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First, I would like to say
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Why don't we just publicizing the acts people do toward each other? We do it for companies (and they are not really even people-- just paper constructs where the actual people change place frequently).
The threat of permanently publishing someone's misdeed to follow them for life on the internet seems a powerful motivation to clean up behavior.
Can privacy go to far?
if it walks like a duck, and talks like a duck....
basically consumers were under the (mistaken) impression that brokers were an agent acting in their best interest, like alaywer or buyer's agent. shame on the consumer for not investigating, however every ad, every broker i've talked to and our own agent tried to play it off like that was our relationship.
so the general public think that brokers are agents working in the clietn's (read, borrowers) best interests. legal or not they tend to think of any incentive to rake the borrower as a kickback.
also kickbacks don't need to be illegial, just unethical.
Bon Giorno, Tanta.
I'm always baffled by no mention of trepidations felt by the so-called mortgage professionals. (Not you, my dear, obviously.)
People who knew how the rate structures worked; and who knew how exploding loan balances affected borrowers who were already at or near the limits of qualification.
Could there really have been a total disconnect with the consequences down the line?
I don't get it. Isn't it a kickback? Someone who the buyer thinks they can trust to act in the buyer's best interests, the mortgage broker, is being paid extra in order to act against the buyer's interests. And they're doing it.
A normal "referral fee" scheme is actually not as bad; usually in that case company X pays extra to get business, so the broker has an incentive to steer business to company X. But company X might actually offer okay deals, considering the entire marketplace; the buyer might not be worse off using company X (or they might be). But with the pay-to-put-buyer-in-crappy-loan situation, the buyer is ALWAYS worse off than they otherwise would be.
I don't see how this isn't a kickback. A bribe.
OT for CA
U.S. trade gap widens unexpectedly in Feb.
http://www.marketwatch.com/News/Story/Story.aspx?guid={FF6294DA-478D-4A58-A89B-8FAA0E365E84}&siteid=mktw
They'd fax you the rates? Fax? What, they don't use quill pens anymore either?
NACA=
National Advisory Committee for Aeronautics.
Precurser to todays NASA.
Everytime I see those damn initials used in the context of housing my head hurts...
Chris
I don't get it. Isn't it a kickback? Someone who the buyer thinks they can trust to act in the buyer's best interests, the mortgage broker, is being paid extra in order to act against the buyer's interests. And they're doing it.
I would call it a spiff before calling it a kickback. A spiff is just a monetary incentive to sell a certain product. An ethical salesperson would qualify a customer based on questions/observations and steer the customer to an appropriate product. If the product happens to have a spiff then the salesperson will make more money. An unethical salesperson might steer a customer towards the spiffed item regardless of what the customer wants/needs.
so the idea was to give brokers incentive to get people into loans with a lower likelihood of full repayment.
Yeah, that makes sense to me as a business model if I'm greedy and can't think past next tuesday.
Anyone who took that incentive and currently is unemployed, hopefully they have learned from the experience. And if they can't pay their mortgage, well, that might give them some perspective on what they did for a living.
don't see how this isn't a kickback. A bribe.
Well, the idea--which I am not endorsing, I am merely describing--is that the YSP is the broker's compensation for getting you the loan.
In theory, when you take the premium rate, you then don't pay fees to the broker at closing like an origination fee or broker fee.
In practice, of course, you could probably get a brokered loan with a 1.00% origination fee, or maybe a $500 flat broker fee. It is the excess compensation here--three points?--that lands it into kickback territory.
My big problem with the term "kickback" is that it does play into this idea that the wholesalers really really wanted only high-rate loans, and so they ponied up "referral fees" to get them. Some certainly really really wanted neg am ARMs and paid up accordingly. But my point about the rate sheet is that they all listed "par" rates, too. It wasn't like you had only premium rates to choose from. And of course the wholesalers published high premium rates because the brokers told them those 103-105 prices were needed to cover borrowers' closing costs. They weren't "supposed to" be broker compensation. Yeah, right.
They'd fax you the rates? Fax?
Oh, my dear. This is mortgage brokering we're talking about.
We all went to posting our rates online as soon as that technology became available. It was wonderful: you no longer had to crowd immense amounts of information in tiny font onto letter-sized pages; you could, for once in this industry, spread out a bit and design readable rate sheets.
And what happened? All the branch processors called to complain, because they needed to be able to print the rates off the webpage and fax them to their loan officers.
So everything went back into the microscopic unreadable printable page format.
Kickback Definition | Definition of Kickback at Dictionary.com
"kick·back . . . 2. a rebate, usually given secretively by a seller to a buyer or to one who influenced the buyer."
How are these payments not kickbacks? If that is a problem then don't accept them, but please don't make excuses and equivocations for the kickbacks.
I would call it a spiff before calling it a kickback.
I've called it "spiff" before, and everyone said, wha? I take it "spiff" isn't a widely-understood concept.
I see where the "kickback" label comes in.
The incentive is different from a regular sales commission. Say you're buying furniture, or pricey clothes, or a car. A commissioned sales rep upsells you into a higher-priced product.
First, you probably realize he's getting a commission, and you certainly realize he's a salesman. No one can say you weren't forewarned. But all the subprime folks I met had titles like "Financial Advisor" on their business cards. Many consumers had no idea how the business works, and didn't realize they were being sold.
Second--and maybe more important: when you get talked into spending more by a real sales person, you do actually get to go home with that vicuna coat. You spend more than you planned, but you get more, too. In a subprime mortgage, the higher-rate loan offers no real benefit to the borrower. The broker knows it's a completely sucky deal for the consumer right at the point of offer.
So, "kickback."
I don't have a problem with higher rates for fancier mortgages with provisions like 'pick a payment'. But if you pay the broker relatively more to sell that product, you are creating an incentive to push a product that may not be in the end customer's best interest.
If, as a broker, the bank offers me 1% of loan value to sell a 6% 30 year mortgage and 2% (double) if I sell an Alt-A double subprime pick a payment, neg-am, win-a-free-car mortgage, there will be an incentive to push that product.
It is conflict of interest that professionals like Realtors and Mortgage Brokers should be concerned about.
Another rather shocking part of that interview was the fact that many homeowners would ask if a rate was "fixed" and the Realtor would say yes... even if it was adjustable!!! They would argue that it was "fixed" for a year when pushed on it. These jokers should be in jail.
It was always much easier to "sell" the higher rate and "earn" 2 or 3pts ysp than to "sell" the origination fee on a par loan. Especially if as the broker you have minimal industry and/or product knowledge and training.
The banks as well would manipulate the rate sheets to push the rates that would be most profitable for them.
The banks as well would manipulate the rate sheets to push the rates that would be most profitable for them.
Well, yeah. But isn't that why, we are told, consumers need brokers? They need someone who can interpret these rate sheets, compare across many lenders, and figure out what's the best deal?
Again, I have this sense that while probably nearly anyone will fall with enough temptation, it doesn't take much tempting to make these brokers fall. Oh, I see 102 on a rate sheet. I MUST HAVE THAT.
I've called it "spiff" before, and everyone said, wha? I take it "spiff" isn't a widely-understood concept.
When I worked a sales job many moons ago we had spiffs. The sales manager would fax us a list of incentives every Monday. Our commission was always a percentage of gross profit, but some items would have a cash incentive on top of the normal commission. Nobody told us to push the products over anything else. We simply knew the spiff was there and acted accordingly.
The phrase "no better than she had to be" comes to mind.And AE's did push neg am ARM's hard,especially the boys and girls from World.
"Tanta writes:
I would call it a spiff before calling it a kickback.
I've called it "spiff" before, and everyone said, wha? I take it "spiff" isn't a widely-understood concept.
Tanta | 04.10.08 - 9:13 am | #
In my younger days I was a sales person then manager for a retail electronics store. As such spiff (and spliff thanks to college) for that matter are well known to me. On all the price tags (handwritten - my promotion to manager was I suspect in part due to my fine penmanship) contained a seemingly innocuous sku that in reality told the sales folk the amount of spiff they would earn if they closed the sale at ticket price.
Speaking of World, Wachovia/World reports 1Q on 4/18. Any bets on NPA% esp in light of their, ahem, "common sense" underwriting. Do I hear 3.5%?
Mark-
I've been involved with Zillow's mortgage thing since day one. Their position is that over time brokers and lenders will get enough positive feedback that it will be possible to tell the honest ones from the scam artists. There's a fair degree of behind the scenes policing going on too, as the people who are trying to play it straight call attention to the quotes that seem too good to be true.
The other reality is that you really do need to know your credit score, LTV and lock in term required to get an honest fixed rate quote. Any pure consumer driven site runs the risk of garbage in garbage out.
regarding lowermybills.com, this lead generation company, owned by Experian, a credit reporting agency, ran some of the most deceptive and wildly successful internet banner ads all throughout the bubble run up.
I hope like hell they won't be "taking over." Same with Bankrate. They have had lots of problems with lenders quoting rates that are not available, just to get the lead.
For all you folks that assume a client can "negotiate" their fees such as the Yield Spread Premium, we would need to assume that a consumer knows what YSP is, and we'd also need to assume that the mortgage broker explains that the YSP is negotiable, and also, we'd need to assume that the YSP was properly disclosed on the Good Faith Estimate at application.
Too many assumptions that are false, way too often, even today.
In regards to national licensing of loan originators, the Conference of State Bank Supervisors has taken this on. Here's their website:
CSBS | Mortgage
State level systems exist right now, but when an LO jumps from state to state, he/she has to become re-licensed and the new state did not have a way of tapping into other state's licensing systems.
This system is suppose to make it easier to track LOs nationwide.
I'm just saying its very believable that wholesalers started looking the other way when the brokers pocketed the YSP, wholesalers called up brokers who consistently 'upsold' and praised them, or when they faxed out new rate sheets coyly mentioned their 'new' YSP for certain types of loans.
OK, here's the problem we're having.
What we call "YSP" is, basically, the excess "price" for a loan over par. Par is a price of 100, or 100% of the loan amount.
