Mortgage Yield Spread Premiums and The Transparency Thing
April 15th, 2008 Categories: Real Estate Technology, Real estate economics, Tranparent mortgage pricing, Yield Spread Premiums, ratespeed
Yield Spread Premium: A consumer option to finance some or all of closing costs by accepting a higher interest rate than they otherwise qualify for.
There has been much debate about Yield Spread Premiums (YSP’s), from overall required disclosure policies to their potential abolition. All mortgage professionals have a personal opinion on the topic, some resort to denial when it comes to their relative importance in relation to the overall mortgage transaction, others will get down right hostile regarding the topic of proper YSP disclosure and use.
Regardless of status-quo industry opinion, YSP disclosure is a vital component to address amidst the mortgage mess we’re in. Many other industry pundits have writtten about YSP’s, opinions vary as widely as the colors of the rainbow, most of the articles I’ve read were written after this article was posted on the Active Rain real estate social network. The post pales in comparison to the comment thread, which is most entertaining. The same article is linked internally (below) as well…
I started writing about YSP’s in early 2006, even before this site became a ‘blog’. They’re an interesting and important topic because Yield Spread Premiums drive business transactions in the mortgage industry, this is a hard fact. As a former mortgage broker (owner/operator), YSP’s were a focal point of who we did business with as a matter of practical business economics.
The wholesale lender who offered the ‘best pricing’ (paid the most in YSP’s for a given set of products) often got a bulk of our business, unless their processing was so terrible it caused closing dates to be missed or something of that magnitude. Any broker or banker who tries to represent otherwise is either lying or talking out of both sides of their mouth.
Improper disclosure of YSP’s have had a staggering detrimental effect on this industry. Very viable, valuable programs like Option ARM’s were destroyed because of improper YSP disclosure. Brokers sold these programs based on the low monthly payment option they offer and then juiced them with margin that caused consumers to defer inordinate amounts of interest to the loans principle balance and caused future rate adjustments to blow people right out of their homes. Similar dynamics exist within other mortgage programs as well.
I’m willing to step out there and say that improper YSP disclosure and use are the cause for many foreclosures in todays market. YSP’s foster higher interest rates via higher margins. Higher margins are especially apparent when an ARM adjusts, (can) cause substantially higher payments. Higher payments, or payment shock, cause defaults and subsequently foreclosures. It’s not a stretch to ascertain that proper YSP disclosure, implementation and greater consumer understanding could have prevented a number of foreclosures.
Its worth mentioning that I’m not here to lobby for the elimination of YSP’s…eliminating Yield Spread Premiums would be a catastrophic mistake, they are a vital tool for many consumers in the market for a mortgage. The average mortgage broker(age) would close as soon as their current pipeline of grandfathered business dried up if YSP’s were outlawed, it would crush the small business owner brokerages, although this may appeal to big business and the retail banks.
Properly enforcing how YSP’s are disclosed and used is vital to a fledgling mortgage broker (and banker) industry. Many in the industry will argue that Wal-Mart or some other retail outfit doesn’t disclose how much they make on a given product so why should they?…Such analogies are akin to comparing apples to arsenic. It’s worth mentioning the ridiculous laws that allow for mortgage bankers (and retail banks) the leeway to NOT have to disclose YSP’s while mortgage broker must disclose them. Hypocrisy isn’t a strong enough word here to describe the two-faced mug of the greater mortgage industry.
If their definition is as the first line of this post dictates, then every last penny of YSP on any given loan must be disclosed and credited to the consumer. If a wholesale lender is offering ‘50 bps (.5%) in YSP for closing a 5 Year ARM Purchase’ as this months ’special’, that ’special’ must be credited to the borrower.
Mortgage professionals must recognize that they are not entitled to YSP’s, they’re not a tool of personal enrichment, not a profit center, and are the business of the consumer. They need to drop the elitest attitude, compete on service and experience, and most importantly of all disclose interest rate pricing with 100% transparency, not 90% or 99%…100%.
