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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Boy am I an idiot when it comes to mortgages! I will consult with you before i get any new mortgage. Great information thank you!
10/31/2006 by Noel Padilla
I’m shuddering! How can you POSSIBLY do your due dilligence if there’s no way to know what the YSP is?
There is a lot of talk about ‘educating’ the borrower; but I can’t see that that’s possible; your average Joe Blogs isn’t going to have a clue what you’re talking about, even given a month of Sundays.
Now I’m wondering if my ‘wonderful’ broker whom I’ve trusted all these years was really totally honest. I have to believe she is (please be honest, please be honest, please be honest……)
10/31/2006 by Jessica Hughes
How can you POSSIBLY do your due dilligence if there’s no way to know what the YSP is?
Call The XBroker
I am off to Cleveland OH today for a ’summit meeting’ of partners to advance a little piece of software that will allow the consumer access to wholesale ‘par rate’ pricing…& the ability to see all YSP’s….
Look for XBroker 2.0, very soon…..
11/01/2006 by Jeff Corbett
Very Funny! I’ll keep that in mind for my next loan.
11/01/2006 by Jessica Hughes
Jeff…. I agree & disagree… it comes down to what you want to make and not so much saying that you are $23,000 cheaper… I know what you are trying to say.
The main thing that should be pointed out…Apples to apples….are the rates and fees. Sure, you can incorporate the YSP…. but if my rate and fees are better than what you have to offer, then the YSP isn’t such a big player that you make it out to be. But I will agree that DiTech is a big player that has higher costs than what they advertise. Besides…they are part of GMAC.
11/03/2006 by Jeff Belonger
Jeff…
As a broker or banker, at 7.5%, I would be paid $13,215 if I chose not to disclose, and retained all YSP.
If a client was offered a flat fee for service of $3k, and chose the 7.5% rate, they would receive a $9,821 credit.
This is a $23k swing…
The average broker (individually) originates 4-6 loans per month.
The average DiTech LO (individually) originates 32 loans per month, and the $395 Flat Fee loan is their most popular loan of choice.
Threw up the chart to demonstrate an easy to read barometer of how slick marketing and perceived ease of use can draw the consumers eyeballs away from what usually is a terrible deal…
YSP directly influences rates and fees…consumers need to be more aware of it’s existence and use, intended and otherwise, so they may make more educated decisions.
Im not saying YSP is bad, just misunderstood and manipulated at the overwhelming expense of the consumer…
11/04/2006 by Jeff Corbett
Jeff… if you read what I wrote… I semi agree with what you wrote. But you are leaving out key elements. One major one, each client is different. 2nd… you are throwing up a chart that has it’s numbers showing a larger savings on the average, making you one fee charge look even better. I made the point that if my rate and fees where cheaper than yours…but my YSP was better, my client is still getting the better deal. You didn’t talk about this. This is what makes me continue to rant a little more. Just like an normal sales person…. they want the client to see and believe what they are saying.
Again…your blog has many good and valid points of interest. But let me put it in laymans terms for the general public. If your fee was $3,000 and my fee was $2,000 and I had the same rate as you, but my YSP was better than yours…. my client is still getting the better deal.
I know what you are trying to start in this industry. I have seen it tried twice before. There are too many interchangables. And one other fact… you are going up against other SALES people…. that will say and do anything to get a deal. The old bait and switch. And some clients will think $3,000 is too much. Again…. each client is different. And I wasn’t knocking what you were saying. But each client would have to be educated and probably have to go through a bad experience before they start believing in how this works. Those are the facts.
You said..YSP directly influences rates and fees…consumers need to be more aware of it’s existence and use, intended and otherwise, so they may make more educated decisions. Just like I said…knowing of it’s existence is going to confuse the average client even more. As long as my fees and rates are better than yours…my APR is lower…and my YSP is better, my client still has a better deal. You can’t cut profit and cost down to nothing in this business. It just won’t happen. That’s my opinion. It’s like asking a mechanic to do it for a flat fee. But then he has to spend 3 more hours on it, because it was worse than it was perceived. ie: when do you give this client this one time fee? Just curious.
11/04/2006 by Jeff Belonger
Jeff…let me point you to a AR post that should clear things up a bit.
http://activerain.com/blogsview/17200/The-Bankers-New-Clothes
11/04/2006 by Jeff Corbett
Jeff…I read it. And like I said…it has some merrit to it. But one thing you will never get around is the “bait and switch” problem. Never…..numbers on paper is exactly that.
In regards to disclosing YSP and other things…. it’s a banker’s world and that will never take place either. Sorry, not trying to sound negative. But these are the facts. You can try to reinvent the wheel, but this wheel is out of stone and metal together. A special metal that even Superman can’t bend. I applaud your efforts and what you are trying to say.
ie: remember when DU first came out. Remember how many people thought that their jobs could disappear? Processors, underwriters, loan originators??? I did for a split second, thinking that computers will take over. But they never will. Risk base pricing…. not 100% of what you are talking about, but similar in cause. Again, from what I have said, you can only educate clients your way and not through a system or a spreadsheet or some formula.
Again, I do agree with you. Lenders will take advantage of this. Would I agree to get paid $2,000 to $3,000 as a flat fee. Yes, if I was guaranteed x,y,z business. But what do I walk away with after my company gets done with me? I did an option arm for a client about a year ago. I didn’t charge any pts on the back and because of my YSP, I was making $17,800 on the deal. I gave the client back $6,000 for closing costs. Yes, I still walked away with $11,800, but before my company split and taxes. But not one person they shopped with, did this for them. I had it on my good faith estimate as lender paid fees.
