Kick backs, hidden cost, back points, HUD (Housing and Urban Development)calls it “Yield Spread Premium” (YSP), money paid by the a lender to mortgage brokers outside of closing. Money paid by the lender to the broker because you got a higher mortgage interest rate. Mortgage brokers are suppose to show this on line 801 of their “Good Faith Estimate” and escrow will show it on the estimated and final closing statements (HUD-1) when closing a loan for a mortgage broker. You’ll never see these “points” on a loan from a bank, mortgage banker. Savings and loan, thrift, or credit union! Several Congressman and Senators have expressed concern over YSP’s in recent years citing undo enrichment of mortgage brokers and their agents. The news media often mentions “kick backs” to mortgage brokers, and yet this practice continues!

 

First we need to understand mortgage pricing. The traditional bank offered one mortgage interest rate that fluctuated occasionally, after WW II loans often included an “Origination” fee (normally 1 point, 1% of the loan amount) more recently we have seen many additional bank and third party fees. Until about 1973 mortgage banks and mortgage brokers as we know them dealt mostly in “government” loans (FHA and VA) the rates were set by the FHA and VA respectively if these rates were below the current market these lenders added “discount points” to increase the “Yield” sufficiently to make money available. We soon saw wide spread use of these “discount points” to buy-down interest rates on all types of mortgage loans. After 1974 when mortgage brokers began their dominance of the mortgage origination market (current estimates have mortgage brokers originating 75 to 90+% of all mortgage loans) your bank normally had 1 rate and it included 1 origination point, mortgage bankers normally have “the rate” and one “buy down” rate. Strangely, mortgage brokers have many rates in 1/8% increments of rate, spanning 2 or more % interest. This is strange because most money offered by mortgage brokers comes from mortgage bankers, the same banks that offer only, the afore mentioned, two, higher cost, rates to their retail clients. About half the rates available to mortgage brokers were the traditional “Buy-down” rates costing up to 2 points more than the so called “par rate” (no discount cost to the broker) the other half were “buy-up” rates paying the broker up to 4%.

 

The payments, kick backs, hidden cost, back points, etc… were finally named “yield spread premium” by HUD about a decade ago. It’s not uncommon for a mortgage broker to have available a 6 point spread (4 points YSP to 2 discount points) available on any given loan program. That 6 points on a $300,000 loan means up to $18,000 difference in closing cost, regardless of all the other closing cost. Yet, all that extra cost only means about 2% difference in the interest rate. Most consumers don’t have the luxury of choice, they seldom have an extra $18,000.00. Unless they need the lower rate to qualify for the loan the lowest rates seldom make sense.

 

A quick glance at the rates and discount points might make you think that you’d always save money after 3 years ( 6 discount points divided by 2% interest reduction) but that’s not true. The idiosyncracies of loan amortization mean that the breakeven point is normally closer to 5 years, not counting the time value of money. In today’s society it’s rare in deed that a mortgage loan actually exists for five years, either the house is sold or it’s refinanced long before the breakeven point.

 

Yet HUD and certain congressman keep holding hearings about the evil YSP and the abuses by mortgage brokers of this “hidden” cost. Selected witnesses offer tales of over charges and hidden cost they are bone chilling. Claims of over charging abound. The problem is they can’t explain why mortgage brokers originate almost all residential mortgage loans, and why it’s almost always less expensive and more successful to finance with a mortgage broker.

 

There have been abuses, many of them, you’re more likely to be abused by a broker and or his agent than other lenders, because: there are more of them, remember up-to 9 out of 10 mortgages come from brokers.. These abuses and promises of reform make great head lines. “Reformed” is always an interesting term, it implies you’re better than the un-reformed. The argument is that only mortgage brokers charge YSP, but is it a charge? Yield is the return on investment or the product of an investment. Spread is the difference between cost and return, or gross profit. Premium is something extra above the cost.

 

In it’s simplest form, if a $100,000.00 loan is at 6.000% it will yield $6,000.00. If the cost of funds is 2.000% then the spread is 4.000% or $4,000.00. If administrate and overhead cost the lender 0.5% then the premium is $3,500.00. YSP is a relatively new term coined by HUD. When most of us went to school if you subtracted cost from yield you determined profit!

 

Why don’t banks and mortgage bankers have to report their profits and why do we call it YSP? We don’t require any business to report their profits to anyone except to stockholders and the IRS. We have to further define YSP, it is that portion of the anticipated profits the lender shares with the mortgage broker. In that 10% or so of mortgage loans originated by lenders they pay commissions and overhead to their own in-house sales department it is considered cost. It is only when the loan originates with an outside mortgage broker that the commission is called YSP.

