Have we been in a crumbling economy in the last few years? What about a crumbling real estate economy in the last 2 years?
In my opinion, I would say yes to both questions.
In some cases, do we have too much government prevention or regulation at times? Jason Crouch wrote an excellent article the other day :
Is Congress Working to Create Yet Another Potential Hurdle to Real Estate Recovery?
In this post, Jason makes a great point about how the government seems to intervene and over regulate, thinking that it will help our economy and potentially our real estate economy. So what is it that Jason brings up and what the government wants to try now? It's eliminating the YSP, which is called yield spread premium.
I wanted to write this post because there was so much information being tossed around that was misleading when it comes to who the government is trying to shut out with eliminating YSP and the fact that a lender could just add more costs.
This post might seem boring, but if you read Jason's post, this could open your eyes even further. If you haven't read his post, please read it before you read this one.
Let's first define YSP - Yield Spread Premium as defined by wikipedia - A “yield spread premium” (YSP) is the money or rebate paid to a mortgage broker for giving a borrower a higher interest rate on a loan in exchange for lower up front costs... This “may [be used to] wipe out or offset other loan costs,..... The YSP is derived through the realization of a market 'price' for a loan that is above 100%.
Myths and Misconceptions about Yield Spread Premiums -YSP-
Major misconception - Congress in the last year has gone after YSP in general, and not just those brokers. Yes, this was true in previous years that the mortgage brokers were the main target by the larger banks, but their focus has changed 100%.
Mortgage Brokers aren't the only ones that receive yield spread premiums. Mortgage Bankers receive the same. The difference is that the mortgage broker has to disclose the YSP that they make on each loan and the mortgage banker doesn't. There are a few different types of mortgage bankers. Two examples :
Infinity Home Mortgage Company, a company where I work, we underwrite our own loans and close them in our name. But we sell the loan on the secondary market.
Mortgage companies such as Wells Fargo or Bank of America do the same as we do, except that they service their own loans. But no matter who you use, we all still have to abide by the same regular guidelines that are set out for such types of loans as FHA loans, conventional loans, VA loans, and USDA loans.
Overall, the yield spread premium (YSP) is based on how the pricing is mandated through the investors on Wall Street who sell pools of loans. Each of these pools are sold as being securitized on the secondary market. All it comes down to is who wants to sell what rate at what price or profit margin to the originating mortgage company, no matter if they are a broker or banker.
The bottom line, the higher the interest rate, the higher the rebate that the lender will receive for such mortgage interest rate. And let's not confuse this with SRP's, which are called service release premiums that banks and brokers also receive.
Misconceptions on the fact that lenders could just charge more fees
Another misconception that I read in Jason's post and in many of the comments was that if the mortgage broker or the mortgage banker couldn't charge the yield spread premium, that they would just raise the costs of the loan. Which would mean to add more lender fees and or points. This might sound good in theory and could happen, but depending on the State or the loan amount, that lender might not be able to add more costs. Or in some cases, refuse lending to that specific person based on the loan amount.
What I am talking about is what is called a high cost loan. There is a term, section 32 loans, which stated that any loan that resulted in anything over 7.99 percent in fees and costs to the borrower, that this was illegal. In the last 7 years or so, many states have reduced this on a state level and not on a federal level. Let me explain further.
In the state of New Jersey, our high cost is considered anything over 4.25 percent in total lender fees or costs. In other states such as Florida (5.00%), Pennsylvania (5.00%), and Georgia (4.99%), you can see that it varies and is much lower than the Federal Government's definition of High Cost loans.
One thing that many of you must realize is that there are some other fees that are associated with my percentage when it comes to high cost loans. Two fees that jump out are settlement/closing fees and any lawyer fees. So it's just not fees charged by the lender.
Summary : So how can this change on how some mortgages could possibly be refused to certain borrowers? Let's safely assume that every lender has a $4,500 profit margin on every loan, and this is to include all lender fees that are associated with mortgage financing.
Example : A borrower trying to obtain a $100,000 mortgage as opposed to a $300,000 mortgage.
If my high cost is 5%, that means that I can't make more than 5%, to include the closing fee associated with the title company and or a lawyer's fee. Let's say the lawyer's fee was $500. So in this example, if I was getting an additional 1 point, aka YSP, for an interest rate of 5.5%, which would keep the borrower's cost down, I would now have to charge this additional 1 point. But wait, my high cost is 5%, so that means I can't charge anything extra without going over the mandated high cost of 5%. Hey, good for the borrower, because they might get a cheaper mortgage. But what happens if the mortgage profits are driven down far enough to where it doesn't make sense for that lender to even do the deal. Then what happens to the borrower? No financing options? Maybe so....
If the government steps in and regulates YSP, as Jason stated in his post, this could have another major affect on our housing economy and on our economy in general.
Your thoughts?
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For more information on FHA loans, please go to this link. The FHA Expert
For more information about the 2009 Tax Credit for First Time Homebuyers : 2009 Tax Credit
For important mortgage insight to watch for, please read : Consumers need to be aware of these Red Flags!
Copyright © 2010 by Jeff Belonger of Infinity Home Mortgage Company, Inc
