I originated mortgages full time for 5 years in the early 2000s. I worked for both mortgage brokers, who place loans with 3rd party lenders, and, as they are termed in New York, mortgage bankers, who are direct lenders. Up until recently, it was hard for a guy off the street to distinguish between the two- the mortgage application verbiage used and process, to the borrower, was pretty much the same. Even as a loan officer, I saw enormous parallels: the qualifying software was the same, and the rates and pay structure were similar. We either earned money on the front end paid directly by the borrower, often referred to as "points," or were paid on the back end by the lender in the form of a Yield Spread Premium (YSP) for brokers or a Service Release Premium (SRP) for bankers. The nomenclature differed, but the net effect was the same: the higher the interest rate, the higher the commission (premium).
When the Subprime Meltdown hit in 2007 and the Financial Crisis hit in 2008, mortgage brokers carried the PR chum bucket for bad loans. Even though Ameriquest, Countrywide and dozens of other major players who were direct lenders failed, it was mortgage brokers, and their yield spread premiums that were often the culprit in both the cyber world and polite company. There were arguments over the true purpose of the YSP.
The banking industry and major media, in their best mad as hell voices, lobbied hard for YSP to be outlawed, and this past week, they succeeded. Yield Spread Premiums are now against the law.
From the Fed:
Today, lenders commonly pay loan originators more compensation if the borrower accepts an interest rate higher than the rate required by the lender (commonly referred to as a "yield spread premium"). Under the final rule, however, a loan originator may not receive compensation that is based on the interest rate or other loan terms. This will prevent loan originators from increasing their own compensation by raising the consumers' loan costs, such as by increasing the interest rate or points. Loan originators can continue to receive compensation that is based on a percentage of the loan amount, which is a common practice.
As with many governmental "solutions," this is outwardly politically expedient but will only hurt the public in the end. Why? Because the playing field is now completely tilted in the favor of large lenders, who keep their version of YSP. Smaller lending entities who previously dealt with brokers will be elbowed out of market share, and mortgage brokers now play by rules so severely tilted against them that they will go out of business. The baby has been thrown out with the bathwater, because brokerages, for all their flaws, were serving a need the bigger banks would often not.
The Service Release Premium, the banker's equivalent to the Yield Spread Premium, is still legal. Direct lenders get to play by their own rules now. Whether you agree with the YSP or not, banks still have the back end option with SRP. Brokers, who often had the capacity to place a loan with literally dozens of lenders, do not. Whatever abuse there was with YSP is still available to lenders in the form of SRP. The lobbyists saw to that. It wasn't enough that YSP was required to be disclosed on the HUD-1 while the bankers SRP was not; they had to kill it, and cut the jugular of brokers. Who needs competition?
Here's how it plays out for the borrowers in 2011: If you have good credit and are a W-2 employee, you
can call your own shots the same way it has always been. But if you are self employed, have less than great credit, or need a niche product in our diverse society, you'll have no mortgage broker to find that specialty loan. Instead, you'll have your choice between a large, monolithic lender's single portfolio and a small community bank, both of whom will scoop the cream off the top and throw the rest back, with the exception of their Community Reinvestment Act requirements. There will be no mortgage broker to find your niche product because they won't be able to operate profitably.
Banks already adjusted to the stupid things they were doing 5 years ago. Underwriting a loan now is as hard as it ever was prior to the Federal Housing Administration's genesis in the 1930s. We are rapidly heading toward a world where large big box lenders will be like huge telecoms, with consumers choosing either their loan portfolio or renting. Smaller community banks will be there for well credentialed people, and ironically, the folks who screamed about killing those evil brokers who were opening doors the big banks wouldn't open, will lament their extinction. Who loses? You. Big banks just did an end around past their most egregious offenses and the government played Washington General defense for us.
Happy?
My prior posts on Yield Spread Premium
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Just what we need, more diffiuclty for the housing market. thanks for sharing.
Spoken like a true insider. Thanks for your insights. I never knew.
Wow! Very enlightening, Phil. Clear and concise… easy to understand. Thanks for the insight. (And bookmarked for future reference.)
YSP's, under this guise of consumer protection seems perfectly appropriate to the misinformed. The future ramifications appear to be a sort of reverse-transparency where we'll end up being trampled under foot.
We are learning the answer to the question, "What if law professors ran the country?"
This is another way to "help" the consumer that will ultimately hurt the consumer.
Featured in the Group "Whacked!!!
Hi Phil : What an outstanding job explaining the stupidity of the Fed and consumer lobby groups who I won't mention by name ACORN.
I love this post!
There still is some verbiage that hasn't been clarified: The final rule applies to loan originators, which are defined to include mortgage brokers, including mortgage broker companies that close loans in their own names in table funded transactions, and employees of creditors that originate loans (e.g., loan officers). Thus, creditors are excluded from the definition of a loan originator when they do not use table funding, whether they are a depository institution or a non - depository mortgage company,
but employees of such entities are loan originators. This is a grey area...will the fed consider SRP to meet the provisions or only YSP? Can an originator still make YSP as long as they don't charge the consumer an origination fee?
Way to go Barney Frank and Chris Dodd. You guys got us into this mess to begin with and now you are attempting to fix it? Thats funny
Great post Phil! Thanks for letting me rant : )
Ed/Celia- You said it.
Marcie- few people get how slanted things are toward banks.
Bill, thanks. Glad to help.
Kevin, the cure is worse than the illness.