Wholesalers don't actually buy loans from brokers. Brokers just take applications and pass them on to the wholesaler, who closes the loans with its own funds. The wholesaler "creates" the loan. So "price" here is a tricky concept.
I use the term "price" to indicate the value that the wholesaler places on a loan of a given type and rate.
The term "points" usually means what the borrower pays at closing. If they are "discount points," it means that the price the wholesaler places on the loan--because of its lower interest rate--is less than par. The borrower pays points to the lender to bring the yield on that loan back to "par." So--if you pay one discount point to get a rate of 7%, you could also pay zero points and get a rate of (say) 7.25%. (There is no law of physics about the price:rate ratio, it depends on a lot of things we don't have time to get into right now. But 4:1 is not unheard of, meaning one point in price to .25 in rate.)
"Negative points" are what we call "premium." It is not, however, cash the lender pays the borrower to take a higher rate (which would be the exact opposite of a discount point). The lender can "credit" premium to the borrower in the form of an offset to closing costs (no one ever disburses cash here). If the lender does that, then the yield on the loan is . . . par. Three scenarios all have the same yield: 7.00% with one point paid by borrower, 7.25% with no points, 7.50% with one point paid by lender to borrower.
The way I am indicating prices, those choices on the rate sheet would be priced as 7.00% at 99.00, 7.25% at 100.00, and 7.50% at 101.00.
Only if the lender does not pay premium to anybody--borrower or broker--does the 7.50% loan actually yield more than the 7.25% or the 7.00%.
The matter is complicated by a practice lenders have had since dirt of charging an origination fee that is expressed as a percentage of the loan amount. Although I always try hard to call that an origination fee, it is frequent that people call it a "point." Just to muddy things up, no doubt. Anyway, this O fee has no relationship at all to your rate: it is supposed to cover expenses and a profit margin for your lender.
Some lenders got into the habit of printing a rate sheet showing 101 for a loan with no O fee. That means that the lender's profit margin is built into the price there. Other lenders require the separate O fee, so that lender would show a slightly higher rate at 101.
End of all this . . . if lenders wanted to increase their yield, they would not get there by closing high-rate loans that they paid premium dollars to the borrower or the broker for. They would have to simply adjust the pricing matrix so that, using our example above, 7.50% gets priced at par instead of 101.
If you did that, then you could still buy higher rate loans without paying YSP to brokers. You would truly goose your yield, and some portfolio lenders do in fact price this way.
Lenders who are expecting to sell their loans into the secondary market are always pricing to some approximation of the required yield from an investor (either whole loan or MBS). But it just isn't true that MBS investors, for instance, want the highest interest-rate loans they can get. I can't re-write my long post about negative convexity here; suffice it to say that without prepayment penalties, high-rate loans prepay too fast. It does certainly reduce your yield to pay premium (over par) for a loan that has a life of a year.
What the YSP thing is about is finding a way for borrowers to "finance" exhorbitant broker fees, in essence. It isn't about wholesalers jazzing their yields. (If they are jazzing their yields, they're doing it in the calculation of that "base price" where you can't see it.)
Does that help?
It's interesting how many viewpoints there are regarding this.
From my perspective, none of this is news, except as Tanta mentioned, the tendentious perspective of NPR.
By this, I mean first that what about this story haven't we heard more or less a zillion times? The only news is that NPR, which is pretty MSM referring to a customary and legal practice as a kickback, which strongly implies it is an illegal practice. And careless of NPR.
Meanwhile, they managed to work 'Brownian Motion' into the next piece, on the failure of risk management in banking. I think they blew it, because although they started out with a little science thing on pollen in water, they should have then just had someone turn over the tank of water. You get all this nice randomness and then....boom.
I was talking the other day about "overage" and "underage," so I might as well clear that up. "Overage" to a lender is, exactly, a situation in which the loan's interest rate is in "premium" territory, but the lender does not give back that premium to the borrower in any way. So the lowest "required rate" my rate sheet might show today for a no-point option is 7.25%. If I can get you to take 7.50%, without getting a closing cost credit, that's 1.00 in overage to me.
Underage is the opposite: if I give you 7.00% at no points when the rate sheet today requires a point for that rate, I am "under" by 1.00.
Again, the only thing a wholesaler gets out of paying two or three points in YSP to a broker who pockets it is a happy broker who will bring in more loan volume. That wholesaler does not get a higher yielding loan than if the borrower had taken the true "par" rate and no excess compensation went to the broker. YSP is not "overage" to the wholesaler.
Now, I suggested the other day that it can be considered a kind of "overage" to the broker. That's the idea of the "point bank," where you pick up 3 points here off some naive borrower, which allows you, if you have to, to concede a bit to a sophisticated borrower (or a golfing buddy, as the case may be). But that's all about how the broker manages his own revenues. Not the lender's or investor's yield.
The discussion is basically pointless because consumers will never get it and they don't need to get it and regulators and the media understand that consumers simply need a clear quote bottom line.
But Diane, throughout my career this issue has always failed on the question of "removing choices from sophisticated people." That is what it comes down to.
Anything easy and simple and "bottom line" you come up with, someone will come up with some example of how a senior vice president of finance at some bank wouldn't be able to get the deal he wants to because "choices" have been eliminated.
Business practices in this industry are, after all, being set by people who tend to think, "what would I want out of the deal?" It's like the whole brouhaha over IOs and Option ARMs. The only people who are going to miss that are . . . people in the industry, who have them quite often.
I think that "Yield Spread Premiums" was set up by HUD to help people with closing cost for those who couldn't afford it. They would have a higher interest rate in exchange. Now the broker gets the closing cost plus the YSP. So, I say it's close to an illegal kickback scheme if you ask me.
re..
What the YSP thing is about is finding a way for borrowers to "finance" exhorbitant broker fees, in essence. It isn't about wholesalers jazzing their yields.
How odd, then, that many direct lenders also offer rebates of part or all their closing costs. Are they also charging exorbitant fees?
I don't disagree with your conclusions, I just find it strange that you seem to think that this was limited to brokers. There were lots of lender's wholesale reps and retail agents making six figure overages off these loans, too.
The other thing a lender gets for paying a broker three points is the loan itself. It's hard to remember now, but back then there was tremendous demand for these toxic deals. The only reason lenders paid 3 points was because that was how the market priced them.
Trust me, if the lenders could have gotten it at two, they would happily have done so and kept the overages for themselves.
How odd, then, that many direct lenders also offer rebates of part or all their closing costs. Are they also charging exorbitant fees?
Not if they are a regulated depository. Come on. Depositories can't get away with charging an "origination fee" of three points on this loan and no points on this loan. I tried to make that clear the other day: once upon a time they tried it, with the old "point bank," and got busted on fair lending examinations.
Any time a retail lender closes a loan at a rate with more premium than is needed to cover any "closing cost credit," they have OVERAGE. It gets reported as such. The regulators zero right in on it, too. And if the regulators conclude you are in fact price-gouging, you face consequences. The problem we have is a regulatory regime that doesn't hold wholesalers responsible for what brokers do.
It comes down to this: do you, as a broker or a retail lender, have a single set fee you charge to compensate yourself for originating the loan? Whether it's a flat fee or a percent of the loan amount? If you do, then fine. It should be disclosed up front to the borrower on the broker agreement that the borrower signs BEFORE anything else happens on the loan. It should have zip to do with the borrower's interest rate or loan amount. Every bank I've ever worked for had a corporately-imposed origination fee and that was that. No loan officer got to "bump it up" to 300 bps today because the borrower is gullible.
If your "fee" is however many points you can get out of the deal with a generous wholesaler and/or a naive borrower, then there's trouble.
it may help people to understand that what lenders are really doing is calculating the points associated with various note rates (given available MBS execution and servicing valuations), so that they are, in theory, indifferent between any combination of rate/points. this is also why the rate/points matrix isn't linear or constant over time.
i once tried to put a little table in the comments showing an example of the calculation but it was a giant mess, so i'm not doing that again.
PS, Shnaps, check out the BBBs on CWALT 06-OC5 and CWABS 06-13. the deal with 115bp less WAC has higher yielding mezz tranches!
The adversarial relationship between wholesale lender and broker is quite pronounced when the shit hits the fan, isn't it?
Not all mtg brokers are bad. Some are good, honest people. Not all wholesale underwriters are bad (I was one once). Some are great, honest and hard working folks who I call friends.
The system was filled with excess and abuse everywhere. The plots are more or less hatched on the wholesale side and then taught to brokers is what I observed. Some brokers and wholesale reps are personal friends of one another, golf buddies etc. I have witnessed it while I worked for a wholesale lender. Not a small one but a major one.
Let's be real. The lender is the one who offers the product and then underwrites and funds it. Mtg brokers amount to a sales force who has independence and the power to choose another provider if the one in question is being unreasonable.
This is the business model: It amounts to a retailer/wholesaler relationship as if I think Coke is blowing it, I'll serve Pepsi in it's place. If market trends dictate I offer exotic energy drinks in the cooler next to the more traditional sodas, I'll do that. If the Health Dept passes a law saying no more exotic energy drinks because they are under suspicion for side effects, away they go!!! But perhaps I will not offer energy drinks to 6 yr olds because I know they really don't understand how to use them properly...
The wholesalers created the sodas and came to my store asking me to stock them on my shelves. Pretty soon, customers came in asking for certain energy drinks by name...
Give me a break. Mtg brokers are mere shopkeepers offering what the major beverage distributors offer. If the beverage makers distribute poison, they go out of business and new ones take their place.
Meanwhile my little shop offers what the market gives and takes and we don't overcharge people for sodas because there are other soda shops around...
This eats at me as a broker. I offer a customer today a rate of 5.875% on a 30yr fixed at 101.00 YSP with no points charged to said customer(lender is Chase for example) and closing costs of roughly 1.2% of loan amount.
The same customer can call up a Big Bank and their rate will 5.875% charging a point on the front and closing costs of 2% with all their junk fees. How is what I am doing not a service and how will the public benefit by getting rid of YSP?
Shouldn't the customer do their due diligence and call up several different lenders and brokers and make them compete for their business?
An attitude that brokers are "bad" and doing away with them will only create higher interest rates for the consumer as an oligopoly is formed.
