Archive for November, 2006
Please Xcuse the Comments
November 11th, 2006 Categories: Random
I have begun to manually add comments from other communities that feature the same posts found here at thexbroker.com/blog.
In the absence of an RSS, or any other interfaceable, and thus easily importable feedtype, I am relegated to these archaic ways…
Soon to follow will be a page of backlinks to the contributing commentors for appropriate recognition. I assure you they are all real people 
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Yield Spread Premiums. Definition, Disclosure and Depth
November 9th, 2006 Categories: Mortgage News, Yield Spread Premiums
Yield Spread Premiums (YSP’s) have gradually made their way into the American homeowners conscious, rising from relative obscurity.
While this is progress, their use in relation to their intent is still misunderstood, manipulated, and maligned. Although more consumers are now aware that YSP’s are cash rebates Lenders pay for a borrower to accept a higher interest rate than they qualify for…this hasn’t stopped Brokers and Bankers from misusing them as a tool to subjectively and unjustly enrich themselves.
Definition.
Even well educated broker/bankers can’t properly define YSP’s intended purpose per RESPA letter law. As explained in the RESPA Policy Statement, yield spread premiums should be proposed “as a valuable option that permits home buyers to pay some or all of the up front settlement costs over the life of the mortgage through a higher interest rate.”
In reality, YSP’s are shrouded within the complex structure of real estate settlement procedures to principally allow mortgage brokers and bankers the ability to impose higher prices on borrowers for their direct benefit.
Disclosure.
Many broker/bankers will disclose YSP’s in a range of fashions, which may appear to protect the borrower, but appearances are deceiving. A prevailing practice among brokers is to enter a range of 0% to 5%, which leaves the broker with complete freedom of action, while providing the borrower with no usable information.
Other brokers won’t disclose YSP’s until closing, misleading borrowers to believe that the suddenly apparent dollar amount on the HUD-1 ‘is a fee paid by the Lender to the broker/banker for ‘delivering the borrower’. Under this explanation, payment of Yield Spread Premiums would run afoul of the first step of HUD’s test of whether YSP’s could be considered illegal kickbacks or rebates.
If the dollar value of YSP’s that end up in the broker/bankers pocket exceeds a fair value for services baseline, the transaction violates HUD’s test. What is this baseline amount? I don’t know…$3000, $5000, $10,000+ ? How could one justify $5000 in additional undisclosed compensation?
Charging broker compensation fees up-front and via improperly disclosed YSP can be viewed as a violation of TILA.
Depth.
85-90% of all mortgage transactions contain YSP’s.
In almost all cases, they are never presented as an option, according to true definition.
They represent the largest source of compensation for mortgage brokers.
overwhelming majority of borrowers do not need YSP’s to pay up-front settlement costs but are never offered otherwise.
‘This abusive form of price discrimination substantially increases the overall costs to borrowers, imposing a “hidden tax” on home ownership. Unfortunately, individuals who are less educated and less sophisticated about financial matters end up overpaying the most. The misuse of yield spread premiums affects prime borrowers, FHA borrowers, VA borrowers’**…all the way down the line. Even for those with the best credit, yield spread premiums can cost many thousands of dollars in increased financing costs.
The oft-maligned broker segment of the mortgage origination industry bears the brunt of these facts, while bankers can maneuver with perceived impunity, since they ‘are not required’ to disclose YSP. It would be interesting to see bankers held to black letter law and operate under more transparent conditions…rather it would be interesting to see how quickly they changed their business practices. Many in the industry don’t believe it’s anyone’s business what they make via YSP incentives. Their definition states otherwise. YSP’s belong to the borrower, not the 3rd party service provider.
The mortgage industry as a whole is a baseball toss away from moving to an overall transparent policy platform, via legislation, technology, or both. My $.02 says technology starts it and the legislators play pile on. At the end of the day, to not disclose has been rendered deceptive and predatory…words that have a clearly deleterious effect on doing business, whether they are legally reprimanded or not. If you think about it…to speak out against transparency in this marketplace is not the type of opinion consumers or legislators will come to appreciate.
The opening salvos have begun. There will be momentous battles with new weapons and strategies, but like most wars, no one comes out the clear winner, but the landscape will be changed forever.
**Proper Thanks to:
Kickbacks or Compensation: The Case of Yield Spread Premiums By Howell E. Jackson and Jeremy Berry U.S. Senate Committee on Banking Housing and Urban Affairs.
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Quotes, Zillow, and Guerrilla Blogging Tactics
November 9th, 2006 Categories: Random, Real Estate Technology
While up in Cleveland, OH for a summit meeting with my partners and one sharp programmer (John McKnight, plug!) I had some time to reflect on some articles, posting, musings, and quotes that struck a cord with me.