For the mortgage professionals who say ‘I already disclose/do business this way!!’ Even if you are telling the truth in fact, nobody believes you. Consumers should ‘trust but verify’, alas there is no way to verify using todays web-based tools; blind trust is something a consumer is less and less willing to afford a perceived perpetrator of deceptive practices. A mortgage professionals value is in their service, fulfillment, and expertise levels, not interest rates. Interest rates are a commodity, a good mortgage professional is not.
Running a mortgage business under the Transparent monkier isn’t easy, you just don’t flip a switch…I was engaging David Podgursky via a Facebook convo, he was telling me that while he wanted to run with the Transparency movement, he was having a difficult time with how to ‘work’ this paradigm shift:
David:
I don’t know… I want to like transparency but I think that sometimes haziness is better … and it isn’t like I hide things but transparency in broad strokes seems to me would have implications that clients would shop based on the professional fees and that alone…
I work in Florida… we HAVE to disclose front and back end… so it is transparent! that BS HUD change makes it even more so!!
TXB:
Transparency in any marketplace causes that marketplace to have to figure out how to run more efficiently, so they can cut costs to accomodate the ever enlightened and discerning consumer. Its a nebulous, tricky proposition but an eventuality none the less…
The way traditional mortgage shops run, split % based commissions and all, are counter to participating in a transparent marketplace. This is where change needs to happen, at the core of the business model.
It’s professionals like David that inspire and motivate me. He does business the right way and wants to be as transparent as possible but the fu*#ed up system gets in the way.
Consumer demand is what can and will change how this industry operates. Consumers are demanding greater transparency and lower costs…and RESPA law happens to back them up. There are plenty of professionals who currently and/or willingly do business this way and I want to help. My intent is genuine, purposely designed to enlighten the consumer and empower the maligned quality mortgage professional.
While this article is sure to be deemed as self-serving, since I’m about to launch an anonymous mortgage application that discloses a participating mortgage professionals wholesale rate pricing feeds, every penny of YSP unveiled, what shouldn’t be lost in translation is the importance of higher education and transparency for the mortgage industry. No amount of legislation will fix whats wrong here, big biz lobbyists will make sure of that.
The mortgage industry still needs an enema and I believe I’ve got a potent one 
Next: How to Run a Successfull Transparent Mortgage Business
Also See:
Yield Spread Premiums, a Quick Study
Yield Spread Premiums, Capital Hill Testimony
RateSpeed, The Mortgage Rate Search Engine
Indecent Disclosure, Yield Spread Premium Class Action Lawsuits on the Rise
RateSpeed, The Automated Transparent Anonymous Mortgage Rate Pricing Widget
Sphere: Related Content
There’s no real way to make a different method sound better in a defense, Jeff…
But I can tell you whenever I lead a conversation with cash…it is going to cost X for my services… then the client will always say, Well so and so will do it for Y
It doesn’t matter anymore WHO they are hiring… just how much it is costing. Because “Every broker has access to the same banks”… but not every broker does things RIGHT or HONESTLY
Not every broker delivers what they promise
If it is still the best rate… if I quote them 5.5% and you quote them 5.5% then it is the one they like the most. If you happen to make $500 more on that rate than I do then maybe you just have a better deal with that lender… but how does that REALLY, HONESTLY affect the borrower??
There is no legitimate answer that can prove it does…
oh?? well… let’s go back to the 2004-2006 timeframe… it DID matter then when Subprime ARM loans could be written at Prime rates but the Margin was terrible!! If the consumer did not notice the Margin difference and have the knowledge to question it, or didn’t receive a TIL… then of course someone would and could take advantage by adding a prepay and 2% higher margin to get 3% over my 1.5%
But Prime vs Prime… same lenders… if I happen to make a few dollars less than you, I defy you to prove that it hurts the clients NOT to know how much I am making,… even though I DO disclose by choice and by Law.
Prime vs Prime… you have Chase and I have Provident and I’m given YOUR GFE… if I can beat your rate with my lender, I win the business… it has Nothing to do with pay. If you say I’ll give you a 5.5% for $2500 and I say I’ll give you a 5.75% and the lender will pay my fees… how does any bit of that transparency win???
“If you happen to make $500 more on that rate than I do then maybe you just have a better deal with that lender… but how does that REALLY, HONESTLY affect the borrower??”
It affect the borrower $500 to the positive. That $500 extra should be disclosed (and credited) to the borrower, its the law.