 

Shouldn’t the consumer go to direct lenders to save money? It sounds good but it doesn’t work that way mortgage brokers do most mortgage loans for two very good reasons. Loans from mortgage brokers are almost always less expensive, because of competition! Thanks to mortgage brokers the mortgage origination business is possibly the most competitive business in the country! Secondly, success! Mortgage brokers are able to close more loans because they have more than one source for a loan. When the consumer doesn’t qualify for a banks program he’s turned down, that’s the end of the application. The turned down consumer will never know that several other lenders would take his loan, mortgage brokers will get the loan approved.

 

Mortgage brokers have all those fees! Yes there are a lot of cost in closing a mortgage loan. Ads are always telling you, you can be finance for only $395 to $995, that’s true. But they are not talking about third party cost! Direct lenders advertising these low closing cost are simply using some of the spread to absorb those costs, mortgage brokers do this all the time using the YSP to off set the consumers cost. Normally the direct lender can avoid showing you the real cost, where the broker will have to show all the cost and issue a credit, he’ll also show the YSP adding to the consumer’s confusion. When a consumer sees a long list of costs he may never notice the total at the bottom of the page may be less than the direct lenders short list. All other terms being equal, the only way to compare loans is to check the amount out of pocket and the monthly payment.

 

Lenders who paint them selves in to a corner advertising fixed fees (like $395) limit their ability to provide the best loan for the individual. Mortgage brokers have a lot more flexibility to aid the consumer and normally will have a lower rate for any given cost, or a lower cost for any given rate. You have to compare apples to apples!

 

If Congress and HUD are investigating the evils of YSP, won’t we be better off? A few years ago the same people investigated “predatory lending” a couple of large direct lenders had preyed on a southern state. To cure the problem we now have new law “Section 32.” The new law did nothing to help the people suffering form the “predatory” lenders. What the new law did was to drive more morally cognizant lenders out of the business of helping troubled lenders! If the lender now makes one of these high risk loans they must have the client sign a new form in escrow 3 days before closing that says if you don’t make your payments you could lose your house! I’ve only been in lending since 1969 but I’ve never seen a mortgage or deed of trust, that didn’t very clearly say if you don’t make the payments you could lose the house. The only thing the new law accomplished was to reduce competition in this already expensive field driving up prices, and cause a few people to lose their home or worst because their loan was delayed.

 

The horror stories are true and all the same. The predatory victim explains: I agreed to pay $1,000/ month, I spent the money, I can’t make the payment, they foreclosed on me! There’s enough sin to go around, who’s more immoral? The lady who spent the loan proceeds knowing she couldn’t make the payments or the lender who should have known she’d never make the payments? The evil YSP story goes like this: I agreed to pay 6.5% , he told me I only had to pay 1 point origination, I found out this YSP thing was the lender paying him 2 points! Where’s the problem, the bank would have given her the same loan for 6.5% at 1 point origination, it’s what she agreed to pay. Consumers never ask the bank what there making The evils of YSP are imaginary but they make great sound bites! We can only hope HUD and/or Congress doesn’t solve a non-existent problem.

 

Copyright 2005

William J Archambault Jr

 

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

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This week brings us the release of six monthly reports for the markets to digest. However, only a few of them can be considered highly important to mortgage rates. All of the releases are scheduled to be posted the middle and latter part of the week, therefore, expect tomorrow and Tuesday to be fairly quiet. On the other hand, this makes is quite likely that we will see sizable changes to mortgage rates later in the week.

Wednesday morning we will see April’s Durable Goods Orders data. This report gives us an indication of manufacturing sector strength by tracking orders at U.S. factories for big-ticket products. It is currently expected to show a decline in new orders of approximately 0.5%. If this report shows a stronger than expected reading, we should see mortgage rates rise because it indicates manufacturing growth. If it shows a larger than expected decline, we should see rates improve Wednesday morning.

April’s New Home Sales data will be released late Wednesday morning. This report, along with Thursday’s Existing Home Sales data, gives us a measurement of housing sector strength and future mortgage credit demand. However, these are the least important releases of the week and probably will not have much of an impact on mortgage pricing.

The first of two revisions to the 1st quarter Gross Domestic Pro duct (GDP) will be released at 8:30 AM Thursday. The second revision to this report comes next month but isn’t expected to have much of an impact on the financial markets. The GDP is the sum of all goods and services produced in the U.S. and is considered to be the best indicator of economic growth. Last month’s preliminary reading revealed a 4.8% annual rate of growth, which was much lower than expected. Some analysts expect a significant upward revision to this reading with the consensus being 5.8%. If true, we may see the bond market react negatively and mortgage rates rise.

