Posted: March-09-2009 at 6:10am | IP Logged	Tweet

Good post Lynn.... I'm in the process of house shopping here around Mooresville. It's good to know I've asked or answered on my own most of these questions without seeing something like this. But there are a few I didn't really think about although it did cross my mind (eg the rate differences, etc.). After all, the particular payments/rates are right in line (if not a bit lower) than others in the market down here :)

Tony

Posted: March-09-2009 at 7:44am | IP Logged	Tweet

I'm in the same boat, sorta, James. Granted, I'm super skepitcal of anything like this by nature to help me see any sort of "aha" situations. But we've got a customer at work who also works in this business and he's helping me out as well.

Tony

Posted: March-09-2009 at 8:14am | IP Logged	Tweet

An absolutely super post Lynn. I think everyone should read that book.

I want to address the following which was #8 above:

8. Is the broker also earning a yield-spread premium by
upselling the rate to me (example: he or she obtains the funds
at 5.5% and is selling me the rate at 6.0% to earn additional
commission)?

This is probably not only the best kept, but the dirtiest little secret in the world of mortgage. As a former mortage broker and banker, the Yield Spread Premium was abused beyond belief by both the mortgage broker or banker (there's a difference...I'll explain later), and the way the closing agent at the attorney's office "splained" it was as misleading as anything I'd ever witnessed. This is one of the reasons I got out of the business many years ago.

One of the major problems I saw with the upselling of rate was that if you were a broker, you had to disclose it on the HUD-1 page 2. It came up as a "POC" item (POC means Paid Outside of Closing), and was to the left of the ledger, so that it didn't affect the over-all numbers. For example, if you perhaps paid for the appraisal in advance on a refinance, there is a place left of the ledger to disclose that you had already paid it and it would show up as a POC item.

As for the "YSP" as it was called and showed up on the HUD-1, it simply said "YSP" $$$ POC"...the closing agent explained it as "a fee paid to the broker for sending them the loan...doesn't affect you"...well, it did affect the buyer/refinance client because they qualified for a lower rate and not only was the broker/banker charging "points" up front to close, but they were "bumping the client's rate by anywhere from .125 to .750 so they could get "back points" or a "Yield Spread Premium" that fattened many wallets over the years.

Now here's the thing that used to really just frost me to no end...if you were a bank or held a "Mortgage Banker" license, you didn't have to even disclose that you were charging a YSP!!! It was nowhere on the HUD-1 Settlement Statement. Talk about dirty...ever notice how some banks do an ad for "zero closing costs" or "no origination fee"? That's because they've plugged in a different rate to the deal, so they can get it "on the back end".

Yield Spread premiums were designed to help brokers compete with bankers on borrowers with good credit. Brokers dealt with "wholesale lenders" who dealt with investors. The investor rates were typically lower than that of banks. To keep "up front closing costs" down, the investors were willing to take less on the rate for certain borrowers. The broker could then turn around and compete with banks by offering the client a little less on the rate and no origination fee (aka "up front points") if the broker was good enough to "upsell" the client to a rate higher than required by the wholesaler but still lower than the bank. This usually amounted to an honest commission made by the broker because there wasn't much "wiggle room" between what the banks charged versus the investor. The investor would then pay the YSP at closing. No origination or "up front" points were charged because the bank "supposedly" wasn't charging an origination fee either. The amount of the YSP was obviously based on how much higher the rate was from their base to what the client was charged on rate, which in this example usually wasn't a whole lot of money. A .375 to .500 upcharge to the rate would usually amount to an extra 1% on the back for the broker. Doing the math on a $100,000 mortgage and the broker makes $1,000 gross for originating the loan.  

Then came the "B", "C", and even "D" paper offered up by investors that basically allowed anyone to get a mortgage no matter how bad their credit. Making bad loans to bad people opened the floodgates so to speak, Yield Spread Premiums were charged along with stunningly high up front fees by the brokers and bankers, who even had their own departments to compete with the brokers to get those huge fees, and it was on like Donkey Kong for many years.

Brokers didn't care what they charged people with bad credit. They now had the perfect excuse to charge more and that usually began at the initial consultation with something like "Well Mr Jones...because of your credit history". 

The unscrupulous brokers and bankers "loaded" every single mortgage no matter who the client was with the max up front and back end points allowed by the Fed, before they had to disclose that it was a "high cost" mortgage, aka "Section 32". The Fed's definition of a "high cost mortgage" was if a mortgage's percentage of fees exceeded 7.999999% of the amount of the mortgage. The broker always went this route as long as they could get away with it without losing the deal. If the broker was going to be charging more than that, he/she had to send a letter to the client and wait 72 additional hours to close. Stupid eh? Most brokers charged the max allowable by the Fed to get their commission as fast as they could. 8% of the loan amount was plenty.

A wise man at a meeting in Atlanta Ga in the late 1990's when this was all just starting told me "Scott. They just can't start making bad loans to bad people and charge the fees they're charging forever. If they do, the banking system will completely collapse some day"...

...little did we know it would only be 10 short years later.