best costs and or services.
In regards to banks, that they should disclose the YSP? I have written about this and I will find the link. Overall... if I am giving you a better rate and less costs than someone that discloses the YSP, why does it really matter. What comes with my costs are my services, excellent knowledge, and pure educating the borrower. You won't get that if you allow to cut profit and make it a level playing field for all. If the gov't told all lenders that you can only make $3,000 per deal, no matter the size of the loan, etc, etc... I can tell you this, even though it's my opinion... you will have even more of a mess. More loan officers will not be explaining things fully, not taking the time to explain things... or giving the borrower very good service. In my opinion, it will become a sweat shop per se... like a 'boiler room'.... everyone will be just trying to get the most borrowers, telling them what they want to hear, just to get a deal in... just so they can get more $2,000 paying clients... it will go back to the old theory, for me to make more money, i need more clients. It might sound good in theory to the borrower, keeping their cost down... BUT.. will it help them in the long run, if that loan officer doesn't take the time to go through that borrower's goals? To find the right fit for them? To educate them? Not if you eliminate profit... I could give you plenty of examples... here is a quick one that I could think of.
If I am making quality cars.... and it might cost you $5,000, but it will last long... yet my competition is make crappy cars, but charging you $2,000... yet, you need a new car in 2 years or need new parts sooner... that could potentially cost you more in the long one.. same with mortgages. There is a lot more than just quoting a rate... a lot more.
Or maybe a better example... Lawyers... one lawyer charges $100 an hour, but you get excellent service and great knowledge and expertise. The lawyer down the street charges $20 bucks an hour... but they are slow in returning calls... really have no clue, and in most cases, you will end up losing. How does that $20 an hour guy help you, besides saving you more money upfront. What about the long term effects? That is what I am trying to convey here...
Overall... You stated this at the end... "Now to level the playing field, the government should regulate the banks and compel them to disclose their RSP and/or refund it to the borrower, shouldn't they?"
I don't think price fixing in this industry is the wise thing.... if I refund my YSP to the borrower, using my examples above, I now will have to get that extra monies from some where else. Who do you think will pay for it? the borrower... even if I get it from the seller. ... My question to you would then be... how far do we go in chopping my profit? Do you expect me to work for free? Would you work for free? How much do you value your services should be the question. Hence why free market in this case should not be messed with, interfered with. again, I will be writing about this in a few days. thanks for your input and feedback. .. I do appreciate it.
I will admit, I sometimes babble when trying to get my point across… you want a simple, yet excellent example to what I was trying to say? I just read this after I submitted my comment.. Please read this comment by Ben Yost…
Ben Yost's comment...
The government continues to slow the housing industry because the more they lend the more is unknown. Only time will tell when things will turn around in our industry.
Jeff, with the new GFE out there, YSP or rebate is now going to the borrower as a credit. The whole issue of YSP should now be off the table and this new GFE was actually a good thing that the Feds came up with Jan 1. Of course those idiots in Washington are always great at postering and clambering to fight and fix last years problem, when some of them equated the "subprime crisis" solely with YSP. I will not even waste my breath trying to explain that one. Anyways, the whole issue of YSP should be resolved now on all fronts as it is transparent to the borrower where these charges are coming from. The one issue i have is that the APR will always be higher on a broker GFE versus a banker GFE because you folks can hide it still. Anyways, i think Obama and his clan of "no private job experience" buddies need to go take a up a fight with more pressing matters right now.
Cheers
This has nothing to do with transparency, if it did then all lenders would have to play by the same exact rules but that's not the case. This has nothing to do with protecting consumers either.
The whole darn thing is a cheap trick divert market share to Banks who have historically lagged behind Brokers (and for good reason). This is a "fix for the fix". The whole bailout thing was bad business just like the Cash 4 Clunkers thing. Plain stupidity.
The Govt takes a huge stake in GM so it needs consumers to buy cars to make it look like a smart plan after the fact. Now the Govt has a huge stake in Banks so it needs consumers to take their business there to make it look like it was a smart plan after the fact. Not a thought given to how many people will get hurt by this, the only concern is that Banks stay in business long enough to pay back the TARP/Bailout money.
At the end of the day, "we the people" always lose from this kind of Govt. meddling.
Well bankers can afford to put their lenders on salary that's why I mentioned the other day that this is another ploy to give more power to the corporate direct lender.
They are trying to push the brokers out of business. While my favorite lender is a BOA lender (I know, weird cuz most aren't all that and a bag of chips,) I do believe in free market and competition.
I believe everyone should disclose their YSP AND it shouldn't be regulated.
Unfortunately I don't sit in office and have a corporate lobbyist stuffing dollars in my g-string so I don't know how much we can do to change it.
All the bull crap that has been for "positive changes" within our declining markets has been in favor of big corporate entities. Anyone notice that?
Jeff,
Great post. I listened to an industry conference call last week between Barry Habib from Mortgage Market Guide (along with Sue Woodard) and Federal Reserve lawyer Paul Mondor. The call discussed R1366, which is the Federal Reserves's proposal of potential changes to Reg Z. Paul Mondor helped to author R1366. The call was interesting because Paul (from the Fed) said they are not so much as trying to eliminate YSP as they are trying to regulate how a loan officer gets paid. A loan originator would need to charge the same amount on every loan, and may or may not depend on the size of the loan. For example, if I have a contract with the mortgage bank I work for to make $4,000 per loan, then I could not make more OR less than that amount on any loan. I would need to quote the same profit on a 50% LTV conventional loan as I would for a 96.5% LTV FHA with 5 self employed borrowers. I would quote the same profit for a $1,000,000 loan as on an $80,000 loan. Of course, this could be a problem if I have locked in a profit that is not allowed per section 32 for a small loan amount. Paul did say that the amount the loan is paid could come from a combination of points and SRP from the bank.
