Why Outlawing Yield Spread Premium to Brokers is a Bad Idea
Making it illegal for mortage brokers to get paid YSP (or Yield Spread Premium) from lenders (which is how we get paid on0 point loans) is a pet product of our legislators. They wrongly believe that this will bring down the cost of borrowers. However, if they do prohibit banks from paying mortgage brokers directly, it would have they EXACT opposite effect of what they desire (more disclosure and better rates for borrowers) as a result. All that would occur would be the already decimated mortgage brokerage industry finally “breaking” since it is mostly populated by small independent companies who cannot survive this. What would remain would be large mortgage bankers and banks. These would certainly not serve the interests of the average borrower very well as has been seen.
In addition, without Yield Spread Premium, borrowers would be forced to actually pay “points” on every loan since this would be the only way for mortgage brokers (if they survived) to get paid. In such event, closing costs would actually increase quite significantly which again, would not help borrowers, nor would it help the housing market that is only now begining to recover. It is very easy to demonize a group of people for the collapse of real estate but disingenuous to do it without regard to the other players who were as much if not more so responsible for the collapse (such as real estate brokers who puffed pricing, banks who underwrote and approved the loans and investment banks who created the products). Unlike tobacco liability where the resposibility is put on those who manufacturer the product (e.g. Philip Morris) not on those who sell and promote it (CVS, Rite Aid, etc), the sellers’s here (i.e. mortgage brokers) have born the greatest brunt of the public’s anger and the legislature’s ire. And, it is not due to responsibility or even perceived damage but merely due to their lack of lobbying power and the “lowest hanging fruit” mentality.
Moreover, the new Dodd Frank Law that is effective for all new loans as of February 1st, as I have detailed in various articles and CLE classes, will have a profound effect on the lending industry in general and mortgage brokers specifically. In addition, new licensing, testing and continuing education requirements have been put on mortgage brokers for the past 2 years (though, I will add, NOT put on loan officers who work for banks doing the same work. See above for rationale). The number of mortgage brokers operating has been reduced by about 75% in the past 3 years. Those who are left are (for the most part) experienced and professional. It is time to let the market recover, allow new laws/regulations to take affect and then see what further measure are then needed. Because, just grasping at straws will not help us further. If a house is on fire, no matter how much gasoline is thrown on it, it will not put out the fire. That is about where we are now and were we will go if many more restrictions are placed.
As for mortgage brokers being fiduciaries. It sounds great and plays well, but it is unworkable. What is the best rate? What is the best product? Impossible to determine this. Also, since rates and YSP are tied together, the only way to decide that is to price control the mortgage broker fees. Otherwise, who determines this? Should we give the borrower a Par rate (i.e 0 points to them and 0 YSP)? That would be the best rate since brokers would be making nothing on the deal. Is that what is intended?
We have a very active mortgage market with lots of information available on web, in newspapers, etc. There is active competition for the best rates with brokers competing with mortgage banks and banks for business. Borrowers (especially in Metro NY area) are very savy and shop around. In order to get a deal we must offer the best rate, nearly that and come with top recommendations/service. That is how business works, that is capitalism and what keeps rates low. For a final analogy, think of a man’s Polo dress shirt. You can buy it at Nordstrom for $100, Macy’s for $75, Century 21 for $50 or Marshalls for $35. Each store offers a different experience and price that works for them. Is Nordstrom required to sell the shirt for the same price as Marshalls? No, of course not. But, under the fiduciary theory taken to this industry (and, why not to ALL industries then) they would. Mortgages is not any different though many people make the mistake thinking that it is. It is not suggested that Bank of America, Chase, Citi, Wells et al should offer the same rates on their loans? Why not? It is the same thing as what they offer goes to profitability. It is no more or less than that way with mortgage brokers.
Our society’s requirement that “someone” must take the blame coupled with the growing lack of individual responsibility for our own actions (which has been increasing exponetially the past 30 years) is the real culprit. It is not the mortgage brokers themselves or the mortgage industry in general. That’s not to say that they bear no responsibility or all regulations are wrong. But, let’s remember that mortgage brokers (bankers and lenders for that matter as well) DID NOT, DO NOT and WILL NOT offer real estate for sale or purchase real estate. They only made the loans available to facilitate the transactions and in many, if not most cases, INVESTED 80-90% of the equity in the property. It’s time for all of those who sell or buy real estate to look in the mirror, accept responsibility for their actions however well intentioned or misinformed, and move on.