Mortgage Financing Options

Yield Spread Premiums -- FHA & Conventional Mortgages -- Why the uproar?

Politicians are wanting to step in and squash the yield spread premium (YSP) that is paid to brokers by offering higher rates. I am not here to debate politics and what is right and wrong, but to give the true understanding what YSP is used for and how it can help the borrower when purchasing or refinancing a home.

Yield Spread Premium known as YSP is defined by wikipedia as the cash rebate paid to a mortgage broker based on selling an interest rate above the wholesale par rate that the borrower qualifies for.

It becomes a balancing act when a loan officer has to defend the reasoning behind how they make money, when the consumer can assume that the loan officer makes more money if they see the YSP on the good faith estimate or on the HUD settlement sheet. It becomes worse when that consumer now shops for his or her mortgage by trying to compare YSP's. This method in my opinion is ludicrous and just plain retarded.  By disclosing the YSP just confuses the mortgage process.

Question : Would you select a doctor or a criminal lawyer by what they charge?  How does the disclosure of the loan officer's profits affect the price that the consumer would pay for that loan?  Very simple, by knowing the profit, the consumer is able to negotiate better.

What's been the hottest topic of lately? That it's unfair that the broker has to disclose the YSP. What gets me is that you just don't see it on the bankers side. Which could lead you to believe that mortgage bankers are cheaper. A lot of the hype is that many brokers don't disclose YSP on their inital good faith estimate, even though they have to by law. And then it's later seen on the closing settlement statement. This is where the client becomes angry and figures that the loan officer is trying to get over on them. What would solve the problem?  Just allow the broker not to disclose the YSP.  But congress wants to eliminate the YSP on the brokers side.  This could make it more expensive  for the borrower.

Let's take a peak, comparing 2 different lenders, not making a difference if it's a banker or a broker. Example : LENDER A :  If their rate was 5.75% and they were charging 1 pt with $500 in fees. The YSP was 1 pt on the back. LENDER B : Their rate is 5.625% and were charging 1 pt with $500 in fees.  But the YSP was 1 1/2 pts on the back.  Who has the better deal?  LENDER B has the best deal for the client. So what if they made more money.  Unless we put an exact fee per loan to be made there is no transparency.  I truly feel that if you get the loan officer to reduce their fees tremendously, that it would seriously affect your service that you would receive.

Conclusion : Katie Marchione said in a comment in another post, "When you buy a $50 shirt at Macy's, don't you think that there is profit built into that price?  You are paying for a product or for a service and the providers deserve to get paid for it."

I admit, that there are loan officers that take advantage of the consumer. But there are many borrowers out there that don't have the money for all of the closing costs. And the lender can use the YSP to also pay for certain fees. And if the yield spread premium is taken away from the broker, borrowers will end up paying for more in closing costs because the lender needs to make a profit.

 

Mortgages & Real Estate -- Consumers need to be aware of these Red Flags !!!!!

How many of you at one time or another bought a house or refinanced your mortgage and ran into one problem or another. May it have been the realtor who was not able to give you the correct answer or the loan officer who strung you along and then changed things last minute. I have never said that I am perfect or that I know it all, but it does come down to honesty, integrity, knowledge, and very good service. 

What about you first time homebuyers that have never experienced buying a home or refinancing for the first time. I truly believe that there are some key phrases that can sometimes be cause for concern, known as Red Flags. And just because you have done this before, doesn't mean that it won't happen to you. If you hear some of what is mentioned below more than once, especially in a short time period, this could be your warning.

The General / Basic Red Flags from both the loan officer or the realtor :

• As you shopped for a realtor or a loan officer, this person was always getting back to you. Now you have signed a listing agreement, a buyers agreement, or the loan application and they don't get back to you right away.  If you are leaving a few messages per day, both e-mail or by cell, and this continues for close to 48 hours, there is no excuse. This is a huge Red Flag if this takes place a few days prior to settlement / closing, especially the day of closing, if they can't be reached at all.
• Key words or phrases used often when first speaking to you ; "I promise", "I guarantee", "no problem, I'll fix it", "I am the best", "I am the cheapest", and "I have the lowest fees". I am sure there are more.
• Delayed phone calls. I promise to call later or tomorrow. But you don't hear back from them and now you have to track them down. Yes, again, things happen. But if this seems to be a reoccurring issue, then you might have problems.
• Deadlines - If there are certain dates on the contract or with the lender, get everything in as soon as possible. If that is ordering inspections in a timely manner or getting documents to the lender, don't wait.

Red Flags from loan officers or lenders :

• You are shopping for lenders and the loan officer never offers you a Good Faith Estimate. Rut row.
• They don't offer you the rate or the payment?  This might sound silly, but I had 3 clients just in one month, that this happened to them. Yes, can I judge and say that they should have asked?  But maybe the loan officer talked circles around that client, and then they just forgot. Sometimes just hearing, "you are qualified" or "you are approved", gets you excited, hence why you might forget to ask the important questions.
• You find a loan officer because their rates were very good. But since you have so much on your mind, they never go over the rate lock-in features of that program. If they don't cover this prior to application, and especially during application, this could be trouble. Or they get you to sign a rate lock form, but they convince you to float. Question, did that rate even ever exist then?
• You might qualify for a FHA or VA loan, but tell you that you don't want those kinds of loans, because conventional is better for you.  This has happened to at least 5 people that I know of. The main reason was because the lender wasn't FHA or VA approved.
• If your lender/loan officer changes rates or fees during the process or at settlement, don't just give in. Avoid excuses such as; "your credit score dropped", "you have less income", "your credit isn't as good", etc, etc. What I am about to say is the average. These things are usually found out in the first week when processing a loan, not last minute.
• Changing stories / shifting blame.  This one can be used in conjunction with the other red flags mentioned above.
• When comparing good faith estimates, don't just compare the bottom line, "total costs to borrower". Some loan officers low ball certain 3rd party fees to make their good faith look cheaper. Or they escrow less taxes on paper that is mandatory in each state.
• You are at closing and the loan officer says, "don't worry about those docs, we can correct that later". NO !!! Once you sign, it's over.
• Update (04/03/08)  -  If you have a credit score of 679 or less and less than 20% down and you know you should be going FHA, but the lender says that going the conventional way is better.... major red flag. It's been proven that going FHA in this scenario is cheaper monthly.

Red Flags from realtors or real estate offices :

• When an agent only shows their listings. If you want to see homes and they keep showing those only listed by their company or that they are selling themselves.
• One complaint - When a realtor has a full time job that is not real estate related. I heard a story that the buyers had to wait until their realtor got up to show them the house. This was at 1 pm.

 
Red Flags from consumers :

• This is actually to the consumer reading this. Never hesitate to tell your loan officer or realtor everything. Even if they don't ask you and you think it's pertinent to the transaction. Don't take that chance in not telling them. We are all here to help you and not pass judgment. The true professional acts in this manner.
• Be loyal and just don't hop to every realtor showing houses. Build a rapport  with that person. That's if  you feel comfortable with that person.

Overall, don't keep falling for the same excuses over and over. Or, for multiple excuses during the process. Yes, things happen, but 9 out of 10 times, not that many on one transaction. These types of excuses are usually to delay you in finding out the truth, until it's too late. If anything above happens for 2 or more days in a row, don't wait, contact their manager or boss. If you don't feel like you are getting anywhere at anytime, seek a professional in the particular field or possibly seek legal advice. It's one thing to give someone the benefit of the doubt, it's another to be lied to or misled intentionally. Never hesitate to ask questions.

Author of this blog : Jeff Belonger

e-mail : jbelonger@ihmci.com