The comment period for R1366 is already over and the proposed changes haven't been finalized yet, but if this is where we're headed, it's going to be a mess.
Great job Jeff. If this goes through this is just one more way that the powers in Washington will mess up another part of the economy.
Great Post Jeff. Like others here I feel that the banks, through their lobbyists (ratio of 5:1 to other PAC groups; second only to healthcare industry), are trying to control mortgage orgination by getting rid of the small local broker offices. IMHO, when they do they'll use this new power to rid themselves of local real estate offices by creating subsidary real estate offices on a national basis. I have already started seeing TV ads about "the no money down loans with 1 year 0 interest" being mandated to end this month; no matter what type of loan you get (furniture, auto, short term, etc) the consumer has to put 10% down payment. This maybe the proverbial "hand writing on the wall", only time will tell.
Jeff - thanks for taking the time to explain this...most Realtors do not understand YSP and although I understand it more than most, it is confusing still. My opinion - the government needs to keep their hands out of the real estate industry right now...between HVCC, GFE and the bailouts they have done enough already! We certainly are not a free market economy any longer! And the government seems to be doing everything they can do to slow the recovery...
We should not get rid of anything, either for the bank or the mortgage broker. But, everyone should have to disclose everything. And that, is a fair and level playing field, but one where, I, as a mortgage lender will make what I am worth. Nuf said!
So, because you need to make more profit to operate your business, you choose to increase the rate to your customer and get YSP, is that right? You're saying that every transaction must produce a fixed amount of gross profit based on your fixed percentage cost of doing business regardless of the amount of the transaction, however, with a minimum dollar cost otherwise, correct?
So, instead of doing more business with less profit, working volume, you're opting to making more profit by increasing the rate to your customer and that is what you call free enterprise or buyer beware.
Have you reversed your role and put yourself in the customers position? How would you feel after you discovered the rate you were charged was higher than you could have gotten for less had you not trusted the loan officer and shopped until you dropped.
The fact is YSP is simply rewarding the LO to extract a higher rate from the borrower, isn't it? So tell me, would you want your family, or your mom and dad to pay a higher rate so you can receive a YSP? If your answer is yes to that question, our discussion is final, however if your answer is no, than why isn't it good for your family but good for your customers? There is nothing confusing about YSP except for the G factor.
Jeff,
Great Post as always. You brought up many points that many do not understand about our business.
Kimo- I am not understanding why you are questioning Jeffs right to make profit. I know that every market is different and costs of doing business vary from state to state and that can make a huge difference. I have known Jeff for years and can tell you he is not known in the industry for having inflated rates and fees. Why? Bcause competition keeps the price in check. Also, if Jeff chooses to charge more than his competition and clients choose to pay him more for his service does that make it wrong? Some folks shop at Walmart, others choose Target and some choose Norstrom's. 3 very different markets. The consumer has a right to choose. Now I think Jeff's point is by eliminating YSP you are eliminating choices for the consumer and that is where it hurts our market. Just my 2 cents.
Good post Jeff. YSP, as you know, is misunderstood by many. It's obvious from Kimo's post he doesn't realize YSP isn't added to the retail rate. I'm with someone who commented on a recent post of mine, a respected real estate agent who fully understands YSP, who said we should either make the banks disclose or nobody disclose. Just having the brokers disclose confuses even smart people into believing it is a fee only brokers have when we all know bankers make more profit than brokers and brokers have to be competitive in rate just to survive.
@Kimo- Why do you think Jeff, or any broker/mortgage banker needs more profit to operate than ANY bank?
"So, instead of doing more business with less profit, working volume..."
Working volume- as in providing less service because you simply don't have time to answer a customer's questions when you are operating a sweatshop ala Countrywide. I'd say the consumer deserves to be able to make that choice, especially when a very good loan officer can often deliver the service yet keep the cost equal or less- as Jeff states in his comment #14.
Indeed, what makes you think "shopping until you drop" will actually achieve the result of finding a cheaper loan? Most often it results in getting the worst service on a deal that doesn't even close. What's the value in that, and where are the cost savings of losing your earnest money deposit when your contract expires?
Let's leave the wholesale pricing incentive that YSP provides (BTW- your grocer can also charge you more for that gallon of milk and make, say it isn't so, more profit!) and let the customer decide what they want to pay for. Having the government continue to make our decisions for us is leading us down a dangerous path.
Gerry Suarez, Jr.
Your FHA Loan Pro
The best part of this current mess we are in is that people are getting active and speaking out. thank you for this post, and the responses; clearing up some misconceptions I had on what is going on. It's Congress that's broken and that's where all change needs to begin.
Jeff, I read Jason's post when it was 1st made featured and it was very eye opening. Your post has really expanded on the topic and opened my eyes further to the negative impact that this legislation could cause. As a Realtor, we are not always privvy to the inner workings of mortgages and their fees, so it's nice to learn a little more about your world.