By the way. I haven't gotten a faxed rate sheet for years now. I get them PDF'd.
Things have changed a lil' bit since you've been on leave Tanta. Things have changed a bit....
By the way do you have a DE?
Tanta writes:
OK, here's the problem we're having.
snip...
Does that help?
I appreciate you taking the time to explain things to me.
I do have some more questions though which maybe off topic and don't need answering if I seem to be following along.
So if you get a 103 priced loan the interest rate will be such that its yield will be the same as the 100 priced loan. This assumes a 30 year fixed mortgage or do ARMs follow the same behavior?
So in order for their to be an incentive for the wholesalers to encourage selling of 100+ priced loans the resale market would have to pay a premium for certain loans or force discount prices for the loans they didn't really want to buy.
I did read your piece on the convex curve yield when you posted. Is it one of the factors in the MBS losses? I assume the MBS issuer has to continue to pay out on the MBS even if the loans in them prepay or default?
So it seems in order for my thinking to be right the resale market for mortgages would have to have been controlled by a few self destructive institutions. Reason says thats not true, but I'm not sure the evidence can confirm or deny that.
The new GFE and the bottom line focus for the consumer doesn't eliminate choices. It simply frames all offers into a comparison model that most consumers, even those we might think are sophisticated, can most easily comprehend. So, even though insiders understand and can argument to merits of YSP and SRP and what's fair and what's not, the reality is that we're facing wholesale change in disclosure.
Consumers, the media, regulators and lawmakers want a fix. The proposed GFE treatment of YSP as a credit to consumers isn't bad. Any mortgage broker who is confident that the service being provided is worth the dollars he earns on a transaction should not fear the disclosure.
I say take heart that predators will be forced to go honest or get out and that means that mortgage brokers will have a more fair market in which to compete. It's hard to compete when liars and smooth talkers are in the game.
Tanta et al:
I have worked in a derivatives exchange for a good number of years and have seen a stock market crash (actually two if you include 1989) an FBI undercover sting operation, a high tech rally (where we use to go limit UP overnight) and then the market breakdown, 9/11 and a good number of other market events.
I have learned this about the press.
They are experts about nothing.
They always want the "short version" because they don't have the time, willpower or constitution to learn about a subject they are to write about.
Hence count on them to get it wrong.
I remember as a L.O. in a mortgage broker's office getting the rate sheets with the positive (102, 103) premium, problem was you couldn't book a loan at those rates. Borrowers shopped around and could always get someone to quote a better rate. The only time I ever got back more that 125 or 150 basis points on a mortgage, was if I wrote the application at one rate and didn't lock the loan's rate and let it float. This way if mortgage rates went my way, the rate I promised the borrower would pay a higher yield spread premium.
The other side of letting the rate float was that rates could go against me and I would have to "buy" the promised rate for the borrower, which at the time probably would have gotten me fired.
Most of the time you quoted a rate to a borrower that paid 125 basis points on the loan amount and call that the "zero point rate."
Those 125 basis points were the entire income earned from processing the loan without any charges to the borrower except for the application fee, which at the time was $295 and was split $50 to the credit bureau for a mortgage credit report and $245 to the company that performed the property appraisal.
My end was 40 basis points on the first 100 and 1/2 on everything above. So on the loan paying 125 basis points, I would earn 52.5 basis points, or $525 on a 100k loan amount.
I didn't get rich on that.
So Tanta, Diane,
Then why don't we just cut to the chase and make all brokers owe fiduciary duties to their clients?
Wouldn't this be a lot easier than more and more disclosures or eliminating choices?
Put the responsibility back on to the loan originator.
Interesting comment about overage. I didn't know that, but in thinking about it I guess it makes sense, especially in light of fair lending rules. I wonder if that's part of the reason why regulated lenders form separate entities to work with mortgage brokers?
My current practice (and something that all lenders are rapidly moving towards requiring of all brokers) is to do exactly what you are proposing. I have sent a sample to your yahoo address.
I didn't get rich on that.
BINGO!
Wherever we got the idea you're supposed to "get rich" taking loan apps, we need to send it back for a refund.
A low margin high volume business in which you can make a decent living but not the Big Bucks. That's what it was, and what it will be again.
This dweeb in the NPR piece made $500K in a year. Filling out 1003s and locking loans.
No loan originator of any kind, broker, retail, whatever, needs to make a half a million bucks a year.
Shouldn't the customer do their due diligence and call up several different lenders and brokers and make them compete for their business?
Excuse me if I'm a little slow here, but isn't this the kind of service a broker is supposed to provide?
Why should I pay for a broker if I have to do the legwork myself?
(I never used a broker. I used a salaried LO for my original purchase, and I went to my credit union and asked for my refi.)
By the way do you have a DE?
No. I have never actually been a line underwriter. I have managed underwriters. I have done due diligence underwriting as part of portfolio valuations and bulk sales. I have done the "second review" for fair lending purposes. But I spent way more time on the legal/pricing/sales & delivery side, plus writing credit policy, than ever I spent underwriting loans.
A former employer of mine once asked me if I wanted to get a DE, and my answer was along the lines of ARE YOU INSANE? Right, then all the really ugly FHA loans would have found their way onto my desk when I was off getting coffee, instead of just all the screwed up construction/perms . . .
Jillayne: It would be helpful to define the mortgage broker's role, fiduciary or not, so the consumer understands the bargain for services. Fair or not, the myth exists in the mind of the consuming public that a mortgage broker is the fiduciary of the consumer.
I don't think its something HUD can tackle. The uniformity in consumer disclosure of pricing - rate versus discount or premium - is, I think, as much as HUD can achieve.
Clarity in mortgage shopping may on its own expel the myth.
For what it's worth I had a DE. Woo hoo!
"Wherever we got the idea you're supposed to "get rich" taking loan apps,"
Well, in my own defense I didn't just take the loan app, I did the processing also, as half the time there wasn't a processor in the office.
There wasn't much software and the office pc's were all stand alone, no local area network.
On the day of a closing you always stayed close to the phones, cuz there was almost always a call.
Tanta, I enjoyed the tendentious read. Thank you. However, I have a tendentious question.
Doesn't it appear as though we're neglecting the elephant in the room?
What I mean is this: why don't we really all simply practice full disclosure and show the spread banks add in pricing to their ratesheets before handing it off to their wholesale or retail divisions?
But let's not stop there, why don't we simply allow homeowners to be their owns banks and apply for a leveraged loan directly from the investor via the fractional banking allowances offered us currently by the banking gods atop their Mount Olympus? (I could get a 500K home with only 42K cash...fun!)
Or, would that rather be like Prometheus, stealing the real secrets from the American banking system and opening it for public view....we can't do that can we?
The elephant just ate a peanut.
FHA loans aren't ugly Tanta. They are a great way to get working class people into homes. The American Dream...??? Think of those files as people who are trying to better themselves and their families. A home to own and raise a family in. The pride of ownership and a fair shake.
There will be more of them... FHA's.
I agree that front line LO's should not be paid 500k per yr. I myself just like a gig where you can make your own hours (within reason) and have relative freedom and make a decent living. But over the years I've learned that in the long run it all evens out. Big earning years are usually followed by small earning years and I manage my finances and projections in 3 year blocks.
Yo Diane Cipa and Tanta:
I welcome the elimination of the YSP but how will it eliminate confusion created by ever changing bond prices? Some of the mtg broker community has abused YSP's and now they may be eliminated entirely. If not abused, they benefit the consumer by giving them choices. They also can be hazardous to the lender by borrowers who are churning or who plan to pay off the lender quickly. So I think it is reasonable to have the consumer pay up front for the use of the money. To err on the side of fairness to all at the expense of the sacred consumer is ok w/ me. Either way I'm ok because I've used YSP's to offer choices to consumers, not to rip them off.
If you call three different providers in a week and there happens to be a Non-Farm payrolls report that comes out on Friday and moves the market, how can you compare a GFE against another GFE unless they were generated on the same day? There is significant volatility in the market for 10 Yr Treasuries which is the benchmark for mortgage backed securities which determine the consumers interest rate. How is HUD or any other regulator going to address that conundrum?
Also is the fact that there are different prices for different amounts of time required for the rate commitment. I myself quote a 30 day lock but how to quote a 60? I have a method of locking for 30 and then negotiating a free extension if prices are same or better. If not, I charge the customer for extension fees but if I'm locked, I have a rate that no longer exists. This isn't as much of a problem for a portfolio lender who adjusts their rates periodically but for a mtg broker who does a lot of conforming deals, this is a major issue.
Trying to explain this to customers is futile. At the end of the day, nobody cares how many times you banged your knuckle with the wrench... They just want to know if their car is fixed or not...
I keep saying. I isn't as easy as it looks folks. "Fixed" rates are anything but fixed from my perspective.
Oh. I want to be regulated like a depository institution. Very much so. So bad. So bad. Wanna know why? That means I could enjoy the benefits of being a depository institution and become a rate spread business instead of a fee business. Please come regulate me??? Please???
LJ writes: This eats at me as a broker. I offer a customer today a rate of 5.875% on a 30yr fixed at 101.00 YSP with no points charged to said customer(lender is Chase for example) and closing costs of roughly 1.2% of loan amount.
The same customer can call up a Big Bank and their rate will 5.875% charging a point on the front and closing costs of 2% with all their junk fees. How is what I am doing not a service and how will the public benefit by getting rid of YSP?
Because what you just said is incomprehensible to 99% of consumers. You may be doing a service, or may be a scamster; in the end, the consumer will have to take it on faith, or more likely, charm.
Sadly, the scamsters have an advantage in our Darwinian business ecology and will slowly drive quality fiduciary types like you to extinction.
If you call three different providers in a week and there happens to be a Non-Farm payrolls report that comes out on Friday and moves the market, how can you compare a GFE against another GFE unless they were generated on the same day? There is significant volatility in the market for 10 Yr Treasuries which is the benchmark for mortgage backed securities which determine the consumers interest rate. How is HUD or any other regulator going to address that conundrum?
