Your Mortgage Broker Is Not Your Friend

[LadynRed]

Excellent article on Yield Spread Premiums.. ie. the kickback the mortgage broker gets for upselling you a more expensive mortgage !!

http://warrenreports.tpmcafe.com/blog/warrenreports/2006/nov/27/why_your_mortgage_broker_is_not_your_friend

There's a dirty little secret in the mortgage industry called a yield spread premium (or "YSP".) Basically, a YSP is a kickback for the mortgage broker - one he earns by upselling you. Say you qualify for a thirty year $100,000 mortgage at 7%. If the broker can sell you the mortgage for 7.5% instead, he gets a tidy payout from the mortgage lender - at 10%, an even juicier one. Conveniently, brokers have no legal obligation to disclose the YSP to borrowers. So the mortgage company ups its profits, the broker takes his cut, and the homeowner gets equity-stripped.

[charlesa]

Ain't that the truth? Thanks for the info.

[ShineOn]

And just think that on top of switching interest rates, points paid, and prepay penaltes hours before closing. Oh and not to mention having 10+ inquiries on your report from their "fishing" for a better loan.

-what you don't know can hurt you.

[sr28b]

"Conveniently, brokers have no legal obligation to disclose the YSP to borrowers."

http://www.fredlaw.com/articles/banking/bank_0112_hbt.html

"HUD has always been clear that all fees to the mortgage broker are to be clearly labeled and properly estimated on the GFE and the HUD-1."

If acting as a mortgage broker then the YSP is required to be disclosed. If acting as a lender, then the YSP is kept a secret.

By the way, not every mortgage broker is bad. There may be few honest ones out there (maybe?).

[jyap]

I currently a mortgage broker and previously a lender can attest to this. However I always give my clients the option. Bottom line is nobody works for free, and there is no such thing as a free loan (no points no fee) Sometimes borrowers would rather not add more money to the principal loan ammount and would rather not come into escrow with any cash. To be able to make a living I can give them a higher rate to make income. Whichever they choose. I always give the option.

[sr28b]

What's the difference between a Mortgage Broker and a Junk Debt buyer?

[foreclosurefish]

Two of the main numbers you should look at are the total closing costs from the HUD-1, and the APR.

The APR is the actual interest rate you pay, not the "note rate." The APR (and, by extension, the yield spread premium) are disclosed on the Truth In Lending document.

Both of these disclosures should be made available to you at least 24 hours prior to closing, and you should receive estimates of them long before then. But estimates, even a Good Faith Estimate of closing costs, do not usually reflect the actual costs to close the loan.

If you're going to use a mortgage broker, find one that you trust. And don't expect him or her to work for free, but agree to pay a fair price for the services that are being performed.

[jq26]

I don't think this is a secret at all. Brokers need to get paid too. People need to shop around to keep brokers in check. If they are tacking too much on top of the par rate for themselves, they risk being undercut. There are market forces at work. In the example given, the homeowner is only "equity-stripped" if he/she feels they are entitled to the 7% rate, which isn't the case. If they don't like 7.5%, they can continue to shop around. I think this is reported on the HUD-1 anyway.

[sr28b]

What's the difference between a Mortgage Broker and a Junk Debt buyer?

A: The JDB returns phone calls.

[Quartermoon]

What's the difference between a Mortgage Broker and a Junk Debt buyer?

Everything you Said ShineOn...

Every single thing you said happened to us.

I had a predatory lending service help me out.. *sigh*

Tip of the Day..

Eductate yourselves before you ever use a BROKER.

I wish we had. We went backwards two years easy...

They inflated our appraisal of the refi and it went to an 80/20 loan knowing we were buying a house the next month.. we finally sold our house after we bought the new house... we had to pay 3 mortgages for 6 months and my DH had to take a 401K loan to pay off the 20 or we would not have been able to sell our first home. Now he has money taken out of his pay for that loan, nearly half his pay... Dealing with a Broker made me feel terrible that I stripped my DH of his manhood to provide for our family...

We couldn't get a loan anywhere.. last year was the hardest part of my life and I owe it all to that Broker.. they made 13,000 off of us.

I still don't know how it all happened.. it was like those moving cups and you have to pick where the ball is hiding underneath one... you just never know

exactly what their hands are dealing you.

Sorry.. still a sore spot with me.

If I could sue them I would... but I would not know where to start.

[Ahntara]

"...I would not know where to start..."

Brokers are licensed. So you could start by contacting (your applicable) state agency which regulates them. Easy to find with a quick net search... File a complaint. Then you could go to the lender they placed your loan with, and any others you know of. You'd better believe that brokers need a good relationship to do business. Make a nice triangle by complaining to Fannie Mae and Freddie Mac. The entire industry follows their guidelines.

[liverichly]

Two of the main numbers you should look at are the total closing costs from the HUD-1, and the APR.

The APR is the actual interest rate you pay, not the "note rate." The APR (and, by extension, the yield spread premium) are disclosed on the Truth In Lending document.

Both of these disclosures should be made available to you at least 24 hours prior to closing, and you should receive estimates of them long before then. But estimates, even a Good Faith Estimate of closing costs, do not usually reflect the actual costs to close the loan.

If you're going to use a mortgage broker, find one that you trust. And don't expect him or her to work for free, but agree to pay a fair price for the services that are being performed.

The APR should be a good indicator, but with the varying loan origination software available today, the rules outling APR affecting fees not being clearly outlined, and the fact that many loan officer's don't know which fees are included in the APR - it can be a very misleading number. Because there are various loan origination software out there, it's possible the same exact loan from two different lenders (terms, fees, everything is identical to each other) can have a different APR from each other.. all because each place used different software. Items listed in the APR should be: points, pre-paid interest, processing fees, underwriting fees, doc preparation fees, private mortgage insurance. Items usually not included in the APR are: title, escrow, attorney, notary (if they charge per page), doc preparation (by the closing agent), home inspection fees, transfer fees, appraisal, and credit report. Application fees & mortgage insurance (the type that pays your mortgage off in the event of death) are sometimes included in the APR.

The way I recommend comparing loan officers is to definately use the GFE you mentioned, however the next step is to get offers for the same exact terms from different sources. Instead of getting a 30-year 6.5% offer from one lender and a 5/1 ARM with a 3-year prepay penalty 6.25% from another, make them both give you the GFE for the rate at 30-year fixed 6.5% (or whatever term & rate you want it for) - they can, and they should if they want your business.

After you get the GFE's you should eliminate all feeds which are independent of the loan, such as title insurance, escrow fees, attorney fees, pre-paid interest, homeowners insurance, courier fees, appraisal, etc. Now add up all of the loan fees (these should be found in section 800, minus the appraisal fee), and the lender with the lower amount of fees would have the cheaper loan.

[breathing_easier]

If I could sue them I would... but I would not know where to start.

Read up on the Real Estate Settlement Procedures Act (RESPA). If you have a case it outlines the guidelines for bringing an action.

http://www.hud.gov/offices/hsg/sfh/res/respa_hm.cfm

[liverichly]

Here's, in my opinion, a much more objective article to YSP:

http://mtgprofessor.com/A%20-%20Mortgage%20Brokers/hud_and_yield_spread_premiums.htm

It goes over the negatives, positives, and how you can use it to your advantage. The Mtg Professor does have a section on UMBs (you'll find out if you want), so he is a little biased towards them, but for good reason.... that is the only subjectiveness I could find.