“But Prime vs Prime… same lenders… if I happen to make a few dollars less than you, I defy you to prove that it hurts the clients NOT to know how much I am making,… even though I DO disclose by choice and by Law.”
It doesn’t hurt the consumer in your example, though your example is far from the norm. If your example was the norm, the industry wouldn’t be in the state that its in. There probably are scenarios where not being transparent can be beneficial to a borrower, but most probably exist in a vacuum.
What it all comes down to is the consumer wants to, and has a right to know exactly what they qualify for. As this want becomes a consistent reality, those who refuse to do business this way will be cursed by skepticism from the consumer and deemed invalid.
I’ve closed too many deals to count where I wasn’t the lowest cost choice, the client chose me because I taught them lessons they could carry on well after I closed their mortgage.
Like I said David, there is a method to selling and operating a mortgage business in a transparent marketplace. It’s not just ‘being transparent’ it’s a series of aspects, from marketing to sales skills to efficiency. I’ll cover these aspects in my next post.
Appreciate your willingness to be frank and engage
YSP is the mortgage businesses profit margin. Just like any business in this country, that is trying to make a profit, they are going to have a markup. I don’t go into Wal-Mart and complain about needing to know what the markup is on the toilet paper! I know every product in that store, and this goes for any other retail store, is not “disclosing” their par cost on the products.
Many times, clients will use me as their Loan Officer just because of the service I provide them. This is what they are paying for and they know it. My service is invaluable, compared to what they have worked with before. Now, if a client asks how much I’m making on their transaction, I most certainly share this with them. I have nothing to hide, but everyone knows their is a profit margin in all American businesses, that are profitable, and no one is complaining about the other companies. Let the next mortgage company undercut me with a bit lower rate, that ok, it’s business, but I’m more focused on a different approach in handling my clients…and that’s through great service! Don’t take away the ysp…let the competition offer a better quote and that will be my personal punishment for not giving them the better quote.
Perhaps, more necessities like groceries and gas should be, by law, required to show the par cost on their products.
YSP is a tremendous benefit to the client, when used properly that is. As you already know, I have no problem letting people know how much I make on a transaction, and I even agree to that fee right up front.
The problem is that focusing on YSP and other “cost related” issues fuels a “lowest rate and fee” craze, further commoditizing the industry. While getting the lowest rate and fees is a good objective, the better objecive is to find the mortgage professional that provides the best value!!!
That means, reasonable rate and fees for the expertise, service and beyond for the transaction. After all, getting the lowest rate and fees on the wrong mortgage can be more costly than paying more to ensure you are in the right one.
@Joshua: YSP’s have been the profit centers of the mortgage industry, although that is most certainly not their intent. Congrats for drawing the wrong type of attention to yourself.
Wal-Mart is a retail store, this is the mortgage industry.
If Wal-Mart entered the mortgage industry as a mortgage broker they would have to disclose YSP (and other costs) just like everyone else.
They could still ‘hide their mark-ups’ on toothpaste but would have to adhere to the requirements of the lending industries when selling mortgages.
Is it clear yet why ‘The Wal-Mart Analogies’ are ‘misdirected’ yet?
@Robert: I know you’re a UMB, so this post is singing to the choir for you…I agree with your thoughts and would like to see more originators focus on expertise and other tangible value…
Put rates and YSP on the table to satisfy the consumers want to know, then blow them away with what they don’t and earn their business.
I worked for a Mortgage Bank for 4 years are we did not have to disclose our “margin” to the client. Now that I am a broker it must be disclosed. How will the industry address this disparity and treat the consumer fairly?
At the end of the day the broker model is honest and banking is the one hiding fees from the consumer.
Thanks,
Bryant
Bryant, you hit on one of the most hypocritical, greasy handed lobbyist, ludicrous aspects of the mortgage industry as a whole.
The confusion this two-faced approach causes consumers to make poor decisions when shopping for a mortgage.
IMO, EVERYONE MUST DISCLOSE, special rules/exceptions for one part of an industry is no good for the entire industry.