The general idea is that you don't give a GFE to a borrower without informing the borrower, in writing, that the rate/points quoted are either "locked" or "floating."
In fact, the proposed new GFE regs would require all GFEs to have a "ten day quote" with them.
I sometimes get the impression that folks on the front end have very little idea not only what data is captured and reported on a wholesaler's "back end" part of the system that you don't see, but also how much of it is transparent to regulators (if not to you).
Every pricing system (I mean the back end, not your user interface for looking at rates or locking loans) stores exact application date, GFE date, lock date (with time stamp down to the second), and rate sheet date and time. On any given loan, a regulator looking at it a whole year later can pull up information on what rate sheet was in effect the day the GFE was given and the day the loan was locked. With a few keystrokes you can find what the "par" rate was on that day and time for the same lock period, because all those millions of numbers from all those millions of daily rate sheets are stored for ten years in everybody's database. Since the last HMDA change, we also store the comparable treasury index value that was in effect 45 days prior to loan closing, which also proxies "market" for a given loan. That is how the HMDA reports distinguish "high cost" loans.
SATO, or Spread at Origination, is such an elementary concept for pooling, securitizing, and prepayment modeling that our systems have, you know, been establishing such things (the spread between a given loan's note rate and the then-current required net yield or MBS coupon at origination) for many, many years. This information has therefore been something that regulators look at in examinations for many, many years.
David Young is all fired up about the components of pricing. Very little in my experience is more combed-over by regulators than the pricing engines. They can go through it table by table, algorithm by algorithm, formula by formula: you can't lock regulators out of your systems. That information would not only mean nothing to consumers, I suspect it would mean nothing to 99.9% of brokers or loan officers. I have tried explaining only small parts of it to people on the blog, and even that is hard to do. There's no way I'm going to talk about Monte Carlo simulations or valuation of servicing rights using an IO model for cash flow as a component of SRP calculation. But those of us who deal with these things most assuredly can and do discuss it with the regulators. To them, it's as open a book as they want it to be.
You want to be a rate spread business? Fine with me: cough up some capital. Then you have a "cost of funds" that can be subtracted from the "gross yield," and then we can talk about what that "spread" really is. Oh, you don't have a deposit base or other capital funds to invest in mortgages? OK, fine. Then you're a fee-for-service application broker. Why not simply consider that an honorable profession deserving a reasonable compensation, and be done with it? Your job is to get the best deal for the customer, not to verify that the wholesaler is pricing in a safe and sound manner that meets fair lending requirements. It is the federal bank regulators' job to do that.
Look, obviously I believe in an informed citizenry who is sufficiently conversant with these complicated things that they know when and how to demand more and better from the regulators. See my UberNerd series. I am not saying "butt out, it's over your head." Nonetheless, I am frankly kind of appalled by the implication in some of these comments that just because it isn't perfectly transparent to a mortgage broker where prices come from or how data is managed, it must be a mystery to everyone. Consumers and brokers cannot "watchdog" this stuff because they don't have the skills and knowledge and experience needed to do it. That is why we have regulatory "watchdogs." And the back rooms of depository wholesalers have managers and auditors and analysts as well, working with these very issues.
In other words, David, it might be an elephant in your room, but in the OTS's or Fed's or HUD's room it's about the size of a springer spaniel. There's a streak of the arrogance of ignorance here that does, indeed, make me crabby. I care a great deal about what the Comptroller of the Currency has to say about wholesale mortgage pricing methodology. Frankly, I have no interest whatsoever in what a bunch of brokers thinks about it, not unless they want to develop the skills, knowledge, and experience that the C of the C has.
I begin to have the impression that a lot of brokers are invested in making it more mysterious for borrowers, not less. After all, the more mysterious it is, the more you can charge for your extra-super-services. Consumers on the whole don't give a shit about the connection between non-farm payrolls and the 10-year TSY contract, and Goddess love them, they shouldn't. They want to know if they are locked or floating, how long they are locked, and whether you're gonna change shit on them at the last minute in order to get a "bump" in your comp. If you are locking borrowers while floating with the wholesaler, you are engaged in naked speculative trading and ought to be thrown out on your ass. Borrowers don't need you to play Bond Trader. They need someone to get them a rate lock, explain it, and honor it. Delusions of grandeur are being maintained at the consumer's expense, not in the consumer's best interests.
Does that mean no poetry today?
I begin to have the impression that a lot of brokers are invested in making it more mysterious for borrowers, not less. After all, the more mysterious it is, the more you can charge for your extra-super-services.
It's a good impression to have, Tanta, because it's 100% accurate. How else do you think the hedge fund business would have thrived all these years while delivering, on average, performance no better than anyone could have gotten from an index fund?
By saying, in effect, "Stand back. Leave this to the professionals." And it sure helps bolster the meme if you can make what you get paid to do seem like open-heart surgery in terms of complexity.
And, again in the spirit of the hedgies, it's a small step from convincing your customers that you're a "black-box" business to convincing them (and yourself) that you're entitled to not just a fee but a piece of the action as well.
And down that way madness lies.
Tanta: Can you hear me clapping? Well said.
Zarley: I'm NOT for the elimination of YSP. I AM for HUD's proposed GFE disclosure format of discount/premium and related interest rate options. This form of disclosure will assist the honest mortgage lending community is eliminating from their ranks, predators and those who can't cope with responsible disclosure.
Tanta, thank you for opening the door a little more to the wholesale pricing methods...that would be a FUN topic to debate about someday (!).
True, it might be one of the many elephants in my room, GOD knows I have quite a few. Although I do think there was a bit of ad verecundiam in your facts and figures (and ultimate) appeal to demos....or (I mean) the regulators.
As an aside, I think you and I would largely agree, in that, several of the brokers out there (90%), need to get out of the business and will likely be done with it due to increasing difficulty in a short time (market forces)...we'll see what happens.
Kindly & Respectfully.
Yo Tanta,
Thanks for the detail but you are missing the point. Rates change so quickly, how is the consumer supposed to compare apples to apples? You did not address how to protect the consumer from rate volatility in the bond market. How can anyone offer a 10 day guarantee on the fricken' bond market??? It changes daily and sometimes multiple times in a single day?
Mtg brokers don't control the bond market and complex wholesale pricing models.
It is complex and I guide my clients through the complexity and get them the best possible execution.
I just came up with something that has not been thought of by anyone else and it's a curve ball to you.
The bond market volatility? How do we address that in the GFE? How do we guarantee a rate quote for 10 days when the said rate is subject to the whims of international financial markets?
Yo Tanta,
You have described the regulatory process of how regulators examine but this is of no use to the consumer.
Consumer calls lender A on Monday and requests a GFE. Then calls lender B on Wednesday and lender C on Friday and then looks over the GFE's with their spouse over the weekend so they can talk it over. They see quite a difference in the Monday quote, the Wednesday quote and the Friday quote. It happens to be the the first Friday of the month and the Non-Farm payrolls report has in fact moved the market.
How is this issue addressed? You have said that it is not the consumers concern and you are correct. But it is someones concern.
Whose concern?
Zarley's solution:
The elimination of the fixed rate mortgage and the secondary market (sort of).
When the US T's drop in yield and mtg backs soon follow, the system is overwhelmed with applicants looking to book a profit by refinancing their debt or figuring they should buy at that time because rates are low. This causes all sorts of quality control problems, staffing problems and even proper interest rate risk management problems. It was also one of the reason the S&L's failed back in the day but that another topic.
Depository institutions or Federally chartered home loan institutions should originate home loans that would remain on the institutions books for a minimum seasoning period of 2 years. Then they could request that regulators allow a bulk sale to Fannie or Freddie to free up capital for more home loans.
The loans would all be adjustable but designed with safety mechanisms for the consumer. If market rates put the rate spread underwater, the institution would sell the loans at par or perhaps even at a discount so that the institution can get out of unprofitable loans due to market interest rates, not bad lending practices. This would eliminate confusion in fixed rate mtg's due to ever changing bond prices. Also, the luck of the draw benefits some consumers at the expense of others. This idea would eliminate that as all would share interest rate risk and benefit equally.
But the fixed rate mtg is a sacred cow... The complexities of our lending system or not due to mtg brokers and their visions of granduer, Tanta. The system is quite complex but not of my doing or any other broker, no matter how much you cloud the issue with wholeasle pricing models SATO, etc.
Who is really having delusions of granduer here?
No lender I am aware of is willing to hedge a GFE for 10 days unless it is paid for somehow?
What? Every time I quote a borrower do I have to either buy a put on US T-Note futures or go short on a futures contract so that in the event the borrower is a) interested in submitting an app b) qualifies for the loan c) the collateral is acceptable , I can still offer the rate....???
I would need to charge a lot more to hedge mere quotes wouldn't I? Then the consumers that actually do close would pay the hedging costs of mere shoppers?
I don't think this proposal or new reg has been thought out very well.
Let's examine the words: Good Faith Estimate.
The estimates are supposed to made in good faith.
Key word: ESTIMATE
Naked speculative trading. I know how to do that but I don't gamble with other people's checkbooks.
One advantage of being a broker is the ability to pull the loan and send it to another lender if rates are better after you've locked it at the first lender. I've had entire blocks pulled before.
Free options anyone?
I exploit the system for the benefit of my clients because I represent them, not the lender.
Zarley: The proposed GFE has a uniform ten day guaranty on the fee quote but this does not require a 10 day lock on the rate. The loan originator must disclose whether or not the offered interest rate is locked or not. If disclosed as locked, it's locked with zero tolerance.
On the origination fee side, you'll need to put together options that you can live with because there's a zero tolerance there. Whether you are disclosing based upon discount points or a YSP, the rate you eventually lock must match up with the fee scenario.
It's different but doable.
Fees are no problem to guarantee if all the variables are known. They never are at application and that is why many things can vary, although those should be the exception to the rule, not the rule as I am sure some unscrupulous originators have done..
Variable fees are highly suspect and appear predatory but I offer you this scenario...
An originator takes in a refi application as an SFR and the borrower does not disclose a rental unit in the rear because his relative lives in back and he doesn't collect rent. The appraisal comes in and it is a two unit property. The lender has a fee adjustment for units as does the secondary market investor(s). Because the borrower failed to disclose, the originator would have to eat a point or a point and a half?
