Home > Mortgages > Old Mortgage Trick May End Soon, Saving Consumers Billions

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WeLoanMore_Jay_Santiago_FlickrA tactic used by mortgage brokers to fool homebuyers into paying higher mortgage rates may soon become illegal, making it cheaper for many Americans to buy homes. The trick, called a “yield-spread premium,” is a kickback paid by banks to mortgage brokers. For every quarter-percent increase in the mortgage interest rate, the higher the premium that banks pay to brokers. (For a good, in-depth discussion of the practice, check out this story by our own Randy Johnson.)

Beginning April 1, the yield-spread premium is scheduled to become illegal, according to new rules by the Federal Reserve. But Congress may yet get involved, possibly delaying the rule or overturning it altogether.

Under the current system, brokers are not required to tell borrowers that they qualify for lower interest rates. The hidden rate increases cause 1.5 million families to pay $2.6 billion extra for their mortgages every year, according to a study by the Center for Responsible Lending.

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In a 2005 report, the center profiled a woman who bought a home for $43,750. Her mortgage broker gave her a loan with a 14% interest rate, even though she qualified for a rate of 10%. The difference cost her $9,000 over the life of the loan. Meanwhile the broker received a $2,700 kickback from the bank.

“Yield-spread premiums are a destructive feature of the subprime market because they give brokers an incentive to act contrary to a borrower’s best interest,” according to a press release by the center. “They cause families to be steered into loans that cost more than is appropriate and that borrowers can’t afford over the long run.”

Under the new rules proposed by the Fed, instead of getting paid more for steering consumers into loans with higher interest rates than they actually qualify for, brokers will be paid a fixed percentage of the total loan amount.

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But the rule is not necessarily a slam-dunk. Mortgage brokers have been lobbying Congress to stop implementation of the rule, fearing that it will put them out of business. They won a hearing from the House Financial Services Committee, which “is concerned that the rules may have an adverse impact on the ability of small businesses that originate mortgages to remain in business,” according to the committee’s oversight plan.

In a video sent to members of the National Association of Mortgage Brokers, Mike Anderson, chair of the association’s government affairs committee, praised the group’s members for their active lobbying efforts.

“Guys, this is great news,” Anderson said of the committee’s decision to investigate.

Image: Jay Santiago, via Flickr.com

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  • John Toepfer

    wow, you really missed on this one. I haven’t bothered to read any of your other posts. You are incredibly misinformed as to how this will benefit and save consumers cash or this is 28 days early in preparation for April Fools.

  • Jude Foreman

    This article is 100% incorrect on so many levels. Yield Spread Premium is not a trick- LOL. What do you think an interest rate is? Its a spread above already borrowed funds (Fed Funds Rate) that’s delivered to the consumer with a premium baked in for profit to a servicing bank/lender. The loan officer/originator can either CHARGE UPFRONT or raise the interest rate. Do you want to pay 2 points (on a 300k loan – that’s 6k out of pocket in addition to other costs) or do you want a slightly higher interest rate to take care of it. What is up with people- do you think borrowing money, servicing, time, work and interest rates are free? This new law will INCREASE FEES AND COSTS TO CONSUMERS NATIONWIDE. Please open an economics book and read the first chapter to figure this out before you post an article that has no concept of the how lending, margins or banking works.

  • Wes

    Really Chris? This is the piece of journalistic integrity you are putting together and calling it credible news? The only trick here is the fact that you clearly have no real understanding how YSP works and are attempting to badmouth the brokerage community without really knowing how it works.
    Yield spread premiums are NOT going away with the 4/1/11 federal reserve rule, in fact this new rule you are saying will save consumers billions actually makes it WORSE for the consumer. That is another story all together.
    The yield spread is currently (since 1/1/2010) a credit made TO THE BORROWER…NOT to the broker. This spread is used to help defray the costs of refinancing and covering fees the borrower incurs.
    Think of it this way..would you rather deal with an incompetent loan officer at a major retail bank (Wells, BOA, Citi, etc) who has no originator license, HIGHER rates, and worse service where they do not need to disclose their massive profit margins? Brokers have had to clearly disclose their EXACT profit margins on each and every loan for quite some time, yet magically the big banks do not. Who is tricking who now?

    Riddle me this, what would the SRP (nevermind you would not know what that is based upon your uneducated commentary) be with a major lender at the identical rate vs the small broker? The answer is large banks are making much larger profits than a broker on loans without disclosing one cent of what they are making on the back end of the loan with their inflated rates. But I get it this whole mess we are in was caused by the brokers…right Chris?

    • MortgageTransparencyNow

      “a credit made TO THE BORROWER…”

      One more ugly broker lair – did the borrowers ask for this “credit”?! I just received a GFE & TIL from one of these inherently unethical brokers with no spread and when the documents arrived for signature there was a spread trick inside!

      A credit made to borrower you say? I don’t need a credit and I made it pretty clear to the broker and proved it to him with documents way in advance.

      This crowd just can’t conduct business ethically and transparently. Instead, the keep calling you and phish for buttons to push – like why do you REALLY need to refinance? And when they can’t find anything that would allow them to play on people’s emotions they don’t want to deal with you.

      My advice to all prospective borrowers is to NEVER talk to them on the phone – email communication only and make sure you have 10-15 of these morons working with you simultaneously at the same stage and they are aware of this.

  • blarrabee

    Christopher, at best, this is biased and poorly researched commentary. Yield Spread Premium (YSP) no longer exists in the manner you refer to it anyway and it’s hardly a “tactic used to fool homeowners” into paying higher rates. If a borrower wanted a “zero point” rate – meaning they wanted to save money on closing costs, YSP was the mechanism by which a broker would be paid by the bank rather than directly by the consumer. Like any other profession and service, mortgage brokers expect to be compensated for their time and in most cases, their advice. Too bad there were a bunch of bad actors out there that brought this on but every profession has those that will lead others astray, even in journalism. It’s up to the consumer to choose their provider or their source of information and the more carefully they choose, the better they will be served.

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

    Yield spread premium is not a kickback, and the new Fed rule effective April 1st, 2011 doesn’t eliminate or make it illegal.

    The �spread� between wholesale and retail pricing has to do with a broker being an inexpensive and lower overhead cost delivery channel for lenders and investors to get their products out, and Yield spread, Rebate, or Service release premium is simply a return of a portion of the lenders overhead savings, as well as a return of a portion of the extra interest being paid over the life of the loan.

    What this newest Fed rule starting April 1st, 2011 does is limit the borrower’s ability to use that yield spread money for their greatest benefit. Because the GFE and RESPA rules that came out in January 2010 make Yield spread premium the borrower’s money, this newest Fed rule is completely unnecessary and actually harmful. Again, RESPA/GFE 2010 made yield spread premium the borrower money!

  • Ditech Home Loans

    A yield spread is not a kickback. Everything a consumer buys has a wholesale cost, and the yield spread determines the wholesale cost of a loan. This pricing model can give borrowers more options when choosing a loan. For example, lenders have been able to offer zero point loans because the points could be covered with the yield spread.

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  • jim loren

    I don.t think you know what you are talking about. What a shame!

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