I am a business person…I will treat clients fairly. But also would like to get paid for what I do. That particular client…. I probably used about 600 minutes on my cell phone, and this was just my cell and just in 2 weeks. 600 minutes might not seem like much, but that is over 10 hours…. just with one client.
Anyhow…we do agree to a certain point….. good job in educating.
11/04/2006 by Jeff Belonger
Could someone bait and switch if their ‘client’ had independent access to their rate sheets and they were forced to provide a copy of the Lenders validated rate lock/pricing sheet?
As far as a banker having to disclose YSP…in a marketplace of forced transparency, what is their sales pitch for an unexplained higher APR or when a consumer asks them why they didnt disclose YSP? ‘I didnt have to tell you?’
AUE’s have caused quite an attrition, a ‘fat cutting’, of human UW’s and other previously labor intensive jobs. I’m not speaking in absolutes…some piece of tech isn’t going to eliminate, rather it will regulate and streamline. DU was an important step forward, but far from a transparent solution,; an ‘insider industry’ example of the type of a tool that can radically change how we do business.
I understand I speak too cryptically about all of ‘this’, as if much of ‘this’ has already permeated the marketplace, which it hasn’t…not by a long stretch. So I lace my posts with thought provoking fact…hoping others begin to see what is coming.
Without actually making the damning allegations and proposing the comprehensive solution, I appear as an idealist, waffling around clouds 9, 10, and 11…high on my own ether..hahaha :))
Over the next 12-18 months, these topics will become a flash point for the industry. There is a perfect storm coming together…
I appreciate your opinion and time Jeff, you and others in this community help me better understand the collective conscious of what is still good in the mortgage industry.
11/04/2006 by Jeff Corbett
Good comments from both of the Jeff’s.
Jeff-X…your figures suggest a $3,000 brokerage fee on a $410,000 loan. Any brokerage worth it’s salt would be out of business with those margins (and still provide a full-service offering).
The brokerage fee for that loan (incuding a processing fee) would be somewhere in the $4,000-$5000 range….and the answer is Yes…I have tried it at the lower margins and you just can’t keep quality, licensed emplyoees for those margins and stay in business. You can mix it up anyway you want but a 1-1.25% margin on A paper loans is an absolute necessity to pay the lights, copiers, and employees (if you’re in it for the long haul)
Otherwise, great posting.
11/04/2006 by Brian Brady
Brian…great point and that was partially what I was trying to get at. It’s always nice to have someone else point it out for you.
But like I said before… Jeff C. makes some good points. But standardizing a flat fee, just won’t work on an overall scale. But he did point out some other issues that I do agree about. One is, some brokers or lenders just making too much off a client when they could give some of it back. That I do agree with…
11/04/2006 by Jeff Belonger
Very true Brian…I took on the arduos task of looking at how we spent our money and how we paid our LO’s, and conceived a unique and alternative model to run on.
This made the price points I speak of very tangible, and profitable. You must change the traditional business process model from the inside as well as the outside.
11/04/2006 by Jeff Corbett
Mr. Corbett,
I applaud your efforts and get a lot of good information from your site, but I do have a question. In your opinion, what should a loan officer make per loan?
In a perfect world, we’d all get consistent business and price based on volume motives, not roller coaster month motives.
Regarding your LO’s, what’s their average split/YSP? I try to consistently price loans at 1-1.5% YSP and feel like I’m in the more competitive end of the pool.
Just interested.
Thanks again, and keep up the good work.
Christian
Ive got an answer for you Christian, although not enough time to dedicate a worthy response to you tonight…but I will
Jeff,
I appreciate that, and I’ll look forward to hearing back.
Christian
Christian…almost forgot about you :-\ sorry!
Our community of brokers and bankers are required to charge a flat fee for service disclosed near the inception of the relationship, between $2000-$5000 (single line broker compensation item) per deal. 3rd party costs not included.
They don’t charge points, as I like to say, the loan amount has very little to do with the cost or time associated involved with closing that loan. A $100k loan can be harder to close than a $500k loan, so we steer clear of the illogical % base loan cost commission model.
Income doc requirement does, i.e. we charge less for reduced doc loans because they require less work.
Our affiliates tier out their pricing based on a few other factors as well. They make less per loan than your average broker, but close more loans in less time, and actually make more money…asing the leading question:
Would you rather make $10,000 over 60 days or $7500 over 30 days? A split commission system doesn’t work under these conditions, so we use an alternative comp model.
We layout the direct wholesale rate sheets displaying absolute par rates and allow the client to choose how they want their fees wrapped up…selling true transparency instead of rates and fees…
Hope this answered your Q
JeffX
[…] Operating beyond the reach of Reg X, online über-shills sucked billions of dollars in overpaid interest expense out of the economy through such notorious schemes as DiTech’s “$395 Flat-Fee Loan”—a Trojan horse packed with up to 3 points in hidden yield spread courtesy of an inflated interest rate. […]
Thanks a million times, Mr. X
You have been very informative and concise in your approach to educating the masses.
I am ashamed of the mess which I also participated in as a loan officer for the past four years. I was always told to sell, sell, sell, or get the…beep..out…of the office and get your own organ grinder…..lol (Former Employer now out of the business, IRONIC???????)
I realized a while back with the mortgage shift and reshaping, that I need to be a part of the cleanup.
Thank you so much for the information on what to charge, so I can always continue to educate my clients and future clients, as well.
Sincerely,
Keith McClain