Friday brings us the release of two important reports. The first is April’s Personal Income and Outlays data at 8:30 AM. This report gives us an indication of consumer ability to spend and current spending habits. An increase in income means that consumers have more money available to spend. Since consumer spending makes up two-thirds of the U.S. economy, this data can cause mo vement in the financial markets and mortgage rates. Current forecasts are showing a 0.7% rise in income and a 0.6% increase in spending.

The second report of the day and the last important data of the week will come from the University of Michigan who will update their Index of Consumer Sentiment for May. An upward revision may lead to slightly higher mortgage rates, while a downward change may help push rates slightly lower. The preliminary reading was 79.0. Also worth noting is the fact that the bond market will close early Friday afternoon ahead of the Memorial Day holiday next Monday. The stock markets will be open all day, but the early close in bond trading may put a little extra pressure on bond prices as investors protect themselves over the long weekend. The markets will be closed next Monday and will reopen Tuesday morning.

Overall, I expect to see the biggest changes to mortgage rates the latter part of the week. It is difficu lt to name one particular day the most important of the week. Wednesday’s and Thursday’s data can both cause noticeable changes to mortgage rates and any significant surprises in Friday’s can do the same. Accordingly, please proceed cautiously is still floating any interest rate.

If I were considering financing/refinancing a home, I would…. Lock if my closing was taking place within 7 days… Float if my closing was taking place between 8 and 20 days… Float if my closing was taking place between 21 and 60 days… Float if my closing was taking place over 60 days from now… This is only my opinion of what I would do if I were financing a home. It is only an opinion and cannot be guaranteed to be in the best interest of all/any other borrowers.

Provided by “a la mode”

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By Lou Barnes

You can watch markets for a long time and not see a one-week reversal in psychology — and reality — as large as this. Mortgages are pulling back slowly from 6.75 percent, but the immediate threat of 7 percent has disappeared altogether.

One week ago, bond and stock markets were drowning in the depressing soup of an obvious inflation problem and a Fed too timid to do anything about it. Then it got worse: Tuesday’s CPI affirmed the fear, the core rate rising .3 percent for the second month in a row, way over the Fed’s 2 percent-annual ceiling.

Then things got weird. Investors dumped stocks and bonds by the bale after the CPI news, but late in the day, long-term bonds, the most inflation-sensitive products in the financial universe, began to rally. By late Tuesday, light had dawned that a CPI report this bad would force the Fed to react, and therefore the odds had risen for the bond market’s dream of Christmas, a Fed overshoot on the tight side. There’s nothing like a recession for increasing the value of bonds.

Then the Fed did react. Just jawbone, but it was first-class ‘bone. First the announcement that Donald Kohn had been named vice chair of the Fed.

Next, a rookie piped up. Fed rookies are prone to saying really silly things (upon appointment as Dallas Fed president last year, Richard Fisher offered an apparently official leak that the Fed’s rate hikes would soon end; he hasn’t been heard from since). Not this guy: new Richmond Fed President Jeffrey Lacker, a man to watch, said just what the markets needed to hear. Just the truth: “Inflation is at the borderline of acceptable, and perhaps even beyond. I have been disappointed by the last two rounds of inflation reports…and containing inflation has to be our primary focus. A pause [in rate hikes] is less likely.”

Why Fed Chair Ben Bernanke has been unable to find simple words like these is beyond everyone in the markets. He spoke after the CPI report, and looked not so much deer-in-the-headlights (he does have some personal substance) as bland, wandering and totally unable to communicate the heart of the matter. If he can’t talk, that’s OK; but don’t make things worse by trying. Give Lacker the mike.

OK, confidence restored, where the hell are we, really? Old hand William Poole, St. Louis Fed president, said that for all he knew about the Fed’s June 29 meeting, it might raise rates a quarter-point, jump them an inflation-pre-empting half-point, or cut its rate. He wasn’t kidding: bet on uncertainty and volatility here.

The Fed obviously believes the economy is about to slow. Bernanke may be helpless as a public leader, but he is a fine economist with the best intentions and fears that the Fed may already be too tight. The most senior Fed watcher, David Jones, said today that the Fed is substantially on the tight side of neutral.