RateSpeed is meant to level the playing field. Brokers and consumers should rally around it’s mandatory use
Wonderful discussion and perfect post. Very valuable points you all have , let me just join the party and say my opinion on the real Cause of the Real Estate mess right now.While transparency is important and I would say ethically crucial in closing the deal, I think the main cause of the disaster right now is, that too many people took the real estate market as a free lunch and in a foolish hope, they will resale the bunch of houses, they bought for speculation pretty quick and still make an easy “buck”, they forgot, what they really should be focused on, and that is, the price of the House. Agree, or disagree, my view on this is, that in this case, the house, or the property is the commodity here…
Just a thought, I liked that discussion guys…
Bottom line, I don’t see YSP going away anytime soon…or ever! You may have a fairly good idea with your RateSpeed vision, but there is too much value and service that many brokers give to borrowers. Regardless of the service or product you are selling, people will buy, if you can provide them with what they are looking for. Price isn’t a top concern when the “want/need” is met. Sure, there are some unethical brokers, but the consumer and good brokers will run them out of the business sooner or later.
“Bottom line, I don’t see YSP going away anytime soon…or ever!”
“”Its worth mentioning that I’m not here to lobby for the elimination of YSP’s…eliminating Yield Spread Premiums would be a catastrophic mistake, they are a vital tool for many consumers in the market for a mortgage.”"
For what it’s worth, RateSpeed isn’t meant to diminish a (good) broker/bankers value, quite the opposite, its meant to augment and focus on their value…
If an unethical broker/banker ran the RS application on their website, it would speed their departure from the marketplace or convert them from being one of the unwashed real quick…
Very well put Jeff, I can see your point and I must say,I agree with you, it does not make me happy much, I like to debate the Great minds, but on this topic, there is no much for me to debate. Providing mortgages, or mortgage service, is a business of Servicing the customer, the point of doing a business is to make a profit and if you are good, you should get paid good. When you know, you are providing a valuable service, then you should not be ashamed to disclose your true price. If you have something to hide, then you do stuff unethically and you have no business to continue to do so.
There you have it…
YSP will not go away but the ability of the loan officer to put it in their pocket may be. Some of the banks we work with have created policies with forms that we must have signed to submit with very clear language that the YSP is for closing costs only (and or that rate would be lower without the YSP). So if YSP does exist it needs to be a credit to the consumer not paid to the broker as additional profit. The solution is going to the banking model which many of my friends shops are in the process of doing not for the consumer but for the LO’s and brokers ability to make profit. Nothing wrong with profit but this does nothing to make lending clearer for the customer.
On the note of service and being willing to stand by your pricing. I still think of this as a sales business and I like the reward of closing sales and earning commissions. Sure I do a nice job but I am not a waiter I am a salesman. A consultant would have a fixed fee for services or charge by the hour. We, as an industry, talk about service and all our great value but we still get paid commissions for sales. If you are a consultant or an adviser then price like one. Set an hourly rate or a flat fee per transaction and take points or compensation based on loan size off the table. Let’s be real getting paid $5,000 to take an application and have your processor run DU/LP and then see the file to funding while you go look for more clients is not a fair price as a consultant especially in this Agency/FHA automated market. As a salesman earning commission then Yeah Baby!
“Some of the banks we work with have created policies with forms that we must have signed to submit with very clear language that the YSP is for closing costs only”
Bryant, I’m also beginning to see those YSP disclosure changes by the banks at the wholesale broker level. So far, that seems an extension of the banking effort to marginalize brokers. On a retail level, the banks are still not disclosing YSP or SRP. The banks cling to the argument that unless they sell that loan no YSP is generated. If they ultimately do, they don’t know how much it will be. But the bank loan officer still gets paid commission based on the rate delivered to the consumer. The banking argument for non-disclosure implodes at that point. The LO should disclose fees earned as a result of the rate, even if the bank doesn’t.
So the trend I see developing is that until the banks wash their own dirty laundry, lenders will simply be driven to a banking or correspondent platform. Transparency and disclosure become casualties, and the consumer gets screwed because nobody discloses.
Jeff, I like your idea very much. However, I worry that without a level playing field, transparency faces an uphill battle. We may seek to differentiate ourselves by emphasizing knowledge, service, transparency, and experience, but the banking industry’s advertising machine has a huge reach.