Mike, good to hear from you. And well put.
Richard- just what I'd expect from politicians. And thanks!
Nevin, coming from you that means a lot!
Great post, explained in a clear way something I never understood. As always, you are right on top of the hot topics!!
Angela, few people really understand this, and the banks like it that way.
Donne, you are welcome but I don't think it will make a difference. Politicians will do what get them re elected.
JP - very concisely written, although I am still not sure about YSP and SRP I do find that this congress and administration seem to be making rules and regulations that are tilted extremely biased towards the "too big to fail" crowd. Perhaps the fewer there are the easier for the government to take over.
Great post Phil! I am a banker, but this whole idea of eliminating the competition seems very "anti-capitalism" to me... I don't get it. Actually, I think I do get it, and I don't like it.
J. Philiip, Thank you for writing this post. The "latest" version of the fixes is just another nail in the coffin. And, it is so vague that final interpetation is still on the table. As a mortgage banker, our CEO has basically said "we don't know how it will all shake out". And, I know another mortgage banker here on AR whose COO said the same thing.
One thing for certain is the consumer will lose. Working with first time buyers I frequently use YSP to help them buy a home. In the future it appears that they will need to save for the costs themselves or find a seller willing to contribute.
Philip - Nicely articulated, my man. Your experience goes a long way in you "getting" it. Good follow up commentary by Nevin as well. Dodd & Frank should have to put on a Lender's Hat for at least a year so they "get" it as well. Another law disguised as helping ...
Phillip, from time to time a person (such as myself) comes across a "gem". I define gem in this case as something that has quality in both content and delivery. You did that with this blog post. Thanks.
And we can make a difference. It is called education and that is the politician's worst enemy. The bonehead GOP'ers are going to learn that the hard way. Thank you again for taking up the mantle in this regard. You gave me both an education (i.e. YSP and SRP) and an opportunity to pass it on. I will do that, I am good in my own right. We *can* make a difference collectively and as professionals we have the opportunity (whatever the subject matter). We represent the front lines.
And today you "doubled up" with your two posts, this one and your other discussion "2 Things Listing Agents Should Not Say On Accompanied Showings". Both were very constructive. We can all use constructive to our collective best advantage.
Kudos from Florida buddy.
Don't you know, "He who owns the gold makes the rules".... has nothing to do with fair. If life was fair we would own the central bank know as the "Federal Reserve" instead of a foreign contingent of robber barons and we would have debt free money.
For those of you that haven't a clue what I just said, let me invite you to watch Bill Stills new documentary, "The Secret of Oz"
http://www.youtube.com/watch?v=D22TlYA8F2E
Very Rockerfellian, in that competition is sin.
I have to laugh at the phrase: free market. What's next, unicorns?
Yes, this is very sad for the smaller mortgage broker and the public. Its gonna be either the "big bank's way, or the highway", it seems to unsuspecting consumers:) thanks for sharing, and well said.
Thank you for the great explanation.
Thanks for bringing that to light Phil. I had not heard about it.
...I'd probably have to disagree with a great majority of this post and comments. YSP hasn't gone to the broker since January 1st 2010. It has been a credit to the borrower for almost 8 months. The only way a broker can get paid is fully disclosing Origination fees to the consumers at the onset of the GFE. My interpertation of the whole thing is that now mortgage brokers will be on the same page disclosure wise as mortgage bankers. Currently Mortgage Bankers DO NOT have to disclosue SRP to borrowers. I'm getting the exact opposite. My colleagues are loving the proposed even playing field.
WOW!! Alot going on here.
Stapleton- interesting that you say there is no YSP. I never thought of it that way. Are you a broker or banker?
Nevin, Phil- I thought that they had to put this Law into concrete when they returned from their summer recess so there is still some issues that need to be ironed out and clarified. I believe The National Association Of Mortgage Brokers (NAMB) will have their Lobbyists pounding the halls of the Capitol to point out all of the points mentioned here.
To all the brokers on AR- you need to join NAMB. They need your fees to help keep us in Business. It is $300/year and they send out e mails weekly about what is going on on the mortgage business. They also employed Lobbyists to help support our cause.
J Phillip,
Love this detailed description from an insiders point of view. Boy does the government scare me, all sides of it! Glad I have good credit, but this will continue to impact the housing recovery!
All the best, Michelle
Stapleton- I don't follow you. The playing field hasn't been leveled, it has been tilted even more toward the lenders. I can't tell if you are a lender or broker- your web page doesn't seem to indicate.
Robert- there are some details to be ironed out but the bank lobby is running roughshod over the broker lobby.
Nick- you're welcome.
Ginger, that is the way I see it.
Dan, you're welcome.
Mark-interesting take.
Sean- there is no free market and there hasn't been for 70 years.
Dave, thank you very kindly.
Jason, thanks for noticing.
Deborah, that consumers will lose is a certainty.
Kevin, I don't like it either.
Mike, we are headed toward a market with half a dozen big box lenders and a few community banks and table funders, but the table funder will all end up selling the loan to the big lenders.
Michelle, anyone who isn't A-1 credit is in for fewer choices and more hassles.
Stapleton,
Around here, brokers are either closing or becoming banks. Are you sure SRP is required to be disclosed in the new law? Because my information is that banks love the new law, and their not being required to disclose SRP was always part of their perks.
Just saying hello, I remember how you came to my defense as a result of comments on my blog. Thanks again, and much success to you!