Chris Dodd wants to ban the yield spread premium

Posted by: Peter Coy on September 6, 2007

Chris Dodd.jpgLast May I wrote a blog item called The Yield Spread Premium: A Dirty Not-So-Secret in Real Estate. Now, presidential candidate Christopher Dodd is proposing legislation that would severely restrict lenders from paying yield spread premiums. Sounds like a good idea to me.

A yield spread premium is a payment by a lender to a mortgage broker. It’s not necessarily wrong, but unscrupulous brokers will sometimes steer a customer into an expensive loan in order to receive a yield spread premium from the lender. Dodd’s bill would crack down on such abuses. Two key provisions:

*If a lender paid a yield spread premium to a broker, it would become responsible for the broker’s actions (so it couldn’t claim afterward that it didn’t know the broker was steering customers into high-cost loans).

*Yield spread premiums would be banned entirely for high-cost, subprime loans.

The bill also would ban prepayment penalties, which trap borrowers into high-interest loans even when it would be cheaper to refinance.

Dodd, of course, is a Democratic senator from Connecticut. Democrats in the House of Representatives are working up similar legislation.

Reader Comments

kettle calling the pot black

September 8, 2007 10:30 AM

I would have to assume that Mr. Dodd would then propose the same rules for any industry where rates are sold - cars, boats, RV's, etc. Additionally, sure seems that YSP is not materially different from our legislator's attempts at pork spending agendas silently slipped onto unsuspecting bills... sounds eerily similar to me.

Joe Adamaitis

September 9, 2007 10:12 AM

As both a licensed broker and lender, I understand your concerns over YSP. However, if you eliminate the yield spread premium, the only way a firm can cover it's costs and pay the loan representatives who bring in the business, would be to charge the borrowers points. As we know a majority of homebuyers are struggling with down payments and closing costs let alone worrying about paying points.

As an example, under Senator Dodd's concept, elimination of the yield spread on a $200k loan would require the borrower to pay between one and half and two points equaling three to four thousand dollars in addition funds to cover the costs of processing, overhead, along with commission to the sales rep. Again as we all know, only a small fraction of buyers have any savings, reserves etc, let alone monies for points.

I never charge my borrowers points, but rely on the yield spread to cover our costs. I also provide borrowers a comparison and the choice to pay points rather than my receiving yield spread. This issue is about those loan representatives including both brokers and bankers, who took advantage and collected on both ends. If you want to correct the problem, limit the amount a broker or banker can collect in total and be sure that both brokers and bankers disclose how much in yield spread for brokers and “servicing release premiums” for bankers they are receiving.

One last example of how elimination of YSP can be a detriment to the borrower is as follows: Using the $200k loan amount with 1.5% in points versus collecting the 1.5% from the lender as YSP would equal $3,000.

If I take my fees in the form of YSP, the rate would be 6.25%. The payment is $1231. If the borrower pays the $3,000 in points, the rate is 5.875 and payment is $1183. A $48 difference. While the borrower pays a bit more each month if they pay zero points and I receive YSP, the real savings or advantage of the lower rate won’t begin until five years from the day of closing. In addition, the national average for the length of time that people stay in a home is roughly five-to-seven years. Hence, if they sell prior to the sixty-second month, they would get no benefit at all from the lower rate.

Hopefully you can now understand why I tell people to “never” pay points and collect the necessary funds to keep my business sustainable. As I said earlier, yield spread is not the problem; it’s those who misuse it.

Joe Adamaitis
President Direct Mortgage
603-817-6543

Just me

September 10, 2007 7:49 AM

Inventories of homes are high because prices’s are over-inflated. No home is worth its current price. Therefore builders and homeowners need to adjust to new reality and reduce prices’s to more acceptable levels. Example , in Upper Montclair, NJ builder reduced prices’s for new homes from 1.6-1.9 mill.(sat on a market for over a year) to 1.1 Mil. and sold them all in approximately 1 month. Builder still made fair profit.

paul krueger

September 17, 2007 2:30 PM

Wow--think of that. A Democrat attempting to meddle with a free market under the guise of "consumer protection". This idea is, of course, absurd---raising out of pocket costs for thousands of homebuyers, stifling the already strugling housing market and economy, and further decimating the mortgage brokerage business. This idea could only have been cooked up by the large banks--a perfect storm of legislation, housing woes, loose lending, and big bank pressure to crush competition.

Bravo, another moronic Democrat carefully packaging consumer protection inside an idea that (gasp) raises costs for the public.

Who would have guessed.

