A Consumers Guide To Mortgage Brokers And The Evil Yield Spread Premium

K ick backs, hidden cost,         bank offered one mortgage          back points, HUD (Housing       interest rate that fluctuated      and Urban Development)calls     occasionally, after WW II loans    it "Yield Spread Premium" (YSP),      often included an "Origination"    money paid by the a lender to         fee (normally 1 point, 1% of the   mortgage brokers outside of           loan amount) more recently we      closing. Money paid by the lender     have seen many additional bank     to the broker because you got a       and third party fees. Until about  higher mortgage interest rate.        1973 mortgage banks and mortgage   Mortgage brokers are suppose to       brokers as we know them dealt      show this on line 801 of their        mostly in "government" loans (FHA  "Good Faith Estimate" and escrow      and VA) the rates were set by the  will show it on the estimated and     FHA and VA respectively if these   final closing statements (HUD-1)      rates were below the current       when closing a loan for a             market these lenders added         mortgage broker. You'll never see     "discount points" to increase the  these "points" on a loan from a       "Yield" sufficiently to make       bank, mortgage banker. Savings        money available. We soon saw wide  and loan, thrift, or credit           spread use of these "discount      union! Several Congressman and        points" to buy-down interest       Senators have expressed concern       rates on all types of mortgage     over YSP's in recent years citing     loans. After 1974 when mortgage    undo enrichment of mortgage           brokers began their dominance of   brokers and their agents. The         the mortgage origination market    news media often mentions "kick       (current estimates have mortgage   backs" to mortgage brokers, and       brokers originating 75 to 90+% of  yet this practice continues!          all mortgage loans) your bank                                            normally had 1 rate and it         First we need to understand           included 1 origination point,      mortgage pricing. The traditional     mortgage bankers normally have     "the rate" and one "buy down"         up to $18,000 difference in        rate. Strangely, mortgage brokers     closing cost, regardless of all    have many rates in 1/8%               the other closing cost. Yet, all   increments of rate, spanning 2 or     that extra cost only means about   more % interest. This is strange      2% difference in the interest      because most money offered by         rate. Most consumers don't have    mortgage brokers comes from           the luxury of choice, they seldom  mortgage bankers, the same banks      have an extra $18,000.00. Unless   that offer only, the afore            they need the lower rate to        mentioned, two, higher cost,          qualify for the loan the lowest    rates to their retail clients.        rates seldom make sense.           About half the rates available to                                        mortgage brokers were the             A quick glance at the rates and    traditional "Buy-down" rates          discount points might make you     costing up to 2 points more than      think that you'd always save       the so called "par rate" (no          money after 3 years ( 6 discount   discount cost to the broker) the      points divided by 2% interest      other half were "buy-up" rates        reduction) but that's not true.    paying the broker up to 4%.           The idiosyncracies of loan                                               amortization mean that the         The payments, kick backs, hidden      breakeven point is normally        cost, back points, etc... were        closer to 5 years, not counting    finally named "yield spread           the time value of money. In        premium" by HUD about a decade        today's society it's rare in deed  ago. It's not uncommon for a          that a mortgage loan actually      mortgage broker to have available     exists for five years, either the  a 6 point spread (4 points YSP to     house is sold or it's refinanced   2 discount points) available on       long before the breakeven point.   any given loan program. That 6                                           points on a $300,000 loan means       Yet HUD and certain congressman    keep holding hearings about the       return on investment or the        evil YSP and the abuses by            product of an investment. Spread   mortgage brokers of this "hidden"     is the difference between cost     cost. Selected witnesses offer        and return, or gross profit.       tales of over charges and hidden      Premium is something extra above   cost they are bone chilling.          the cost.                          Claims of over charging abound.                                          The problem is they can't explain     In it's simplest form, if a        why mortgage brokers originate        $100,000.00 loan is at 6.000% it   almost all residential mortgage       will yield $6,000.00. If the cost  loans, and why it's almost always     of funds is 2.000% then the        less expensive and more               spread is 4.000% or $4,000.00. If  successful to finance with a          administrate and overhead cost     mortgage broker.                      the lender 0.5% then the premium                                         is $3,500.00. YSP is a relatively  There have been abuses, many of       new term coined by HUD. When most  them, you're more likely to be        of us went to school if you        abused by a broker and or his         subtracted cost from yield you     agent than other lenders,             determined profit!                 because: there are more of them,                                         remember up-to 9 out of 10            Why don't banks and mortgage       mortgages come from brokers..         bankers have to report their       These abuses and promises of          profits and why do we call it      reform make great head lines.         