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Big Surprise: Mortgage Brokers Don’t Like the Fed’s Plan
By JLP | April 7, 2008
I saw this tonight on Marketwatch:
The Fed has proposed prohibiting brokers from receiving yield-spread premiums, sums lenders pay to brokers for higher-rate loans, unless the broker has entered a written agreement with the consumer disclosing total compensation. The written agreement would occur before the consumer applies for the loan or pays any fees.
Brokers reap outsized profits from borrowers taking on these pricier loans even though they appear to be on the consumers’ side, critics say.
Of course the brokers don’t like this idea:
However, there’s evidence that additional broker compensation disclosures can create confusion, cause consumers to choose more expensive loans, lead to bias against broker-assisted transactions and impede competition, hurting consumers, according to the National Association of Mortgage Brokers.
“The deck would be stacked against mortgage brokers,” wrote Perry Leach, a consultant with Central Texas Mortgage Corp. in Austin, Texas, in a public comment. “The change would be an onerous and punitive act for which there is no justification. The overwhelming majority of mortgage brokers already provide their services at a fair market price.”
Personally, I think this is BS. Disclosures cause confusion but putting people into loans that they don’t understand isn’t confusing? LOL! That’s pretty funny. I seriously doubt that the Association of Mortgage Brokers has the customer’s best inerest at heart in resisting this change.
I don’t see anything wrong with having ONE disclosure form for all mortgage transactions, whether they be through a bank or a mortgage broker. I think mortgage brokers SHOULD have to tell their customers how they get paid.
Finally, brokers SHOULD NOT be paid more for selling more expensive loans. That’s a huge conflict-of-interest.
Topics: Housing Market, Mortgages | 19 Comments »
April 7th, 2008 at 11:18 pm
It’s totally BS.
There is nothing more pathetic than an industry who has just been caught with their hand in the cookie jar, offering up incredibly stupid justifications.
Mike
April 8th, 2008 at 1:35 am
I think the mortgage brokers are complaining that the retail bank officers don’t have to disclose how much their retail unit is being compensated for the loans they make. The bank officer just quotes an all-inclusive rate + point + closing cost, whereas a broker is required (if this rule sticks) to disclose rate + point + closing cost AND their compensation. Brokers and retail bank officers are all salesforces originating loans. Why should one be singled out? Assuming the customers compare apples to apples, the broker’s compensation shouldn’t matter. If broker A who charges $5,000 is able to get a lower rate/point/closing cost than broker B who charges $2,000 or a bank officer who doesn’t disclose anything, then broker A is still the best choice among the three. It’s still up to the consumer to shop for the best deal, whether it’s from a broker or a bank or a credit union.
April 8th, 2008 at 2:10 am
>>>”Finally, brokers SHOULD NOT be paid more for selling more expensive loans. That’s a huge conflict-of-interest.”<<>>I don’t see anything wrong with having ONE disclosure form for all mortgage transactions, whether they be through a bank or a mortgage broker. I think mortgage brokers SHOULD have to tell their customers how they get paid.<<<
I agree, a single disclosure form applicable to all, mortgage brokers and banks alike, would be preferable. Do you also agree that BANKS should have to tell consumers how THEY get paid? Has the Fed proposed that banks not receive SRP?
April 8th, 2008 at 2:13 am
”Finally, brokers SHOULD NOT be paid more for selling more expensive loans. That’s a huge conflict-of-interest.”
NO, it’s not a conflict of interest. Are you seriously suggesting that a SALESPERSON not get paid more for selling a more PROFITABLE product?
April 8th, 2008 at 2:20 am
Why should anyone object? No one reads all those disclosures anyway.
April 8th, 2008 at 7:24 am
I have mixed feelings about this from a more general perspective. I don’t agree with government interference in free market capitalism and I believe that people should be capable of think for themselves or at least seek assistance when trying to understand something as important as say mortgage terms. However, when these same (greedy) free market capitalists and (idiot) consumers start screwing up the system and in effect screw over the “conscious” middle America, I begin to rethink my stance on government intervention.
I don’t have a problem with full disclosure in this case or in any case. In fact, it would be ideal for sales ppl in general to breakdown all things affecting the purchase price of whatever they are selling you. I don’t think it should be mandatory. If ppl truly demand disclosure enough to create a space for it in the market, then eventually, a company will come in and fill that space without having its hand forced by the government.
April 8th, 2008 at 7:29 am
Although not required, there are already mortgage brokers that are willing to disclose full compensation in advance and in writing, and they seem to be doing okay. Some even believe that doing so gives them a competitive advantage. There is even an industry organization in existence for brokers that have been willing to do this, the Upfront Mortgage Brokers Association. Some consumers will demand it and not work with a broker that won’t.
Rich said: “NO, it’s not a conflict of interest. Are you seriously suggesting that a SALESPERSON not get paid more for selling a more PROFITABLE product?”
