Are Mortgage Lenders Ripping You Off? by Bill Roberts
Everybody knows about Loan Origination Fees (points) which are charged up-front and are disclosed to the borrower. That's how the Loan Officer gets paid, right?
You may not be aware of it but the "money" in making loans is in the yield spread premium (YSP) or as it is better known, the rebate. YSP can only be paid if the investor (Bank) can earn enough interest on the loan. When a loan is paid off early, they lose that opportunity. Therefore they charge a pre-payment penalty. It would be fair to say that if you have a pre-payment penalty, the originator got a rebate.
Banks offer YSP when the LO makes a loan at a higher interest rate than the best rate the bank offers.
I have sold loans with pre-payment penalties, but only when it was the only product available for a particular borrower or his particular circumstance dictated its use. And only for a purchase, never a re-fi.
Often times a purchase borrower "needs" a no-cost loan and help with closing costs. Well, there is no such thing as a free loan. Everybody needs to get paid. The rebate allows an LO to "pay" the costs associated with a loan for the borrower and still get paid for his work.
The problem arises when an LO gets greedy and wants to get paid too much for doing the loan. Since when is it reasonable to charge $15,000 to $20,000 or more for a loan on a $500.000 home?
One of the rationales for high fees is the number of people that need to be compensated when a "retail" lender originates the loan. First there is the tele-marketer (who might be called an "originator," and then there is the loan officer. But it doesn't end there. There is also a "Sales Manager" and then there are support people and office over-head and advertising. Well you get the picture. A lot of money is "needed" to pay for all of this.
The Loan Officer might do his own "pricing" and since his commission will probably be a small percentage of the entire fee, to get what he feels he is worth he has to charge a very high fee.
The investor "sees" the estimated HUD prior to funding. If they go ahead and "fund" a loan with these kinds of fees, they are complicit in "stealing" from these people.
So what can you do if you don't want to get ripped off by a mortgage lender? Well, by utilizing the services of an independent mortgage broker (not associated with a retail mortgage company) who has a commitment to fair and honest dealings. Explain that you "know" he gets a rebate from the investor (bank) and ask him to disclose the rebate on the GFE (Good Faith Estimate of costs associated your loan) and on the HUD-1. He may be "exempt" from disclosure of the rebate if he is associated with a direct lender. Ask him if he is a direct lender or a broker. A broker MUST DISCLOSE any rebate he receives.
If you need help with planning your next mortgage give me a call. Bill Roberts 619-244-4610.
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I think there will be some changes to this soon. The pre-pay is a horrible concept.
Jason, it has its uses but it has been abused. Thanks for commenting.
Bill Roberts
Bill- That is why in my area I use Tom Weiss and Mathew Blum for loans for us and our clients. Katerina
Katerina, there is no substitute for a trusted mortgage broker. None of the "big name" retail lenders can be trusted.
Bill Roberts
Bill -this is a great educational post for both consumers and agents on how to be smart about obtaining mortgage. Often, people think they know all they need to do it, but your post showes, that there is more to the lending costs then meets the eye.
Faina, I hope it is useful. Too often people listen to these liars that quote them a good rate only to find at funding that they are being soaked. Thanks for commenting.
Bill Roberts
Bill- Amen to that! I just cringe when a customer tells me they are using B of A for their mortgage! Welcome to rip off the consumer city, and this is another reason why we must keep banks out of the real estate business! Katerina
Katerina, Keeping banks out of real estate is going to require a federal law prohibiting it. I don't see that happening. But I wouldn't worry about it. Can you imagine BofA doing everything you do to market a property for $500?
People need to "wise up" about banks, but they won't. Smart people will continue using us for real estate and mortgage services. They will benefit from doing that. The rest will lose.
Bill Roberts
Hey Bill
I agree with the statements regarding prepayment penalties, particularly as it relates to using them for purchases, and not for refinance transactions. I think this is quite wise, and beneficial for all parties involved.
Your rationale regarding broker vs retail pricing however, does not make sense to me in practice. In theory, yes, but statistical and empirical data supports that the typical broker transaction costs the borrower an additionol .5 to .875 points in fees and/or points. To give the broker side the benefit of the doubt, is this a function of handling the tougher deals....I'd like to think this, but I would not believe it to be true.
Should it be this way? Absolutely not. Is it always this way? No, but more often than not, it is.
Somewhere in the comment thread, was there an inference that banks would migrate into real estate? I can't think of any that want to do this, nor would benefit from such a model. Am I missing something?
Bill, First regarding banks and real estate, I believe BofA has indicated that they might enter the business and offer "discount" services. The word is that they would only pay $500 co-op to selling agents.
As for the fees on loans by retail vs broker, statistics are vitually impossible to assemble because "banks" don't disclose YSP. If you are just looking at an average of all fees charged, then the ratio between full doc conforming and stated sub-prime is definitely going to skew the results. The only meaningful comparison is on a loan by loan basis not an average. There is an old saying about statistics: "figures lie and liars figure."
You say in theory my thesis makes sense, well I say in practice it is the case. I have seen way too many "bank" loans where the rate, fees, and pre-payment penalties were outrageous. I have had intimate knowledge of retail operations where the LOs would brag about getting a $20,000 gross on a re-fi. Since their commission was in the 25-40% range they felt this was fair. And it was encouraged by management.
Thanks for joining the conversation.
Bill Roberts
Bill R
Interesting that Bank of America would look at this. As I spent time there previously, I do not see them offering discount services. I could easily however see them leveraging their brand power and client base to refer a presumably pre-approved buyer to a seller agent. The model is not much different than other lead providers except that as an agent the buyer is qualified from a lender that you won't need to worry if they will be around tomorrow. I imagine that is their take, but I'm not completely certain as I have not heard this same rumor.
To me, YSP is irrelevant. I've been on both the retail and wholesale side, have used both effectively, and except for the instances where YSP is being used to help pay for closing costs, the rates will be within .125 of each other, depending on the type of documentation, ltv/cltv, occupancy, etc. Often it depends on the appetite each 'bank' may have in attracting that specific bucket of business. It's about knowledge and experience, which given your time in the business is like preaching to the choir; I simply do not believe nor can I support that one channel is better than the other. More lucrative at times as a broker, yes, but that is in exchange for all of the business expenses that come from practicing this way. More stable being a bank. yes, but again, that is in exchange for the investment and benefits provided on the retail side.
Regarding retail operations, you definitely are referring to the subprime guys. So if they made $20K in retail, are you inferring that the wholesale or broker channels charged less? For that channel, I really find that one extremely difficult to believe as a rule rather than an exception.
Always a pleasure Bill.....look forward to meeting!
Bill, I too am looking forward to meeting you in person. Maybe we can continue this discussion about what the mortgage and real estate business should look like.
Give me a call when you're down this way.
Bill Roberts