Mortgages

More Stupid Mortgage Rules from the Government

Comments 6 Comments

MortgagePaperwork_Caitlin_Childs_FlickrOne of the problems with the mortgage business is that too many regulatory fingers are in the pie. Not surprisingly, none of these entities talks with any other entity. The current issue on the table is that of compensation of loan originators, or more specifically, mortgage brokers.

It is probable that the genesis for this is the “Yield Spread Premium,” or YSP. It is no secret that in the old days many disreputable mortgage lenders – not just mortgage brokers – used YSP as a way of making more money off the customer. Even though this compensation was disclosed on the HUD-1 closing statement, most borrowers didn’t understand how to read the statement because the last regulation was poorly written.

What could and did happen is that the lender would quote a loan origination fee of 1 point but then when he locked in, the pricing would be such that in addition to getting one point from the borrowers, he would get an extra half point from the lender. He wouldn’t pass it on to the borrower.

[Consumer resource: [Resource: Misconceptions May Keep Homeowners From Getting Low-rate Refis]

At its core is a stipulation that broker compensation to be either Borrower paid or Lender paid, but not both. Why not? Because the Fed does not understand that with the new rules that HUD put into effect a year ago, this change in TILA is completely unnecessary.

What it definitely does is raise the cost of borrowing to some consumers. Let me show you how. Here are some numbers from today’s rate sheet, assuming I was going to make 1 point on the transaction in accordance with the current law.

Rate Wholesale Points Points to Borrower
5 (1) 0      (1 point YSP to me)
4.875 (.625) .375
4.75 (.125) .875
4.625 .5 1.5

Under the Federal Reserve Board’s new rule, the two transactions in red would not be allowed. In both those cases, part of the compensation would come from the borrower and the lender. That is prohibited. Which means that you, as a borrower, would have to choose 5% or 4.625% even though one of the other options might be best for you.

Second, lenders are requiring that I declare my compensation for all loans originated with them. That compensation must include the fee for processing which is NOW on a “dollar per loan” basis. Note that the lender is still allowed to charge a flat fee per loan for underwriting and documents regardless of size, but we brokers can’t. I have to try to compensate for that by fixing my compensation.

The Unintended Consequence »

Image: Caitlin Childs, via Flickr.com

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  • http://www.kentuckyloan.blogspot.com joel lobb

    Well-informed written article.

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  • Owl Tree

    This was a perfect presentation of the negative consequences of the upcoming rule. Well done.

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  • DON IN BAMA

    I appreciate your putting this in a format I can understand. Small wonder I am looking for an additional job and wanting to start yet another one. Seems like the FRB doesn’t understand anything. (expletive deleted!)

  • http://www.geneperez.net Gene

    its going to be that brokers are going to cushion for those market swings as well since you cannot change the rate from what I hear but when the market moves and your are negative then what do you do .. I don’t know the govt seems to do things that are counter to a market recovery for real estate… at least. .. Santa Maria Real Estate

  • http://www.intellestate.com Brad Norris

    If there is a minimum baseline lender paid compensation, then it limits the ability to reduce your margin to get a deal. The lowest baseline comp, I’ve seen is 100 basis points. There is no competition distinction made between Conventional and FHA/VA financing though it is a prevailing fact that Government loans have more disclosures, rules, challenges and cost more to originate/process. I foresee see a future where larger loan borrowers pay more for the same service. I know I am willing to originate a $400,000 loan for 50 basis points, but under this new arrangement, I won’t be able to. The consumer will pay more as they are now presented only with these “padded” rates and competition will be strangled. If the want to approach compensation (which I am NOT in favor of) in an “equitable” manner, why not start with a base line dollar profit that’s allowable rather than basis points. Some of the smaller dollar loans are some of the most challenging.

    Regulators have spent the last 3 years trying to regulate the industry into a state of perfection. There are standards of behavior that are expected here that aren’t expected anywhere else in the economy. We are not allowed to make mistakes. God forbid you fail to quote the 1% transfer tax on a $400,000 property. It’s not bad enough however that we may have to PAY THE BORROWER for the service we perform, we now have to give up our ability to negotiate and determine for ourselves what our work is worth.

  • http://www.qmortgage.net/rate_quote Jon Berry

    It’s good to see someone else trying to expose the truth and harmful consequences of this Fed rule on loan officer compensation. Because RESPA/GFE 2010 made yield spread the borrower money, this is not only unnecessary, but harmful to the borrower.

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