YSP? We don't require any          "Reformed" is always an               business to report their profits   interesting term, it implies          to anyone except to stockholders   you're better than the                and the IRS. We have to further    un-reformed. The argument is that     define YSP, it is that portion of  only mortgage brokers charge YSP,     the anticipated profits the        but is it a charge? Yield is the      lender shares with the mortgage    broker. In that 10% or so of          consumer will never know that      mortgage loans originated by          several other lenders would take   lenders they pay commissions and      his loan, mortgage brokers will    overhead to their own in-house        get the loan approved.             sales department it is considered                                        cost. It is only when the loan        Mortgage brokers have all those    originates with an outside            fees! Yes there are a lot of cost  mortgage broker that the              in closing a mortgage loan. Ads    commission is called YSP.             are always telling you, you can                                          be finance for only $395 to $995,  Shouldn't the consumer go to          that's true. But they are not      direct lenders to save money? It      talking about third party cost!    sounds good but it doesn't work       Direct lenders advertising these   that way mortgage brokers do most     low closing cost are simply using  mortgage loans for two very good      some of the spread to absorb       reasons. Loans from mortgage          those costs, mortgage brokers do   brokers are almost always less        this all the time using the YSP    expensive, because of                 to off set the consumers cost.     competition! Thanks to mortgage       Normally the direct lender can     brokers the mortgage origination      avoid showing you the real cost,   business is possibly the most         where the broker will have to      competitive business in the           show all the cost and issue a      country! Secondly, success!           credit, he'll also show the YSP    Mortgage brokers are able to          adding to the consumer's           close more loans because they         confusion. When a consumer sees a  have more than one source for a       long list of costs he may never    loan. When the consumer doesn't       notice the total at the bottom of  qualify for a banks program he's      the page may be less than the      turned down, that's the end of        direct lenders short list. All     the application. The turned down      other terms being equal, the only  way to compare loans is to check      lenders out of the business of     the amount out of pocket and the      helping troubled lenders! If the   monthly payment.                      lender now makes one of these                                            high risk loans they must have     Lenders who paint them selves in      the client sign a new form in      to a corner advertising fixed         escrow 3 days before closing that  fees (like $395) limit their          says if you don't make your        ability to provide the best loan      payments you could lose your       for the individual. Mortgage          house! I've only been in lending   brokers have a lot more               since 1969 but I've never seen a   flexibility to aid the consumer       mortgage or deed of trust, that    and normally will have a lower        didn't very clearly say if you     rate for any given cost, or a         don't make the payments you could  lower cost for any given rate.        lose the house. The only thing     You have to compare apples to         the new law accomplished was to    apples!                               reduce competition in this                                               already expensive field driving    If Congress and HUD are               up prices, and cause a few people  investigating the evils of YSP,       to lose their home or worst        won't we be better off? A few         because their loan was delayed.    years ago the same people                                                investigated "predatory lending"      The horror stories are true and    a couple of large direct lenders      all the same. The predatory        had preyed on a southern state.       victim explains: I agreed to pay   To cure the problem we now have       $1,000/ month, I spent the money,  new law "Section 32." The new law     I can't make the payment, they     did nothing to help the people        foreclosed on me! There's enough   suffering form the "predatory"        sin to go around, who's more       lenders. What the new law did was     immoral? The lady who spent the    to drive more morally cognizant       loan proceeds knowing she          couldn't make the payments or the     to pay. Consumers never ask the    lender who should have known          bank what there making The evils   she'd never make the payments?        of YSP are imaginary but they      The evil YSP story goes like          make great sound bites! We can     this: I agreed to pay 6.5% , he       only hope HUD and/or Congress      told me I only had to pay 1 point     doesn't solve a non-existent       origination, I found out this YSP     problem.                           thing was the lender paying him 2                                        points! Where's the problem, the      Copyright 2005                     bank would have given her the         William J Archambault Jr           same loan for 6.5% at 1 point                                         origination, it's what she agreed      About the Author: William J Archambault Jr in lending and real estate since 1969. A mortgage broker in Las Vegas, NV. He writes about up to the minute investment real estate tempered with the wisdom of our grandfathers. He's the author of:"One House At A Time/Finding And Buying Single Family Rentals" avaiable at http://www.reii.org E-male author@reii.org Source: www.isnare.com