The problem has been very strong real-time economic data, and oil at $70 stubbornly maintaining inflation pressure. At the end of this sea-change week, oil is still there, but other strong-economy and speculative indicators have reversed even more strongly than long-term rates and Fed confidence.

Stocks are down 200 points in two weeks, and shaky worldwide. Gold has collapsed from $728 to $655 in 10 days. Natural gas in the last 48 hours has traded under six bucks, down 60 percent from last winter. And, the Fed is not the only tightening central bank: the Bank of Japan is still maintaining a zero percent cost of money, but it is sucking cash out of the system at an amazing pace, the monetary base in Japan down 9 percent since January.

If the economy cools, quickly, then the pause-leaning Bernanke is a hero; if not, the Fed has to play catch-up and over-do us into recession. For the moment, either way the calculus favors a top in long-term rates.

Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@boulderwest.com

Inman News

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Mortgage brokers and lenders say it happens all the time: A mortgage applicant says, “Oh, I’ve already checked my credit score online.”

Then the loan officer pulls the home buyer’s FICO score and finds that it’s 50 or 100 points lower than the generic credit score the applicant quoted.

“This is becoming a real problem - a lot of people simply don’t know the difference between FICO scores and other scores,” said Ginny Ferguson, immediate past chairwoman of the National Association of Mortgage Brokers’ credit-scoring committee and co-owner of Heritage Valley Mortgage Inc. of Pleasanton, Calif. “They think it’s all the same.”

FICO scores, developed by Fair Isaac Corp., are the predominant credit measure that the mortgage industry uses. The scores run from 300 to 850, and are used to predict a borrower’s likelihood of future nonpayment, with higher scores indicative of better creditworthiness.

Other commercial scoring models, which may also accurately predict risk of nonpayment and gauge a consumer’s credit health and behavior, are widely available on the Internet.

But mortgage lenders rarely use them, and therefore they have limited relevance for a home mortgage application.

Lenders use FICO scores to price mortgages. Lower FICO scores can cost applicants hundreds of dollars a month in higher interest payments, and thousands of dollars over the term of the loan.

When FICO scores are substantially lower than non-FICO scores, “the consumer assumes the broker did something to make their scores worse” - perhaps seeking to charge them higher rates or fees, Ferguson said. “And of course, that is not the case.”

Independent credit reporting agencies that supply FICO scores to mortgage lenders also are feeling the heat.

“Our members get blamed by their own customers, who are primarily brokers and lenders,” said Terry Clemans, executive director of the National Credit Reporting Association, a trade group that represents hundreds of credit agencies providing consumer reports and scores to mortgage lenders.

“We’re getting a lot of angry conversations about `Why is your score lower?’ than what the consumer got somewhere else” online, Clemans said.

But credit reporting agencies are simply middlemen, purchasing reports and FICO scores from the three national credit bureaus - Equifax, Experian and TransUnion - and repackaging them for mortgage lenders.

Ferguson, who lectures nationwide to loan officers on credit scoring, said she has seen only one instance of a mortgage applicant’s FICO score being higher than an Internet pop-up site’s score, “and that was just by two points.”

Typically, she said, a FICO score comes in 35 to 100 points below a generic score purchased off an Internet site, and that’s where the trouble starts because “we just don’t use those other scores.”

Fair Isaac itself has become concerned about marketplace confusion over its proprietary scores and a multitude of other scores.

Tom Quinn, vice president of global scoring for Fair Isaac, said the company’s own research has documented disparities of anywhere from five points to more than 200 points between FICO scores and non-FICO scores on the same consumer.

The disparities exist because the statistical scoring models often assign different weights to the same information and generate what may be strikingly different numerical conclusions.

Some of the most active Internet-driven score purveyors are associated with national credit bureaus.

But they don’t go out of the way to tell consumers that the credit score they are buying is an in-house generic score, not a FICO, and therefore it will have little relevance in a home mortgage transaction.

For example, TrueCredit.com is owned by TransUnion. The website trumpets the importance of credit scores as financial management tools, but only reveals in tiny block print at the end of its “credit score sample report” page that “the credit score provided here is not a so-called FICO score.”

Steven Katz, a spokesman for TransUnion, said his company’s TrueCredit score “is really intended to help consumers understand the importance of taking control” of their own credit management.

It is, in other words, primarily an educational tool, not what will actually be used to qualify you or price your mortgage.

Nonetheless, prominent on the TrueCredit.com site is the statement that the TransUnion score is “how you may be viewed from a lender’s perspective.”

Except, of course, if that lender happens to be taking your application for a mortgage and only pulling your FICOs.

Hartford Courant

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