Mortgage Interest Rate Pricing, The Disturbing Truth
November 5th, 2006 Categories: Mortgage News, alternative real estate commission models
DiTech™ was arbitrarily chosen for this comparison, but it could have been any other retail lender, since they don’t have to disclose YIELD SPREAD PREMIUM (YSP): Cash incentives (typically) paid to the broker in exchange for selling you a higher interest rate than you actually qualify for.
Comparison based on the following factors: 5-yr ARM, Single Family, Primary Residence, Rate/Term Refinance, Full Income & Asset Verification, Loan Amount: $410,000, LTV: 80%, Middle FICO: 675, Debt to Income Ratio: 39%, Property Zip Code: 92618, Date: July 11, 2006.
The Net Savings column should be interpreted as a general loan cost comparison if the YSP was disclosed, used, and credited as it is intended, to assist a borrower in financing closing costs. The actual savings (or expense, whichever way you choose to look at it) is really a multiple of this column, once you extrapolate the extra interest paid over the term of the loan for choosing the corresponding higher rate.
That said, if you were to retain a transparent broker or banker who negotiated a $3000 fixed fee with you (a fair value for services…ill call this type of mortgage professional ‘X’), the money swing is appallingly HUGE. What is the difference between the two charts? It’s simple: If you select an interest rate where the YSP exceeds a flat fee, the X broker/banker should credit YOU the difference. Apply it towards closing costs, take it in cash—Whose Money is it Anyways? Despite what many in the mortgage industry believe they are entitled to, the Lender kick-backs should go in YOUR pocket, not the broker/banker’s. It’s YOUR MONEY.
On with further dissection….
6.375% THIS IS THE WHOLESALE PAR RATE FOR THIS MORTGAGE. It is a true ‘0 Point’ interest rate, meaning it costs the broker NOTHING to obtain it for you. Do you understand? Good. No? Look at it again. If that’s the case, why is DiTech™ charging $9,697 for the same rate? We hope it’s because you don’t know it’s happening.
6.875% The broker/banker is pulling $6,355.00 in back-end YSP from the lender plus the $5,096.30 in front-end costs from you, this is actually an $11,451.30 “rip,” to use the proper industry-term. Drinks are on the house—someone’s celebrating, and you’re footing the bill. Cynical? This half-point bump could cost you as much as five times the damage in overpaid interest charges. Obtain the same rate from an X broker, and you would be CREDITED $3355…..
7.125% Here, DiTech’s™ pitching 7.125% as a “No-Points Loan,” which leads you to believe it’s the lowest rate you can get without having to pay any points. We already know that’s a lie, since 7.125% is paying over $9,800 in Yield Spread at a wholesale level—and they’re still clipping you for $1,400 up-front. Hope you like clipping coupons. Obtain the same rate from an X type broker, and you would be CREDITED $6803
7.500% The $395 Flat Fee? The way we see it, this is the poster-child for deceptive marketing. Let’s peel this rotten onion together, shall we? On 7.5%, there’s over $12,000 in Yield Spread dangled in front of any broker who cajoles you into swallowing this rate. Since this represents a commission above and beyond the value of services provided….and may soon be deemed an illegal ‘kickback’.
Obtain the same rate from an X type broker, and you would be CREDITED $9821 How do they get away with all this? It’s simple:
- FACT: Retail lenders ARE NOT required to disclose YSP. The law leaves them free to “set their own pricing”—which, as you can see, is more than a little higher than the wholesale cost at which they buy the rates. This isn’t just the DiTech’s™ of the world—your friendly local banker’s in on the act, too.
- FACT: Brokers ARE required to disclose YSP, but do they? Rarely. The reality is, brokers can easily mask YSP rebates and carry on as if 7.125% is your “qualifying rate.” And should you happen to notice the YSP rebate on your closing documents, they’ll tell you it’s a “fee” paid by the lender at no cost to you (a dirty lie we’ve already exposed here).
When it comes to YSP, the banks turn a blind eye to why you “decided” to accept a higher rate than you actually qualify for. They don’t care that the only reason is because some liar duped you into thinking it was a “PAR RATE.”
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