May 19th, 2010 6:44 PM by Dana Bain
If you've been following the news the last few years, you should be very familiar with YSP (yield spread premium) - fees paid to mortgage brokers for obtaining financing for you. YSP is the difference between the "par" rate (wholesale rate) quoted to mortgage brokers, and the rate you ultimately pay for your mortgage. YSP has always been regulated, contrary to popular myth that has been circulated via bank lobbyists. Yes, mortgage brokers can make some decent money getting a loan for a borrower, but not even close to the commissions that real estate agents charge - and not even close to the SRP (Servicing released premiums) that banks make on every loan they fund.
If a mortgage broker is quoted a par rate of 4.75% for instance, and you are quoted 4.875%, the YSP is could be somewhere around .25% to .5% of the loan amount. That equates to between $250 to $500 on each $100,000 of the loan amount. But remember that the bank quoting the rate of 4.75% already has a mark up on that rate, because of course, the lender wants to make money on the deal. What is the actual par rate to the lender (bank)? And what rate will this bank make on the sale of the loan to an investor? Banks also pile on charges for "risk based pricing." So, if you are not the "ideal" home buyer, there can be a "hit" to the rate for credit score, loan to value ratio, loan amount, type of property, and much more. These "hits" to the rate are assessed against the mortgage broker, so of course the rate you will be quoted goes up. AND, of course, the bank is making money (SRP) on every single "hit" as well.
So, what is SRP? SRP is the premium that banks make (and pass a portion onto their loan officers) when they sell a loan to the secondary market. Everyone should now be familiar with the concept of their loan being sold. Prime loans have long been sold to Fannie Mae, Freddie Mac, big banks, hedge funds, and other investors, both American and foreign. SRP is earned by charging fees, charging - familiar with this? higher rates - just like mortgage brokers charge. In fact, banks make a LOT of money on SRP, are not capped on the amount of SRP they can earn, and unlike mortgage brokers are not required to disclose the amount of SRP they are earning or are paying their loan officers. Of course, they have every incentive under the sun to make as much money as possible, so those of you who go to banks, thinking you are saving money or getting better rates - think again - it is very likely that you are NOT!
In fact, the truth is that mortgage brokers are far more regulated than banks when it comes to making home loans. Mortgage brokers must be educated in the loan process. They must be licensed, and must take continuing education on everything from loan financing to ethics. Bank loan officers do not have to be licensed, and in general are far less informed than independents. They are encouraged to sell you on "advantages" such as buying down a loan rate, when in fact, in most cases, the bank wins on rate buy downs. There are some buy down programs where the borrower will NEVER break even! (The cost of the buy down is more than you will save, even if you keep the loan until it is paid off.)
Banks are permitted to charge up front application fees for your mortgage, thereby locking you into a loan with them. Mortgage brokers are prohibited from charging application fees - and are allowed to charge only for two upfront fees, the cost of the credit report and the cost of the appraisals. Do you know anyone who has "eaten" an application fee, even when they were able to find a better loan rate elsewhere? It happens all the time.
To make the playing field even more rocky - banks of course, have far more money than the mom and pop mortgage broker and they spend that money freely on lobbyists. The lobbyists work on our Congressional representatives to pass more laws to "protect" the consumer - but in fact, in most cases, the laws are protecting the very banks that are paying their executives multi-million dollar salaries, and whose greed and corruption created the financial meltdown we are all living through today.
Next time you are ready to get a mortgage loan - why not ask the loan officer at the bank how much SRP they will be making on your loan? Or how much SRP the bank will be earning on your loan. Do you think those numbers will be disclosed to you?
Of course banks have been trying for years to shut down the independent mortgage broker. The competition is not welcome. Sadly, they are succeeding. Independent mortgage brokers are disappearing at an alarming rate across the country. Those that are still in business are very often actually "net branches" of a small or regional bank - that of course, is taking their SRP off the top of every loan that closes. And so it goes - bureaucracy at its finest.
The latest news is that Congress is getting ready to again drop the cap on the amount of YSP that mortgage brokers can earn on a loan. The proposed cap is 3%, which sounds very high, but remember that this number has to include ALL the fees that lenders charge and all the garbage fees you will pay for the loan that the mortgage broker will never touch. These fees include things like appraisals, underwriting fees, processing fees, credit reports, and on and on. Remember - banks have no such cap. But, to make matters even worse for the consumer, think about the small loan amounts and that fee cap.
If a consumer is applying for a $50,000 loan for example, 3% is only $1500. When you subtract all the fees out of that $1500, (such as $500 for an appraisal, $600 lender fee, $400 processing fee, etc, the mortgage broker could end up paying to get you a loan. How many mortgage brokers will be helping those of you who need small loans? Just another strike at competition financed by the banks, via their lobbyists.
This column is not intended to to portrayl mortgage brokers as victims at the mercy of banks. It is more to open your eyes as consumers to what is taking place out there behind the scenes, and how this will affect your ability to get financing, and what you will pay for those loans. It is a time for full disclosure - and SRP should be disclosed too.
For more information - please check out more information about SRP.