If it is clear that they are representing the company that is selling the product (the lenders), it’s fine. The problem and conflict of interest arises when salespeople hold themselves out as customer/client representatives, saying they’re working on behalf of the borrower.
April 8th, 2008 at 8:21 am
I agree with TFB that it’s unfair that banks get a pass on disclosure of back-end fees when their rating model is similar, but different.
Receiving yield-spread $$ is a questionable practice to say the least. Why not ban that practice? It’s illegal for a borrower to get that money, why is it OK for a broker?
I’m going to go out on a limb and guess the biggest problem borrowers have had is not understanding the terms of the ARM loans they’ve been sold. If someone is going to add something to the loan process, attention should be paid to explaining how things change after the new carpet smell fades from the house thay bought.
Brokers play a important role in the mortgage world. Bank loan originators can be just as sleazy as brokers, I’ve never understood how they get a pass on disclosure rules.
April 8th, 2008 at 8:44 am
Rich,
Come on. You can’t tell me that a mortgage broker who has multiple loans to choose from and one of those loans pays more than everyone else even though it costs the customer more, that the broker isn’t going to somehow try to justify that loan as a “good fit” for the customer.
If the goal is to get the customer a loan so that they can buy a house, WHY should the broker get paid more to sell a loan that costs the customer more?
April 8th, 2008 at 9:46 am
Everything is about money. And brokers really do that. Especially here in the Netherlands. They work on commission or provision base here, unfortunately..
April 8th, 2008 at 4:29 pm
I was a 30-year mortgage broker, who now does occasional consulting for mortgage people. I’ve seen a lot over that time. I have seen everything from double-digit mortgage rates back in the 70′s to mortgage brokers charging 10% (yes, ten percent) origination fees, and selling the borrower on it. I have, fortunately, been associated during my career, with people who were indeed mortgage “professionals” who practiced (in the words of a colleague) the “Three D’s”. They were, DISCLOSE, DISCLOSE, DISCLOSE! You can’t go wrong doing that. The mere notion of sitting in front of a fellow homeowner, who in many cases raised a family and has this building that his children call “Home”, and Not totally disclosing what he or she is about to get into, simply sickens me.
Yes, when I first got into this business I was “young and dumb”, and did what I was told, thereby probably charging people too much for a mortgage, but again I WAS “young and dumb”. I DON’T DO IT ANY MORE!!! That is due to working on my craft, EDUCATION in my field, and mainly operating on a simple principle…”If I see my client in the grocery store on aisle 3, I ain’t gonna duck into aisle 4″.
Now, let’s not lose sight of a couple of things. Firstly, I believe that the American marketplace can and will take care of itself over time. Secondly, let’s bear in mind that a lot of the lenders that the brokers have used over the years are NOT blameless in all this. Why do you think brokers collect yield spread premiums? Because the lenders pay it out. For years they made a habit of sending their account execs to see mortgage brokers, making sure that the brokers know that they can receive YSP. If it’s there, the brokers collect it. If that’s the way they want to play the game, let ‘em. The borrowing public simply needs to be made aware of it. Honesty is still the best policy, you know. By the way, your local BANKER should be required to make the SAME DISCLOSURES to their borrowers. Wonder how much money they make “on the back-end”? To finalize, it is everyone’s job to make sure that all is disclosed. Here’s a unique approach..BANKERS, MORTGAGE BANKERS, MORTGAGE BROKERS, LEND ME YOUR EARS!! Do unto others as you would HAVE them do unto you!!!!!
April 8th, 2008 at 11:41 pm
I’m not sure why people are insinuating that bankers/lenders don’t disclose either. None of the bank’s fees are secret because you pay them separately! The origination fee, application fee, and anything else are right there on the settlement statement, which you must sign during closing. In fact, so are the mortgage brokers’.
And banks don’t just raise their rates. Rates are set and updated daily; if you call your lender will look at a spreadsheet and tell you EXACTLY what rate s/he can offer that day. The rate they offer will vary since each lender has different underwriting standards (your rate will be higher if your credit score or down payment is lower), which is why it’s important to shop around.
With a broker, you are trusting him/her to shop for you and get back to you with the “best deal.” The difference with brokers is that they can offer the lender (on your behalf) to pay a HIGHER THAN MARKET rate, and they get paid based on the resulting spread rather than with a separate origination fee. They love this because they have to disclose origination fees and the like; but you’ll never be the wiser if the simply tell you “the best I can get you is 6.5% when really it was 6.375%.
For this reason I do not oppose mandatory disclosures of that fact. PS I am a lender and work for a bank. I deal with mortgage brokers on a daily basis. Our rates and fees stay the same; clients who come to us through a mortgage broker simply pay an extra origination fee to that broker at closing (we don’t compensate brokers with yield spreads).
April 9th, 2008 at 4:58 am
“I’m not sure why people are insinuating that bankers/lenders don’t disclose either. None of the bank’s fees are secret because you pay them separately! The origination fee, application fee, and anything else are right there on the settlement statement, which you must sign during closing. In fact, so are the mortgage brokers’.”