William

September 18, 2007 2:56 PM

I am a licensed mortgage broker. Chris Dodd doesn't have a clue about how the mortgage industry works. Is he planning to ban Yield Spread for mortgage bankers as well? Oh, wait they don't have Yield Spread on the banking side? Is that right, Chris? Wrong. The loan officer who writes the loan for a bank knows what his "personal" yield spread is going to be - the bank publishes a rate sheet for its loan officers that looks suspiciously like the wholesale rate sheet that I look at every day.

The only thing this bill is going to accomplish is to eliminate mortgage brokers from the equation, eliminate competition, and result in higher mortgage rates for consumers. But, folks like Chris Dodd don't care about putting 30,000 small businesses out of business - they have decided that if 5% of mortgage brokers are bad, they must all be bad. Fortunately they can focus all of their attention on us because we don't have any bad doctors, car mechanics, lawyers, or politicians out there.

Brad Thorpe

October 4, 2007 8:55 PM

Chris Dodd never had a real job in his life. What makes him an expert relating to people making a commission for a service. Isn't this the American Way?
Good mortgage brokers give value to the customer and desire to be compensated for their services.

Ken Cook

October 11, 2007 2:17 PM

I agree with most of your comments and I'm not going to revisit what Joe A posted because he's right on. Dodd, like any other politician, is simply putting on the act that they are protecting someone's interest while doing more damage to your freedom of choice.

Hillary Clinton is no different. I don't mind the elimination of YSP but let's keep it real - expose ALL forms of back-end commission and hold banks to the same rigorous standards you want to propose for many very legitimate mortgage brokers and small lenders (I am a small lender as well as a broker).

I'm in Georgia where total fees are limited to 5% including title, attorney, lender, broker, etc. Brokers are pretty much limited to about 2% total fees.

Hey Dodd - banks and national direct lenders make far more than brokers but you don't want to tangle with them because of their power? Meet the NAMB and MBA. *EVERYONE* makes money from loans. *ONLY* brokers are required to disclose how much.

Ken Cook
Director of Operations
Novation Mortgage
678-946-0101

EDUCATION OVER LEGISLATION (Proof the government wants YOU! [to remain ignorant so they can govern you])

ACW

October 25, 2007 1:26 PM

I'm a lender and I know how tough it is to make money on most loans by charging just front end points, so I too let the borrower make the decision which way they would like to go 1 orig 1 dis pt or 0 and 0 for a slightly higher rate which will make me get SRP which is like a YSP but for lenders and it won't show on the HUD-1 like it do for Brokers. By selling directly to Wall Street in bulk lenders have better rates which allow for a larger spread above PAR to give to L.O's.

Eric

November 4, 2007 1:04 PM

Again, let's not blame consumers for taking out loans that they knew that they couldn't afford, it's not their fault. The majority of our country are wimpy, whining, complaining victims who don't take responsibility for their own actions. Now they look to the government to do something to protect them from themselves.

The comments here are right on in my book. Democrats messing in free enterprise? No way. Never happens. Next step: Communism. Everyone gets their fair share and government makes all of the decisions.

This bill is absolutely ridiculous in that it stomps free enterprise and awards big business. If small businesses continue to get eradicated due to legislation by those who don't understand nor have ever held a "real" job, where does that leave our economy? Are we going to continue to move towards socialism where the decisions of few rule the masses?

The answer: mandating education and more strict monitoring of mortgage professionals. What about mortgage fraud? What about credit "piggybacking"? Mortgage brokers on the whole are not the problem but to create legislation that could cost another tens of thousands of jobs would really help our economy, wouldn't it Dodd?

Running for president? What a joke.

Eric Boucher
Owner
Dynamic Funding Solutions, LLC
East Hartford, CT

Ryan Smith

November 6, 2007 12:05 PM

Local Bank rates for my area are between .25% and .75% higher than the "par" (no yieldspread paid) interest rates that I can secure as a Mortgage Broker.

If I make 1.5% of yieldspread on a loan, but am still .125% lower on the note rate than the local banks, where is the problem? I get paid for my service, the borrower gets a better deal...everyone WINS!

Larry

November 6, 2007 3:53 PM

Maybe he should write legislation requiring that stores disclose their down to the penny profit on a loaf of bread too! The consumer has the choice......Period!!!

Larry

November 6, 2007 3:54 PM

Maybe he should write legislation requiring that stores disclose their down to the penny profit on a loaf of bread too! The consumer has the choice......Period!!!

