Well, they have went and done it now. If you read my posts regularly, you know I am a staunch advocate for Mortgage Brokers and Yield Spread Premium.
I have worked with different mortgage brokerages for the last 7 years, and have seen the benefits of being a broker versus being a lender or a bank.
Mortgage brokers have built-in flexibility in the way they do their business. They can move fluidly from one lender to another, and the borrower does not have all of the hassle of making multiple applications and credit report pulls from different banks or lenders. And that's the simple part.
Mortgage Brokers are the kings of the low interest rate. I do not care what bank or lender you walk into off the street and that institution offers you an interest rate - the mortgage broker is almost always going to be able to beat the rate you just received. FROM THE SAME BANK OR LENDER.
Why ? You guessed it - Yield Spread Premium. Lets call it "YSP", for short. YSP, or the percentage a bank or lender will pay to a broker for a certain interest rate sold to a borrower, RULES.
The lender will offer YSP as an incentive for mortgage brokers to send them their borrowers. It's a great way for lenders and banks to supplement their mortgage loan pipeline. Quite often, banks and lenders offer better rates to mortgage brokers (wholesale) than they offer on their own websites or in their branches (retail). With retail interest rates, the bank is rolling all of the costs of the bricks and mortar into the interest rate. Somebody has got to pay the light bill. Might as well be the customer...
Ultimately with YSP - The BORROWER is the winner. How - You may ask ? Well, the mortgage broker can give some relief to closing costs by switching some of the burden to YSP. That way, the seller's contribution on a purchase can be used to help pay more than just the closing costs - now money can be extended to the escrow account, etc...Everybody Wins...
Banks do have interest rate YSP as well, but it is not disclosed. So what do you think will happen if you do not have to disclose YSP and there is not competition from mortgage brokers ? Artificially higher interest rates. The banks make a killing. Guess What ? You lose, Mr. & Ms. Borrower...
You would think the U.S. Congress would understand the way this works. Apparently they don't. Or they do and do not care. Or, they are just trying to give more business to banks. Who knows what their motivation is to legislate pure, unadulterated garbage ?
Enter the Game Changer:
The Financial Regulatory Reform Bill, or H.R. 1728, is going to change everything - or make the mortgage industry a good bit different than it has been for quite some time. According to the National Association of Mortgage Brokers, borrowers will have two choices - 1) Pay all closing costs out of pocket, or 2) put ALL closing costs into their interest rate. Now, that is not going to have that much of an effect on refinances (most refi's roll the total closing costs and escrows into the new refinance loan), but it is going to have an adverse affect on purchases. Go to the NAMB site and read their press release concerning Bill HR 1728. If you are so inclined to read more about Bill H.R. 1728, Save yourself some time - go to the Bill H.R. 1728 Summary site to get a snapshot of what we are dealing with here.
When purchases are negotiated, there is usually money contributed by the seller, and the borrower can use these funds to help pay for closing costs, prepaids, etc...But what if the seller has little to no funds available to contribute to the transaction ? Here comes the mortgage broker to the rescue. The loan officer can lower or eliminate the closing costs by utilizing YSP, and allow the borrower the flexibility to pay less or pay zero closing costs at closing, AND keep a decent interest rate.
The interest rate staying low is in the best interest of the borrower and the lender. The borrower can remain qualified with their debt-to-income ratio and payment, and the lender has a better chance of getting the monthly payment from the homeowner because they can afford to pay the mortgage payment. Well, guess what just destroyed THAT practice ?
If the borrower must roll all of his closing costs into the interest rate, then they may not qualify. Either go buy a cheaper home or forget it. In the Metro Atlanta area, that can be quite easy to do. In Charleston, West Virginia, well - Good Luck ! Or, they lose the house because they cannot DTI, nor do they have the additional funds to pay ALL of the Closing Costs. Lose/Lose...
Mortgage Brokers are not the only losers with the new legislation. Lenders who use brokers for their pipeline are going to lose as well. The lenders I currently work with count on me and other mortgage loan originators to feed them fresh, highly qualified borrowers to keep their businesses viable and solvent. If a lender does not have retail outlets to handle customers, and borrowers have never heard of them so they will not consistently receive internet traffic, then what are they going to do ? Collateral Damage is at play here. The Winners ? The Big Banks. Hmmm...Aren't they the ones that got us into this big mess in the first place ?
You may ask about the rampant fraud in the mortgage industry, some of it due to mortgage brokers doing a lot of illegal activities just to get a deal done. Well, in some cases the lenders own employees where steering a lot of mortgage brokers into doing a lot of "shady" things so they could get things done. The income margins for some lenders employees was so low during the housing boom, employees where doing whatever they could to make more income. But that is not excuse for bad behavior.
Bottom line is this - fraud was rampant in the mortgage industry. Builders, Real Estate Agents, Closing Attorneys, Mortgage Brokers, Lenders, Banks, Buyers, Sellers, Appraisers, Borrowers, Home Inspectors, ANYONE involved with a real estate transaction - ALL sectors of the real estate industry were committing mortgage fraud.
Hence the regulatory changes to common practices we have seen in all sectors of the real estate industry. Some of the changes are good. For instance, I do not particularly like HVCC (it gets in the way of getting things done - not everybody is a crook, for gosh sakes), but I think it serves it's purpose. And the Mortgage Disclosure Improvement Act of 2008 portion of the Truth In Lending Act (TILA or Regulation Z) requirement surely offers protections for borrowers by not allowing them to go hastily to closing.
But this new legislation if just plain bad. Misplaced, Misunderstood, Misjudged, Misaligned - It just Misses, Know What I Mean ? It's like a $4 bill. Just wrong...
Borrowers for purchases and refinances are going to be the Ultimate Losers. And when the borrowers lose, WE ALL LOSE.