Ever see a SRP on the settlement statement?
April 9th, 2008 at 5:02 am
“Come on. You can’t tell me that a mortgage broker who has multiple loans to choose from and one of those loans pays more than everyone else even though it costs the customer more, that the broker isn’t going to somehow try to justify that loan as a “good fit” for the customer.
If the goal is to get the customer a loan so that they can buy a house, WHY should the broker get paid more to sell a loan that costs the customer more?”
Why? Why should the stereo salesman at the BuyMore(!) get a bigger commission for selling the customer a stereo that costs more?
JLP, why are you making the assumption that the mortgage broker (or bank) is in anything but an adversarial relationship with the borrower?
April 9th, 2008 at 8:21 am
I agree with Meg. When we bought our house we were advised to never go through a broker because we would end up paying more than needing to if we went through the lender directly.
The brokers need to have a disclosure form and if they are against it then it tells you even more about the scruples of the field at large.
April 9th, 2008 at 9:13 am
Rich said:
Answer me this: what benefits does a customer get from a mortgage that costs them MORE? It’s a mortgage, not a hi-end stereo that has better features over a cheaper stereo.
There were cases where people who qualified for better loans were instead put in subprime loans? Why? Most likely it would be because the broker made more money using the subprime loan.
I’m not saying that ALL THE BLAME for this mess lies with the mortgage brokers but I do think that they should share in the blame along with the clients who bought more house than they could afford.
April 9th, 2008 at 11:27 am
For the benefit of people who haven’t worked in the mortgage industry: Banks that originate mortgages may retain and service the mortgage, but typically they sell them on the secondary market (even if they retain servicing rights through an agreement with the investors) in much the same way a mortgage broker does (without the servicing agreements of course). If the situation comes up where they can get a YSP (of sorts, mortgages are bundled so if sold at a premium, why that’s just good trading) from the investors who purchase the mortgages, they do so (and believe me they do so) however they are not required to report it as back end fees in the same way a brokerage does. That’s why the mortgage brokers have their shorts in a bunch about the disclosure rules and why bankers are pushing the disclosure rule while exempting themselves.
In my experience buying and selling houses (I’m at around number 19 or 20) mortgage brokers can usually beat a bank by around ¼ to 3/8 of a point on similar terms, if the broker quotes you his best rate (at ‘par’). Do the arithmetic, if banks and brokerages sell mortgages on the same secondary market, that means banks are getting on average YSP for a lot of loans. Any wonder banks don’t want to disclose?
IMHO, the mortgage broker industry should be scratching their heads about policing themselves better to make sure their members are not taking advantage of borrowers. Really though, it’s not much different from someone who buys a new car at sticker price and pays $1000 for ‘rust proofing’. If you do no research on a purchase, who’s to prevent you from getting ripped off by a shady salesperson?
April 10th, 2008 at 12:37 pm
No amount of disclosure or education would keep the stupidly hopeful or greedy people from getting into mortgages they can’t afford. You would think they would ask the advice of someone they respected before signing. You’d think they would bring someone to the closing that understood the paperwork being signed.
That doesn’t seem to be the case. You hear of people claiming they trusted their fellow congregant or pastor-turned-realtor to do right by them. In the end, they got screwed.
April 25th, 2009 at 7:07 pm
1st things 1st’s.
(i will explain to you how the mortgage broker gets paid)
Let me begin by saying everyone on this site is as ignorant as all the people who do not work for their money, yet instead would like the government to think and decide for them instead – as well as punish those who work very hard for their money.
I can tell that 17 of the 18 of the last posts are from people who are not mortgage professionals whether you are working for the
bank or for the brokerage…
the mortgage broker gets paid like this
they shop around 100′s of banks, thus forcing the mortgage lenders to automatically set lower interests rates for the brokers to give to the borrowers. if you were to call into a bank yourself the interest rate will always be higher, a lot higher and that is because the borrower does not have the ability to shop around 100′s of banks like the broker can.
for example:
the loan officer at the bank will offer you a 5.5% interest rate for 30 years fixed with no points where as they will offer the broker the same program at 5% with no points. they then tell the broker that if they wish to they can offer their client a higher interest rate say at 5.25%-5.5% thus allowing the bank to pay them a yield spread to the broker. This then allows the broker to eat up closing costs for the borrower. and that protects the borrower from paying to much up front on closing costs..
THAT IS YIELD SPREAD
on other thing…
a sub-prime mortgage is very a misconceived term.
anyone who does not have a 720 credit score is automatically considered sub-prime and therefor falls into a “sub-prime” mortgage category. it is not a type of loan program it is not a type of mortgage itself it is just the fucking (pardon my french i am sick of ignorance) name for the category of the person who falls below the 720 credit score.
why should you get 720 credit score A mortgage if your credit is 620??