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The Effect of Transparency on the Mortgage and Real Estate Industry’s
November 7th, 2006 Categories: Mortgage News
Few people like to entertain the guy who trashes their business model as antiquated, especially those within the industry who currently enjoy a comfortable margin of success doing business under the self-prescribed ‘right way’. So, let me simply say that I am here to help, not just pee in your Cheerios. Maybe I’m guilty of a little too much self-promotion, but you can’t get mad at the kid who tries to answer the tough questions, whether invited or not, and offers a solution for everyone else to openly poke holes in/at/through.
‘Disintermediation’ is an act of progressive business practices that are more debated by the day in this ‘underground’ real estate related community. As these industry’s move towards the path of greater transparency, outsourcing for less expensive products and labor is becoming a required task more than an option or debatable topic. Globalization hit the mortgage service industries a few years ago, if you hadn’t noticed. Anyone can outsource file processing (from Indiana to India) at far less expense than employing an in-house processor, with less errors 
This is only the tip of the iceberg, the risk (or opportunity) is far greater.
Much like the traditional stock broker middleman, the mortgage broker/banker and real estate professional middleman is a species who is facing a slaughtering wave of attrition, and for very similar reasons. The mortgage bubble has popped, and as the market scales from historical demand back into some balance with supply, only the strong and/or adoptive will survive…specifically…those who can do more for less, in less time. In the case of the mortgage industry, new and inexpensive technology is mandating transparency and forcing disintermediation from traditional ways. Instead of looking over the entire landscape, many within the industry refuse to look further than past what they can currently see.
Too often I hear comments like:
‘No piece of technology is going to replace me!’, ‘I’ve been very successful for years, why would I change?’ ‘It’s not practical to do business like you suggest’, ‘My customers love the way I do business’, ‘People don’t mind paying my fee.’
The internet has only been around for apprx 11 years, it is still in it’s infancy. There were plenty of people 10 years ago that dismissed Information Technology in a similar fashion, and PC cynics before them.
The demographic that has grown up online is just now entering the mortgage marketplace. They don’t value the traditional relationship as much as information. It, not you, is recognized as the most valuable resource. If they can get around you on the cheap, they will, and someone will be there to sell it to them for less than you’re capable of. Think of it this way, fathom doing business without the net and still being as efficient and effective as you are today? Impossible.
Dot com era businesses (and their plans) blew up at the introduction of transparency into it’s inflated numbers and projections. Company’s with P/E ratios and other fundamental baseline measurements that made 0 economic sense imploded.
The stock brokers who were making huge rips under cloak were exposed and marginalized or eliminated from the industry. I got along great with my stock broker, that didn’t mean I felt obligated to pay him 2-3 times the amount I now pay to buy and sell my securities. I found a way to do it faster and cheaper. His job and fees were marginalized to the point he joined the mortgage industry. Now he’s looking at me like, ‘What’s next?’.
Quid pro-quo; What is the benefit of changing how you do business now? Market share, and alot of it. However, early adoption of disruptive technologies that promote transparency and as a result, increased loan volume, requires disintermediation from current mortgage broker labor compensation models and business processes.
The new mortgage market consumer will demand more efficient, less expensive, point and click, intuitive interfaces to gain their business. If your cost per loan acquisition is $1,200+, you have a shelf life of about 1 year. Insist on continuing to charge points instead of a fixed fee for (multiple) services? Get relegated to fighting for ‘whats left’. Own or working for a brokerage that pays some type of 30%-70% split? You’re pricing yourself out of competition.
Seth Godin postulates that integration of new technologies, business ideas, products, and paradigms generally move into general usage/acceptance along a traditional bell curve, which seems more than reasonable to believe.
Lets put the transparent, efficient, cost effective, and intuitive mortgage business model into the curve as a whole, assuming that what I have laid out becomes remotely true.
Where will you or your Company be in this curve? Among the late majority, or cynical laggards who die a slow death or play perpetual catch-up?…or among the innovators and early adopters who are positioned to capture significant market share….a market that is primed for a huge correction, the beginning of which we are just now seeing.
The e-myth demonstrates that a business owner, and thats all of us in mortgage services nowadays, must work on his/her business, not in it, to become successful. The Innovators Dilemma discusses the dangers of getting too comfortable in your current success model, and why the big traditional players in the market fail to innovate, recognize, or implement disruptive technologies, to their detriment. The dot bomb explosion has demonstrated what happens to those pimping overvalued products, impractical revenue models, and non-transparent policies.
Disintermediation and/or transparency aren’t nouveau business process concepts whose effects have never been studied, they can be seen in a number of recent events . Considering the mortgage market is many times the size in volume over it’s equities counterpart, totaling some $8+ Trillion dollars, the overall effects and shift of wealth will be proportionately huge.
Which side of the wave will you be on?
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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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