Friday, June 4, 2010

In Defense of Mortgage Brokers and Yield Spread Premium...

Today, I am cruising around the web just reading various articles, poking my nose in here and there, just snooping around as usual.

All of a sudden, I come across a blog written by a person who once was treated poorly by a mortgage broker. He felt that he was taken advantage of, so he decides to start a blog "exposing" the dark secrets of mortgage brokers, and discussing why they are evil.

Go ahead - take a look at the site. Read the blog, it's sort of interesting. In a twisted way, I guess.

Now, to be fair, I have a somewhat biased opinion about mortgage brokers - I have been a mortgage consultant with a mortgage brokerage for the past 7 years. I think brokers offer a legitimate service to borrowers, and a much needed alternative to going to a bank. A broker can save a borrower both time and money, because instead of paying multiple application fees to each bank, he can just pay the application fee once, and let the broker shop around for him. Immediate savings. OR, if the borrower works with someone such as myself - there is no application fee. No credit report fee. No upfront fees, whatsoever. Enough about me - this blog entry is not about me, anyway.

Needless to say - It ticked me off. It's another dishonest cover up that confuses the public.

So let's do some REAL mortgage loan exposure. The mortgage broker can provide the same interest rate or better than the average borrower can find at the neighborhood bank. How ? Because the bank offers incentives to mortgage brokers and correspondent lenders to provide them with a steady stream of new borrowers, because a banks job is to lend money. This incentive is the Yield Spread Premium, or the amount the bank is willing to pay the party who provides them with a new, qualified buyer.

Usually the mortgage broker can offer a better interest for the borrower rate from the same lending institution, than the borrower can receive from walking into a bank and applying for the same loan. How do I know ? I do this all of the time.

This is the wholesale versus retail aspect of mortgage interest rates. Why the difference ? The higher bank interest rate is derived from overhead - they have to pay the light bill, rent, the loan officer's salary, etc...The borrower's interest rate in intrinsically connected to this.

The largest banks have stopped doing business with mortgage brokers altogether. They began phasing out their mortgage broker relationships in 2007. I think they new something was in the water. I think the large banks are behind an unnamed, unidentified scheme to get rid of the mortgage broker. That way, they can charge whatever they want in interest rates, and there is no competition.

Funny thing is this - our friend the mortgage broker hater has mortgage interest rate ads from big banks and lenders DIRECTLY CONNECTED TO HIS SITE. Complete the "Real Mortgage Rates" info and select click on "submit". You will see what I am saying. I am an actual mortgage broker, and I do not advertise any rates on my site, other than the average weekly Freddie Mac rates, that are publicly available on the Freddie Mac Website (I believe the borrower should have a good starting point on the rate they are being offered). What is this guys motivation ? Who's side is he REALLY on ?

Every mortgage broker must reveal the Yield Spread Premium to the borrower. It is stated up front on the Good Faith Estimate, and is shown on the Settlement Statement at closing. Banks are not required to show how much they make on charging a borrower a certain interest rate. They are allowed to "hide" the true amount of money they make on charging the interest rate the borrower has been offered.

Here's another truth - banks sell their loans to the secondary market (Fannie, Freddie & Ginnie) and receive a Service Release Premium, or payment from the GSE's when the bank sells the loan. This is on top of any income they may have received for charging the borrower a certain interest rate.

Needless say, I continued to prod around and found an excellent article about this subject, "Why Oh Why YSP? Why Mortgage Brokers Can Price Better". It verifies everything I am expressing here...It is recommended reading for those who want to have a good understanding of how yield spread actually works.

There is a lot of truth out there in the blogosphere, but there is also a good bit of fallacy. People are being bombarded with all kinds of information, and it is hard to discern what is truth, what is fiction and that gray area in between.

I am sorry the blogger was given a raw deal by a mortgage broker. There are bad apples everywhere. But one bad apple should not destroy the reputation of an entire industry, especially when it provides a legitimate, viable service to the public.

I am going to tell things as I see them, and point out any information that seems not quite right. And this blogger is not telling the whole story...


  1. This is amazing list like the previous one..
    Thank you for this article..

  2. Thanks again. I know the media and government have attempted to put mortgage brokers in an unfavorable light. A lot of the new legislation in the mortgage industry is directly aimed at reducing and/or eliminating income for brokers. Sorta like the "squeeze" play in baseball. In this instance, competition is good. If brokers are eliminated, the big banks would set the interest rates, everyone would suffer, and the ultimate loser would be consumers.. Small Banks, Lenders and Mortgage Brokers have and will continue to keep the interest rates low -through competition, as long as the Fed and market forces allow...

  3. You are blog is so fantastic.In your blog you write the"The largest banks have stopped doing business with mortgage brokers altogether".So can you tell me the name of those bank.

  4. Sure, The banks that still work with brokers are Acopia Capital Group, Crescent Mortgage Corporation, Real Estate Mortgage Network, Icon Residential, ClearVision Funding, First Guaranty Mortgage Corp and United Wholesale, just to name a few...

  5. I should say only that its awesome! The blog is informational and always produce amazing things.
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