I think this is why RESPA designed a "Good Faith Estimate" back in '74. As the name implies, the originator is making the estimate in "good faith".
These types of scenarios go on in the real world constantly as far as surprises to both originators and their customers.
How is that addressed? Would there be a form that would be signed to essentially renegotiate the fee arrangement and noted as a regulatory exception due to extenuating or unusual circumstances or non-disclosure by consumer? Some consumers just really don't know everything about their own properties or even their own finances and these things are discovered via processing and underwriting.
As for rate locks: I just got through taking a refi application and informed the consumer about the rate environment and risks of floating. In this current market I advise extreme caution in floating due to rapidly falling dollar. Falling dollar bad for bond yields which will be bad for mtg rates. BUT there is also downward pressure because of economy. Borrower requested that I monitor and and advise. I advised borrower that I can't guarantee 5.875 @ 0 pts on a cash-out refi, owner occ, condo, will be there on Tuesday. I can promise to monitor and advise however... Advised borrower that we will run AU findings by Monday and discuss market conditions and decide on strategy at that time in regard to float or lock.
Borrower mentioned 60 day locks she had in past and thought all were 60's, not 30's. She used to be a loan processor, ya' know... No Mrs. Consumer, 30 for that price but we can either extend for free if rates are same or better (in effect getting you a 60 at a 30 day price) or you can assume the worst and pay for a 60 upfront right now, even though it is unlikely we will need 60 to close. I recommend this strategy to my clients as I've found it saves money for them on lock fees most of the time. If not, we pay a week at a time to extend and may not need to go 60 but perhaps only 40 or 45.
This is how it is supposed to be done folks... The consumer is a repeat customer. This is the fourth loan I've handled for her and her relatives. This is not accomplished by giving out crappy deals. This is all about doing the best for them (it is Saturday at 4:38pm) and also being honest and forthright and firm in your negotiations.
Hi, Zarley: HUD addresses changes to the GFE due to unforeseen circumstances.
If origination charges are going to change due to unforeseen circumstances, you document those circumstances, reject the loan and make a counteroffer with a new GFE based upon the changes. It's a re-disclosure burden.
If unforeseen circumstances change third party fees, I believe the burden is only that the unforeseen circumstances be documented and such documentation be retained in the case binder or loan file.
PS: Here's a good link site provided by HUD on the proposed RESPA rule.
Locating New Page....
Essentially, that is what is done currently in regard to unforeseen circumstances. A big issue currently is LTV pricing adjustments.
My concern is mainly that regulators are trying to create a one size fits all approach to mtg lending, which I do not think is in the best intrests of the consumer(s).
I think an army of regulators who consumers could talk to if they feel victimized, is the best approach. We have regs but who enforces them? Currently, no one. If regulators were likely to contact originators in the event of consumer complaints, I think you'd see all the horror stories go away.
Thanx for the info and insight Diane!!!
Thanks, Zarley. Well, let's hope HUD gets their legislative relief. Should be interesting.
Having done some research into living conditions I have made the decision to move to the US! Apart from the medical care (which having just watched the film Sicko I am slightly concerned about) I have decided that there are more positives then negatives and am therefore very excited about the prospect of moving.
However I am concerned with purchasing a house, are mortgages over there the same as there are here? Do I need a large deposit and having spoke to a few people online I am concerned I wont be able to find a company to give me mortgage broker bonds.
and if I cant can I buy a house? Also I am familiar with the term surety bond so is a mortgage bond just a guarantee I will pay on time or is it more?
Tar and feathering was invented for a reason.
all this talk of "spiffs" is making me hungry. does anybody have any brownies?
Here bacon. Have one of my special ones...
The publication of a rate sheet, in itself, doesn't mean the lender is neutral as regards which loans are offered. The best loans (from the borrower's perspective) would be priced to provide the needed return, to be competitive - more or less the Econ 101 "perfect markets" price. Everything else would be aimed at market segregation - which is to say, at the unwary, the uneducated, the stoopid. The lender needs to motivate the broker to segregate clients. That's what the bribe does.
I heard this piece - all three brokers interviewed were like "Well I never did it, but if you wanted to you certainly could ...." If none of them did it, who did?
oversaturation of mansion and castles,
no noblemen to occupy them.
Just overreaching, simpleminded maggots. Subprime nation, maggot nation.
It is not a kickback if it is used as intended. Say a broker wants to make 3 points on a deal.
He may offer his client: you can choose 6% paying 3 points (0 YSP)
You can choose 6.375% paying 2 points (1 YSP)
You can choose 6.75% paying 1 point (2pts YSP) or
Yoy can choose 7.125% paying no points( 3pts YSP).
Any choice 3 points total as the broker wanted.
If the client is keeping their property (loan) for a long time, it is better to pay the 3 points.
But if the client is looking to move or not keep the loan long, he may be better with the higher rate and 0 points.
Let the client choose. However that is just the theory. The reality is that the brokers are charging as many points as the client will accept and then upping the rate as much as possible to get as high YSP as they can.
If you cpmpare retail rates vs. wholesale rates the average is about 1 to 1.5 points difference. In other words, if you go to Countrywide direct and they are charging 6% with 0 points, your broker will be making about 1 to 1.5% at the same 6% rate. SO if your broker is content with 1 to 1.5 points, they're OK. More than that, you are better off going to the source directly.
However. Unless things changed markedly in this business in the few years since I worked in it, it doesn't really play out that way. Brokers get rate sheets faxed to them by wholesale lenders. Those "premium" rates with the 102-103 pricing are simply printed on the rate sheet along with the "par" rates.
I think its believable that it was made known to the brokers that the higher rate loans were preferable as they were needed to juice up the MBS returns. My recollection is there were several IBs selling MBS that also had mortgage operations.
Right? An MBS full of boring old 80LTV 30 year fixed 5.25% high FICO loans has a lower yield then one with some of the Alt-A or Option Arms mixed in?
I guess NPR didn't check with MBA lobbyists for definitions -- A YSP is a kickback.
I'm amazed this slipped past NPR's checkers.
Or maybe I'm not.
The world doesn't get more agreeable every day.
The broker should disclosed the commission they are making on this transaction including bonus fee's for placing the loan in more expensive slots.
The publication of a rate sheet, in itself, doesn't mean the lender is neutral as regards which loans are offered.
Precisely.
Back in the 90s when I worked for retail lenders, we never put out a price over 101.50 to 102, and certainly never one under 98. If you had one of those deals where the seller or builder was going to pay three discount points, you needed to talk to an underwriter first and then get an "off sheet quote" for a deep discount, just as much as a steep premium. In those days, we reserved the right to know what exactly was going on here, ya know, before we hedged that lock.
You have to remember that these are the "gross" prices from which the loan-level risk adjustments are subtracted. So you put out 102 so that a borrower who gets a .25 hit for FICO and a .25 hit for condo and a .25 hit for escrow waiver and a .25 hit for LTV can then have a gross price of 101, which means he pays no points at closing (no discount, and no 1.00% origination fee).
If the highest gross price on your rate sheet is only 101, then most borrowers will pay points of some kind because of the risk-based adjustments. Now, I am of the view that anyone who racks up more than a point or so worth of risk-based adjustments (on a prime credit product) probably should pay points at closing. Especially those investment property loans: I want my 1.50% up front in cash on those, not "rolled into the rate" because I never get that if the borrower flips the thing.
And, of course, there really was all this folderol from the brokers that they needed three or four points of premium to pay all closing costs for the borrower, not just the origination fee.
Well, they claimed that that was what they were using premium points for, but as you can see some of them, at least, were pocketing it.
This should have been--and could have been--stopped in its tracks by the wholesaler. The wholesaler has control of the Settlement Statement, and should simply have refused to close if that excess premium wasn't credited to the borrower. But they didn't, because a poor broker's gotta feed the kids . . .
Anyway, my point is that on some of these deals, the only way the broker could get the whole 2-3 point premium was to have a loan that didn't have a lot of loan-level price hits. Now, lenders can design their pricing any way they want: the "base price" can be "best case" and all adjustments are negative, or it can be "worst case" and all adjustments are positive. It is my belief that most of them are "best case," because that's the psychology of people casually glancing at your rate sheet: you don't want to look terrible compared to everyone else at first sight. Therefore, the loans with the 2-3 points premium pocketed by the broker are often the "best" loans--no or minimal price hits for high risk elements.
I suggest that this is a measure of how disgusted the public has become with mortgage brokers: Need to be taken out and shot.
I'm sorry, but a mortgage broker is by definition a mortgage applicant's agent, period. As a home purchaser or refinancer, you hire the mortgage broker, a middleman, to find you the best deal among lenders. You may theoretically get a better deal with a broker, but that does not appear to have been the case. What the NPR report confirms is that the applicants' agents, the brokers, were in cahoots with lenders. This kind of behavior is not only unethical, but a form of fraud, which can be prosecuted as well as litigated in federal court.
I think its believable that it was made known to the brokers that the higher rate loans were preferable as they were needed to juice up the MBS returns.
But that isn't the way you do it if you just want high rate loans.
Look, if I'm a wholesaler, it's my damned rate sheet. I can put any rate I want to next to the price of "101."
There are, of course, competitive pressures that force me into keeping my "101" rate somewhere near the other wholesalers'. But if we're going to think like this was an organized conspiracy among all wholesale participants who were all selling to Wall Street, then everybody can just agree that "101" is a high rate.
Lesson to be learned here, whether in business or personal:
When making a large purchase, always ask the sales rep - How do you make your money? If they are not transparent, it should be a warning signal.
There are bad brokers and self interested brokers and brokers who are just literate enough to read a rate sheet but on the aggregate mortgage brokers provide a service. If you're looking for a mortgage get several quotes but don't limit yourself to just one outlet. Eliminating mortgage brokers will result in higher costs to the consumer.
The incredible growth and inadequate regulation of the wholesale broker channel has created a surplus of brokers that really add no value. Industry contraction and improved regulation (and oversight by lenders) should weed out these participants. It's easier to identify the unscrupulous conduct at the point of sale than it is to identify parties incenting or enabling it.
