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

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Mortgage Yield Spread Premiums and The Transparency Thing

Novastar Home Mortgage seems to have hit the trifecta:  Part of a $46M judgment slapped on them as a participant in the Bankrate.com unlawful restraint of trade lawsuit filed by American Interbanc,  a class action lawsuit brought by it’s investors for not disclosing regulatory issues, and another class action suit for improper disclosure of Yield Spread Premiums to borrowers in Washington State.  Anyone who read my last article and wanted to know more about specific TILA violations that can lead to mortgage rescision, look no further right here.  It’s a white hot topic and lawyers love to play pile on…

A Novastar representative maintained they ‘appropriately disclosed YSP’s and that borrowers did not suffer any actual damages’.  Huh?  What part of selling a consumer a higher interest rate or charging more in closing costs than what was disclosed, is not damaging?  The mortgage industry needs an enema…it’s run by fools who think they’re above the law and don’t know when to shut up.  Pavlov’s canines learned quicker.

When will the light bulb turn on within this industry’s collectively dense head about disclosure issues?

It’s an industry that also has serious multiple personality issues.  Everyone sells the same products yet you have different rules of engagement for the resellers.  Brokers must disclose everything (but don’t), Bankers don’t have to disclose as much as Brokers, and Banks can pretty much keep it all on the inside…

It wreaks of greasy handed lobbyist poisoned politics.

As far as disclosing YSP’s, I have the solution:

Put a bright orange, legal sized page between the GFE and TILA  that says ‘Yield Spread Premium’ with a line for the dollar figure underneath it.  Underneath the dollar figure state:  “Use The Above Amount to Apply Towards Closing Costs”.  There, it’s disclosed, right out there for everyone to see…write it in large braille font for the blind to read as well.  No way to get around talking about it this way…

It should meet RESPA disclosure requirements and shouldn’t require an assessment by Ivy League educated pundits to discover if the new document is clear to the consumer, i.e. show the consumer the document and ask them how much money in Yield Spread Premiums were disclosed.  If they don’t answer correctly, promptly let them know they no longer qualify for a mortgage and call the No Child Left Behind organization.

The sad part is, those originating mortgages are usually not much more savvy than the consumers they serve, which is why the lending industry makes it easy for it’s resellers to tell how much in YSP is being charged.  A mortgage rate pricing sheet typically looks something like this:

OK, this is where the big math happens, so grab a calculator:  Multiply the % in the rebate column by the Loan Amount, i.e.  .625% x 300,000 = $1875.00

Ideally, a mortgage professional would simply show the consumer this chart and let them choose which rate they wanted…But they don’t.

Ideally, some ‘visonary’ would provide consumers and mortgage professionals a little tool that automatically did this to benefit and protect both parties.  Although I’m still partial to the bright orange piece of paper…

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Indecent Disclosure, Yield Spread Premium Class Action Lawsuits on the Rise