Sorry, that was my post above.
I think its believable that it was made known to the brokers that the higher rate loans were preferable as they were needed to juice up the MBS returns.
Right? An MBS full of boring old 80LTV 30 year fixed 5.25% high FICO loans has a lower yield then one with some of the Alt-A or Option Arms mixed in?
i think you're confusing MBS yields with issuers' execution. higher rate loans don't "juice up MBS returns," they generate more excess spread, which creates credit enhancement for the deal, which allows the issuer to get more leverage. subprime AAAs have coupons of like Libor + 15bps, you know.
Are there any proposals to perform criminal background checks on mortgage brokers at the national level?
I know of one broker in the Boston area who is a borderline career criminal (no joke).
Are there any proposals to perform criminal background checks on mortgage brokers at the national level?
I don't know if that's part of whatever national licensing proposals are in play or not. It probably is. Many states already require it.
The reputable wholesalers also do it themselves when the broker applies for approval. I've seen a few in my time that would certainly blow your dress up.
subprime AAAs have coupons of like Libor + 15bps, you know.
true, but those mezz and equity tranches can be made to look "spiffier".
The ultimate problem is the mortgage brokers have no skin in the game so as humans that maximuze thier pofit on each transaction.
Just like real estate agents that are ultimately working for themselves to maximize thier income, not for thier clients.
The only skin these people have in the games is from future referals and repeat business although I believe that is a minor factor vs. getting an extra 10K tomorrow on a deal.
The solution is NOT to regulate brokers as it changes nothing but will lead to the 6% real estate problem.
The solution is to regulate the marketplace for mortgage products and rates so that it is very obvious to the buying if there is a better rate or not out there.
OT, but I think it is essential that the word gets out.
Tanta talks rightly about chains of enforsements, and lenders not bothering to do these right.
Well, in Florida at least, they found a horrible way of getting around this.
They endorse them IN BLANK. This turns the notes into the equivalent of BEARER BONDS. Then, in virtually all Florida foreclosures, they claim that they lost the note.
This happened on a mtg I was foreclosing a week or so ago, and then on another one with a different originator.
Once was a fluke. I thought it was an error. Two is an indication of something else brewing. If this has been done in a big way--and I have a sample of 2 here--there are many, who knows how many bearer-bond notes which anybody can steal and claim ownership for.
They did of course, find the original note, because they never lost them, and it was sitting in all its glory, unprotected in a court file that anybody can get to, and nobody watches you when you are looking at them, so anybody could steal. It crossed my non-larcenous mind, that I could take the damned thing, and nobody would know. For a milli-second.
Have a look at The XBroker Mortgage Real Estate Marketing Technology
Very interesting commentary on brokers in general. In one of the recent posts there, zillow's new mortgage quote service is mentioned.
It's anonymous, and a real quote, and has some interesting policies, clearly aimed at weeding out the bad apples.
Jamie
OK, so the current system worked terribly. Never mind "...but on the aggregate mortgage brokers provide a service..." because that just means the people smart/experienced enough not to allow themselves to get ripped off got service.
What's the solution? It was suggested a few days ago that brokers become agents of borrowers, but Tanta said lenders would want an agent at the table, too. Seems reasonable to me, but costly.
Disintermediation via the Internet? Zillow is experimenting. But from what I've read here, maybe a lot of borrowers aren't literate enough to fill out the form correctly.
I don't see a ban on brokers happening until a better business model makes them irrelevant. I'd love to hear what the better business model might be, because the current one sucked.
One point I found interesting was made above: For any given deal, extra points makes the borrower more likely to default. Were holders-to-maturity writing these nutty things, or was it generally confined to warehousers, who could rationally have believed the risk was OK because the loan would be someone else's problem by that point?
Jonathryn: Oh come now. Does the finance guy at the used car lot have a fiduciary responsibility to the customers? Only to not outright lie to them.
Of course, this also explains their social popularity.
If you go to the table, and you don't know who the pidgeon is, you're the pidgeon.
This all sounds like nothing more than a traditional sales incentive scheme. Salespeople get paid more to sell high-margin products. I don't see anything at all wrong with that.
I think the problem people have with it is:
But I think most of this is a moot point. The brokers, ultimately, weren't adding much value for lenders or borrowers (they didn't screen borrowers well, and they didn't recommend the best loans to consumers). The complex loans which made a broker seem useful are also going away. I think the brokers will essentially go away, or be radically less important/powerful. Consumers will realize they are salesman, and treat them accordingly.
I am surprised at how you are defending this practice.
However you slice it, the broker has an economic incentive to get a worse deal for their client.
They are clearly not working in their client's best interest.
Your "it's perfectly legal" is the Enron defense (true, but wrong).
This definitely tips the argument in favor of the uninformed homeowner vs. the powerful banking industry.
Who wins in a contest of homeowner vs. bank and broker?
Your cavalier attitude about this is outrageous, and mars your otherwise high level of integrity you show in this blog.
Once was a fluke. I thought it was an error. Two is an indication of something else brewing. If this has been done in a big way--and I have a sample of 2 here--there are many, who knows how many bearer-bond notes which anybody can steal and claim ownership for.
It is done in a big way. Probably 99% of securitized loans are endorsed "in blank" when they are sold to the trust. All Fannie Mae and Freddie Macs are endorsed "in blank" unless the F's are buying the loan out of a pool.
This is why we have this thing called "document custodians," and why it's such a big deal. They aren't quite as risky as a bearer bond--I mean, you can write your own name into a blank endorsement all you want, but you can't take it down to the local bank branch and "cash" it, nor can you make some servicer send you the monthly payments.
But there is risk with an endorsement in blank, which is why we have these "trustees" who place documents with "custodians" who are financial institutions with trust departments that are regulated as trustees. The custodians keep those notes in vaults and assure that those endorsements don't get filled in by some idiot off the street, as it were.
The crying shame of our business is that it seems the custodians are losing notes or accepting copies in lieu of originals. Not really the blank endorsement part. That's typical with a security. (Think how you would endorse it for a security: to Bob and Carol and Ted and Alice and everyone else who bought a tranche?)
My experience with spiff is that you sell the same product to your most loyal and trusting customers at a grossly inflated price.
My dress? I believe my father's ancestors wore kilts with no underwear, but no dresses per se.
Your cavalier attitude about this is outrageous, and mars your otherwise high level of integrity you show in this blog.
You are interpreting the statement that this practice is legal--which is just a statement of fact, it is legal--with a defense of it. I did not say "it is perfectly legal." Nor did I imply that anything legal is moral or just fine with me.
Maybe you should look up the word "tendentious." I was remarking on the fact that NPR chose the word "kickback," which implies illegal conduct. That says something about NPR's view of the matter. But it is not literally true in law. Otherwise lots of companies would be in jail, and they're not.
true, but those mezz and equity tranches can be made to look "spiffier".
Shnaps, i don't understand your point. how do higher note rates make mezz tranches look "spiffier"?
...to Bob and Carol and Ted and Alice
Hilarious reference. Now if you can find something from Hair...
Bob & Carol & Ted & Alice (1969)
Otherwise lots of companies would be in jail.
How do you put a company in the clink? Do they get their own cell block?
from Wikipedia:
In 2007, the The U.S. Department of Justice characterized SPIFFs as kickbacks, and illegal if the purchaser is the government
What's good for Uncle Sam is good for me.
Also, Caveat emptor! This discussion indicates that neither the broker, mortgage company, or bank is there to do what's in my best interest. They want to make as much as they can at my expense. To think otherwise is being foolish.
I always understood that "spiff" could apply to any incentive--not only cash. Steak knives, for example:
Blake: We're adding a little something to this month's sales contest. As you all know, first prize is a Cadillac Eldorado. Anybody want to see second prize?
[Holds up prize]
Blake: Second prize is a set of steak knives. Third prize is you're fired.
Faxing around rate sheets. LOL! Why doesn't the mortgage industry use those old Telex punch machines?
I will be shocked if there is such a thing as a mortgage broker in a few years. Nothing but useless expensive corrupt overhead. Efficiency and a little regulation should do the trick... extinction, the sooner the better.
This discussion indicates that neither the broker, mortgage company, or bank is there to do what's in my best interest.
No feces.
Any field with a low barrier to entry where there is "fast money" to be had will quickly fill with the same kind of people who sell aluminum siding and fuel oil futures.As soon as the fast money goes away,so do they.In california if you could pass a criminal background check and the sales "exam" which is a basic literacy and math test,you were in.Half the people who were acting as loan brokers,or more are gone.Some may have active licenses still,but they are working as fitness consultants etc.As far as removing fraud from Real Estate,forget it,we just need to get it back to manageable levels.
bacon - well, they generate CDO fodder. Now that's spiffy!
They're not kickbacks, they're only large undisclosed fees paid to the broker to steer the customer into less-suitable, higher-cost, loans!
We'll have to ask Jas Jain for the proper vocabulary to describe this particular "legal" situation. Until then, the common vernacular "kickback" appears to fit close enough to evoke squeals of denial whenever it appears.
well, they generate CDO fodder.
but my point is, the mezz tranches would still get paid the same if you had a lower WAC, the deal would just have more hard CE, and thus lower leverage for the issuer.
The context that is missing here is the overwhelming prevalence of fraud in subprime lending at the time. Many of these high rebate loans were "No doc" programs (aka liar loans) that were designed to appeal to otherwise unqualified borrowers. Only the unqualified, the ignorant, or the naive would pay the exorbitant fees, prepayment penalties and high rates that went along with three on the back on an ARM?
It's hard for me to think that sophisticated lenders didn't know exactly what they were doing in offering these loans. I guess if you assume real estate prices rise 10% every year you can make the risk look OK, but it seems strange to me that once reality intrudes lenders suddenly discover that brokers took advantage of what was offered to them.
Not to excuse the large number of brokers who did commit fraud, of course. The good news is that by the time the lawyers get done with them, the few that have anything left will have lost it all.
I only wish someone could do the same to wealthy executives of who left the industry with tens or hundreds of millions of dollars earned from these same loans.
...Nothing but useless expensive corrupt overhead. Efficiency and a little regulation should do the trick... extinction, the sooner the better.
My aged disgruntled curmugeonly neighbor couldn't have said it better. Unfortunately he's a bit senile. I've benifited from the services of brokers as well as referred friends and family members to ones that I consider reputable. Brokers can provide a service and they are not the only party culpable for the current credit crisis
I think 'transparency' is getting close to the core of the problem here-- but one has to expect that transparency will have a cost that -someone- will have to pay it.
So, just as an example, I decided some time last year that if I couldn't describe where the money ends up in given investment, I'd put my money elsewhere. I still think that was the right thing to do, but it wasn't cost-free.
I never expected a car salesman to tell me the lowest price. Consumers have a job to do too. You don't even need to call more than one broker. Just say, "Is that the best you can do? The other two brokers I spoke with were cheaper." Heck, go crazy and call two or three brokers and use that line. People get 3 bids before they spend $1,200 getting a room painted, but only go to one mortgage broker?
By the way, I'm no fan of mortgage brokers. I'm just saying that when two people conduct a transaction, I can view both of them as failing. I don't have to choose a "winner" or decide who is more at fault.
"also kickbacks don't need to be illegial, just unethical."
Amazing how some people, after hundreds of years, still just don't get it.
In a capitalist, market-based system, there is no need for anything to be ethical as long as it is legal if you don't like the system, you need to work to change the laws there is no other way you can rationally expect the behavior to change.
I would submit that the mortgage brokering busines did change a whole lot since Tanta left the industry. My only basis for positing that is the extremely high number of people who bought outright terrible mortgages for themselves. That simply does not compute with the state of the industry Tanta describes.
Commenters: lets not underestimate the large fraud component. in the NPR piece, the 3 interviewed all sold unaffordable mortgages to their customers and learned what they were doing to their customers and each of those interviewed said: "yeah, I saw tons of fraud, but not by me." If those three were the good guys, I'd hate to see the bad guys.
If any purchaser of a house had talked to my parents, they would have been told that the bank is looking out for them to not get screwed, so you can pretty much trust the folks you are dealing with. I imagine there was plenty of wisdom from one time home buyers of a different era that didn't apply.
What else is new?
Most business in the US is based on hidden commissions to oversell people on shit they don't need.
toady, would your Mom & Dad agree that mezzanine tranches are still paid the same compared to, say, an MBS pool with a lower WAC?
If so, I suppose I owe bacon a point.
Tanta--I repeat that in 99% of cases they claim they lost the note. I assume this is a lie.
But that note I looked at with my own eyeballs was sitting in a file that ANYBODY can look at. Now I wouldn't have the faintest idea how to negotiate it, but I bet somebody would. That note is, as I write, NOT in a vault, but a court file, and is completely unprotected. A court file is a public record. You have to sign in, but I could have signed in as Susie Somebody, with an invented bar number and nobody would have noticed.
And why couldn't you endorse it to the Trustee?
I think this is much ado about nothing. Right now you can go to any lender and get different rates for the same loan type. For example, eLoan lists rates from 5.5% to 6.625% for a 95% LTV 30 year fixed. The reason for this, as Tanta implied in an early reply, is that the rebate is used to partially or completely pay the closing costs. If buyers don't have lots of $$$, they can pay a higher rate rather than paying points and fees. This gets them into the house for less money out of their pocket but a slightly higher monthly payment. There are multiple rates, from high closing costs to low to none. THAT is why a mortgage broker might encourage a buyer to select a higher rate.
If so, I suppose I owe bacon a point.
yes, you do, but i will waive it since you tried to get me a hat tip yesterday. as long as my net points balance out at the end of the month, i'm pretty sure this is allowed. we should probably check with Tanta.
would submit that the mortgage brokering busines did change a whole lot since Tanta left the industry.
I'm actually up to speed on the "people getting terrible loans" part. I was simply wondering aloud if, in the three years or so since my last regular contact with wholesaling, they had changed from sending out rate sheets (via fax or email or pidgeons, whatever) to making personal phone calls to each broker each time a loan needed pricing to wave these "incentives" in front of the poor victim brokers until they caved in and took the premium price.
I don't think this is true, so you could understand my remark in context as that subtle irony I am famous for.
Otherwise I plan to just sit back, munch on pumpkin bread, and watch bacon dreamz and Shnapsterissimo argue bond yields.
My broker (who is now selling cruises) got lots of faxed rate sheets, and also got called by Countrywide individually and asked if he couldn't persuade his client to go for adjustibles and such instead of fixed rate loans. He was not adverse to getting a huge yield spread premium, but felt he was doing the client a big disservice if he stuck them in an ARM, when they wanted a fixed.
And why couldn't you endorse it to the Trustee?
Because you don't want to create the confusion that would legally entitle the trustee to payment on his order (without recourse). Note endorsements are not short-form bills of sale: they say "pay to the order of" like a check endorsement, not "for consideration I transfer all rights and title to" like an assigment of mortgage does.
Actually, it's a convenience thing. The blank endorsement doesn't matter as long as the loan performs, because there is a loan sale agreement/servicing agreement that makes the servicer send payments from that note to the trust which disburses to the investors and everybody's happy. It is only, in fact, when the thing goes bad that you have a problem.
This issue does keep coming up: state and federal courts both seem to want the servicer to be the endorsee because the servicer is the party actually foreclosing. Well, if the servicer has to be the endorsee for FC purposes, the servicer just gets the note from the custodian, fills out that endorsement to itself or the trustee of the security, whoever is legally the party suing for FC, and goes from there. This saves having to send the note to the trustee to have it endorsed back to the servicer.
It does get very complicated.
The only way to "negotiate" a mortgage note is to send the borrower a "Transfer of Servicing Rights" notification, as required under RESPA, announcing that you are now the party to whom payments must be sent. You must also induce the former owner (the endorser) to send a "goodbye" letter to the borrower saying payments should no longer be sent there. Then, if a borrower writes a check out to you and mails it to you, you can run down to Nationsbank and cash the sucker.
You could, also, try selling that note on the "secondary market," although it's not like loan buyers have kiosks in malls. You would have to find a buyer, and also produce the assigned mortgage and the title policy and a bunch of other docs.
That note is, as I write, NOT in a vault, but a court file, and is completely unprotected.
Well, to be honest with you, that's where I part company with some of these pissy judges. They won't take a certified copy for the court filing; they want the original. That creates opportunities for the notes to get lost or damaged or "updated" when nobody's looking. That is, in fact, why servicers try to get away with providing copies to the court: they don't want to take the original out of the vault at this point (only at the point where judgement is granted do they want to cough up the original, since at that point the FC is "real." I mean this as servicer thinking, not a matter of law.)
Well, the only way you can get by with sending in a copy is to slap a lost note affidavit on the front of it with a stapler saying that you lost the original. I'd bet quite a bit that many of these "lost" notes aren't "lost." The servicer would just rather look incompetent (like it lost the original notes and only has a copy) than risk losing them for real. As you note, the court doesn't exactly secure them like they were bearer bonds--they sit around in files in open court that anyone can get their hands on. So at some level these huffy judges might cool it a little on the "lost note" harrumphing, unless they can prove that their own clerks have never lost one.
A lot of people are I suspect under the impression that a lost note affidavit does not have a copy of the note attached to it. It does.
real estate agents and mortgage brokers are travel agents, circa 1991. Technology will leave these leeches in the dust and not a moment too soon.
It is time to get a real job.
Take a close look at who NACA is. The smartest broker in America, selling your favorite flavor of koolaid as well as loans.
Also take a close look at the "exploding" 2/28 Arms. They are almost all based on 6 month LIBOR which is at 2.68% and margins around 5.5% - 6.5%, which puts the indexed rate at just around the start rate. The only reason many of these are not resetting lower is because the start rate is also the floor rate. Last year when LIBOR was 5.5% it was scary but now it's looking a little more benign. I'd love to see some verifiable data on this rather than just more wailing and gnashing of teeth.
bacon dreamz writes:
i think you're confusing MBS yields with issuers' execution. higher rate loans don't "juice up MBS returns," they generate more excess spread, which creates credit enhancement for the deal, which allows the issuer to get more leverage. subprime AAAs have coupons of like Libor + 15bps, you know.
Actually I don't know.
I just figured making a higher interest rate loan to someone some how made issuing MBS more profitable. How that is accomplished I don't know.
So, what I think you are saying is that an MBS with a mix of mortgages whose total loan value of say $1M could be sold for say $1.1M at but at a lower rate then a MBS of $1M would have generated?
So paying a premium to earn less then what the underlying instruments are actually generating?
This doesn't make sense to me, I must still be not getting this.
I keep rereading this post, trying to see the point of it. Is it that brokers respond to incentives? Of course they do.
Even the dumbest broker is smart enough to read the fine print and figure out what they can make on a loan. Lenders don't have to do much more than an 8 point type rate sheet if the numbers are good (they are all .pdf or on line now, anyway). I'm not excusing fraud or unethical behavior on the part of anyone, but to say that lenders didn't know exactly what they would get with these programs is disingenuous.
What amazes me is that they built a risk model on home prices increasing by 7-10% per year forever, then act like the victims when it all comes crashing down. Now I may be just a dumb little guy broker, but even I knew at the time that home prices cannot increase forever when median household income is static.
Tanta, don't be so quick to assume this is a "perfectly legal practice."
In California, the Unfair Competition Law makes any practice that is "unfair" illegal. Other states have similar laws. YSP seem pretty unfair to me.
And this is why professional, non-predatory, mortgage brokers ought to embrace the proposed RESPA rule including the GFE. The consuming public will never understand how mortgages are priced and brokered. The new GFE pulls the focus of the consumer to the bottom line origination fee which is all that is important.
Non-predatory mortgage brokers CAN live with this form of disclosure. Predators lose all obscure methods that enable them to bait and switch.
We need to separate the good guys from the bad so let's just give the YSP to the consumer and allow them to credit it against a fairly negotiated brokerage fee.
There seems to be a lot of confusion about what YSP represents. It's not a sales commission for the broker, or a kickback.
It's the borrower's money. You can buy down the interest rate on a load by paying points - that's a negative YSP. You can get a rebate by accepting a higher interest rate - that's a positive YSP. The rebate can be used to pay closing and origination costs - that's how you get what appears to be a low- or no-cost loan.
All of this is supposed to be explained in the loan disclosure documents. If it's not disclosed, the broker or lender committed fraud, so that the broker could steal the YSP that belongs to the borrower.
If the use of the YSP is disclosed, but the borrower didn't understand it, didn't read it, or didn't ask someone to explain it (or did ask and got blown off), that's a different problem, but it's not theft.
Tanta, don't be so quick to assume this is a "perfectly legal practice."
Look, I don't like YSP and I'd be the world's happiest camper if it were abolished.
But it has been adjudicated many times. The courts have found it legal. If anyone wishes to be outraged that it is legal, be my guests. But it does us no good to pretend that it isn't.
YSP does have to be disclosed. The biggest problem I have is that it often isn't disclosed until right at settlement, when the broker "discovers" that your rate lock is invalid and presents you with this higher rate. People think they can't back out, or they really can't back out because it's a purchase and they're under contract issues, so they go ahead. But if you look at the HUD-1 Settlement Statement, you see that YSP disclosed on page 2.
This is yet another reason why, as I argued yesterday, the fuss about more disclosures is sometimes so misguided. This stuff is disclosed. But if you are not really aware that you could have gotten a lower rate without that YSP, what good does it really do to have it disclosed to you that your broker is collecting it?
YSP has been from HUD time immemorial classed as "broker compensation." Not as a "kickback," which has a specific legal meaning in HUD regulations. I am not saying I approve of this, for heaven's sake. I am saying it's the way things are, and if you want it changed, you need to bug the shit out of your legislators until they write some law that makes HUD change the regs.
There seems to be a lot of confusion about what YSP represents. It's not a sales commission for the broker, or a kickback.
It's the borrower's money.
Confusion? You are aware that we are reading the transcript of an NPR report in which three brokers are quoted as having accepted premium pricing as compensation. Not this "it's the borrower's money" rhetoric.
Please, spare us. It is NOT "the borrower's money." Legally, the wholesaler doesn't even have to pay the broker OR the borrower a cash payment for a higher rate. That is customary, but it isn't required.
As I have already pointed out, brokers keep claiming they use this money to credit against the borrower's closing costs, but then we keep seeing reports like the one from NPR saying some of them use it to increase their compensation on the deal.
Tanta-
I am trying to see the logic of your position. Let me ask you one thing. Let's assumes that brokers were prohibited from receiving any YSP, so all our quotes involved paying some kind of broker fee in addition to the discount points (if any). Are you also going to prohibit lenders from doing zero point loans at a higher rate than loans that involve paying a fee?
If not, doesn't that imply limiting competition in favor of large lenders? How does that benefit the consumer?
Out in the real world, lenders are very rapidly moving towards policies requiring brokers to provide a signed separate, upfront, written and itemized disclosure of all broker compensation (including SRP's) in their application package. They further require a written redisclosure if any fee should change by more than $100.
I think this, combined with reasonable limitations on the amount of SRP's that can be charged and a renewed commitment to traditional underwriting to wring the more desperate borrowers out of the system will go a long way towards controlling the kinds of abuses that have occurred in the past, while still allowing the consumer benefit of fair and full competition between brokers and lenders.
so, what's up with the HELOC's banks are pushing right now? Seems like they mushroomed after 3/18. somehow, i have a feeling the 2.25 funds rate won't be there for too long, so it's a prime hunting season for the banks to help their balance sheet, or?
I am trying to see the logic of your position. Let me ask you one thing. Let's assumes that brokers were prohibited from receiving any YSP, so all our quotes involved paying some kind of broker fee in addition to the discount points (if any). Are you also going to prohibit lenders from doing zero point loans at a higher rate than loans that involve paying a fee?
Look, you just need to get the broker out of the "paid closing costs" part.
The wholesaler is the one providing the premium that pays for the closing cost credit. Fine. Let the wholesaler--the actual lender--calculate a rate adjustment to a locked par rate that is sufficient to cover costs, show them as as "lender paid" on the HUD-1, and make sure the two (the covered costs and the premium) boot to zero.
One of the "covered costs" can be the broker's compensation. But that compensation should have zilch to do with the loan amount or the interest rate. It's either a percent origination fee on every loan--the same one point regardless of rate and loan size--or it's a flat fee.
My problem is that when brokers use a rate sheet to determine the premium amount, they then know how much they can charge for their services. I see this on HUD-1s all the time: if there was only 2 points to play with, the broker fee was 1 point and the rest covered third-party costs. If there was 3 points to play with, the broker fee was 2 points. The way it should work is that the broker tells the wholesaler what his fee is--which has already been agreed to with the borrower in the signed broker agreement--and then if the borrower wants this "no cost" business the wholesaler can include that broker fee on the HUD with everything else that needs paying.
Frankly, though, I don't think "no cost" closings are always a great idea for everybody. Not for borrowers and not for lenders. A whole lot of the problems I see with the recent mortgage market is that we have "hidden" upfront costs to the extent that people are just not wary any longer about financing and refinancing, since they don't have to write checks at closing any longer. And there are things, like points on an investor loan, that I would never allow to be paid out of premium, because it's mind-numbingly stupid.
And I already explained SRP the other day. If you don't know what that phrase means, quit using it. I do get quite disgusted with brokers who pretend like they understand mortgage pricing but obviously don't.
You claim "spiff" is an unknown word and then use a phrase like "It is a bit tendentious"? Good thing I have my dictionary handy. Now if only I had a French-English dictionary nearby, I could translate Musee des beaux arts...
Good thing I have my dictionary handy. Now if only I had a French-English dictionary nearby, I could translate Musee des beaux arts...
Don't think you're going to make me feel guilty. I used to use words like that back in the pre-internet days when you actually did have to have a dictionary around. If I had no mercy then, I have no mercy now that dictionary.com is just a click away. (Or a clique away if you can find larousse.com.)
Tanta writes:
There are, of course, competitive pressures that force me into keeping my "101" rate somewhere near the other wholesalers'. But if we're going to think like this was an organized conspiracy among all wholesale participants who were all selling to Wall Street, then everybody can just agree that "101" is a high rate.
My ability to communicate is very poor.
My thoughts are that the huge market for MBS in recent years created an 'new' Oligopsony in the mortgage resale market. You don't actually have an actual conspiracy within the wholesale industry when they have so few buyers.
I'm sure the original reason for the YSP was as you originally stated, but that doesn't mean the use of the YSP can't have changed over time as the demands for certain types of mortgages in the resale market changed.
I'm just saying its very believable that wholesalers started looking the other way when the brokers pocketed the YSP, wholesalers called up brokers who consistently 'upsold' and praised them, or when they faxed out new rate sheets coyly mentioned their 'new' YSP for certain types of loans.
I'm sure some brokers figured out they could pocket the YSP without any prompting, but it strains belief that so many brokers came up with it on their own that it actually created a discernible trend in the subprime/alt-a market.
I suspect that a site with functionality such as Bankrate, the old Lowermybills, etc etc, will wind up taking over the job of the mortgage broker. Hell, maybe even Google (if they get into the service business) or Yahoo (if they get into the head-out-of-their-ass business).
Put in your name, your SSN, and the loan amount you're looking for, and we'll do the work of researching your best loan rate etc, and we'll make money by selling right of first refusal for certain parameters.
Zillow's marketplace is a great start, but depends a little too much on the brokers not coming back with a "oh, your loan terms have changed, you need to pay me 3 points" bait and switch. It's only in an automated website interface that we'll see an "e-broker" working in the best interest of the client.
So, a mortgage broker or a stock broker is like a horse broker --- they're not there for the customer, they're there to sell the product at the greatest profit.
Where did the American public get the notion that a broker was a friend?
If you want to be broker, hire one?
Ahem..
re "And I already explained SRP the other day. If you don't know what that phrase means, quit using it. I do get quite disgusted with brokers who pretend like they understand mortgage pricing but obviously don't."
Kind of testy today, aren't we? I guess since this is your blog the Red Queen rules apply, and you can make a word mean whatever you want. Out here in high cost land where no one has done a govvie for the last two decades, SRP and YSP tend to be used interchangeably in common parlance. I will defer to the purist, but there's no reason to be nasty about it, is there?
As to my not understanding mortgage pricing, I guess my thirty years making a living from it and about ten years teaching it doesn't amount to much in your eyes, but I do manage to get by.
Moving on.
re.
"The way it should work is that the broker tells the wholesaler what his fee is--which has already been agreed to with the borrower in the signed broker agreement--and then if the borrower wants this "no cost" business the wholesaler can include that broker fee on the HUD with everything else that needs paying."
That's actually not too far from how things have evolved over the last month or so. The difference is that the total YSP is paid to me, and I instruct escrow to credit whatever amount I have agreed to pay to the borrower. I have experimented with quoting cost over price, but found that it just confuses most borrowers.
I don't think anyone claims "No Cost" loans (I actually call them closing cost rebate loans, since "no cost" is not an accurate way to describe it) are a universal answer. Depending on pricing, they can be a good value for clients who do not expect to keep a loan for more than five years or who lack sufficient equity or cash to pay points or fees. I find them particularly useful when financing in a declining interest rate market, since clients can get a loan now but refinance later without having wasted the original set of transaction costs.
Since I am in a fiduciary to a borrower, my role is to offer them my best advice. I owe the bank honesty, accuracy,and full disclosure of all relevant information, but they are not my client. I don't doubt your perceptions about the risks of these loans from the lender side, I have seen companies go under for exactly that reason. Still, I work for the borrower, not the lender, and I am obligated to recommend what I think is in their best intrests.
By the way, since we are being jargon Nazis today, the term "No Cost Loan" is frowned on by regulatory agencies. In CA at least, anyone that advertises a "No Cost Loan" can expect to hear from the DRE.