TOP LO

November 8, 2007 7:05 PM

The banks want to eliminate the brokers. The bank lobbyists are at it again. But this congressman will be responsible for hundreds of thousands of layoffs as brokers (who often help people get approved who are otherwise unapprovable through taditional banks) go out of business. Great job moron! Kill the economy! Im moving to Europe later bitches!

TOP LO

November 8, 2007 7:06 PM

The banks want to eliminate the brokers. The bank lobbyists are at it again. But this congressman will be responsible for hundreds of thousands of layoffs as brokers (who often help people get approved who are otherwise unapprovable through taditional banks) go out of business. Great job moron! Kill the economy! Im moving to Europe later!

Dave

November 9, 2007 6:03 AM

This bill is nothing more than the result on a powerful lobby by big banks to get rid of competition combined with politicians desire to appease the public by finding someone to blame for the current mortgage and housing market mess. Banks charge this fee, called Service Release Premium but it is paid long after the transaction when the bank sells the security and it is not disclosed on the HUD Settlement Statement. In 1992 after the last recession, legislation passed requiring the disclosure of YSP on the HUD Settlement statement for brokers only. Now they want to put us all out of business by removing the ability of brokers to be paid but allowing banks to charge the same fee and not even disclose it anywhere. These politicians know nothing about the mortgage business, but they do know what their constituancies want. Eliminate the competition!

Dave

November 9, 2007 6:04 AM

This bill is nothing more than the result on a powerful lobby by big banks to get rid of competition combined with politicians desire to appease the public by finding someone to blame for the current mortgage and housing market mess. Banks charge this fee, called Service Release Premium but it is paid long after the transaction when the bank sells the security and it is not disclosed on the HUD Settlement Statement. In 1992 after the last recession, legislation passed requiring the disclosure of YSP on the HUD Settlement statement for brokers only. Now they want to put us all out of business by removing the ability of brokers to be paid but allowing banks to charge the same fee and not even disclose it anywhere. These politicians know nothing about the mortgage business, but they do know what their constituancies want. Eliminate the competition!

Dave Radant
President
Reliable Mortgage Inc
Mpls, MN

Justin Hubbert

November 12, 2007 10:50 PM

Chris Dodd must have never passed an entry level economics course. YSP is as fundamental as anything gets in a free economy. Isn't this what capitolism stands for, you pay me for a service, and if several of my competitors try to lower their rate to win the business????

This is a sleazy attempt by banks to reduce the free economy created by brokers. Look at Bank of America trying to do this by eliminating their wholesale division.

If this is eliminated, we should all be forced to deal with FNMA directly, since all rates from there down the food chain ultimately contain yield spread. Dodd- call me for a free Econ 101 course.

Justin Hubbert
Park Place Finance

COUNTRYWIDE STILL PUSHING ARMS

January 19, 2008 7:38 AM

Dont Banks get SRP? Isnt SRP kinda like yield spread? Banks have been dangling "Bonus Yield Spread" or "Earn a Free point if you can get your customers into a pick a pay or 1% loan" ...

The banks lied to wall street... Sold dirty paper and knew exactly what they were doing. Mr. Dodd's solution is a pathetic joke when broken down and revealed for what it really is. The payment difference that yield spread results in is negligible and this old con man knows that but the banks are lobbying and trying to use this pop as an excuse to monopolize.

Gabe1234

October 27, 2009 12:41 PM

Clearly Dod's good intensions are visible and I appreciate his desire to protect the consumer. I have the same desire but now have to pay the price for the actions of a few ignorant people. I agree that there are some Mortgage Brokers who are scum. Just like in any field. I am sure you will agree that there are many crooks and scumbag attorneys,Doctors, CPA's ect. but the majority of professionals are good people. The same holds true for Mortgage Brokers. First and foremost the biggest crook here are the Banks! They are the people who created all of the products brokers sold. NINA, negative amortization, no doc loans, etc. There is not one mortgage broker on this entire plannet that came up with not even one of these destructive products. These banks would practically bribe mortgage brokers to sell these loans. They would visit the office and bring Starbucks and offer tickets to sports events, etc. all the while assuring brokers the products were great for the consumer. Where does the bank get the "YSP" paid to brokers from? So that you are very well informed the banks make a profit called a "SRP" from every mortgage. This fee is built into the interest rates they offer. The higher the rate the higher the "Service Relief Premium" payed to the bank by the invester. When a bank makes a mortgage they sell the loan and make this profit. Sometimes this fee is up to 10% of the loan amount. When the bank pays a YSP to a broker they pay the MB a percentage directly out of this fee. Now that "the law" has banned the mortgage broker's "YSP" the banks will pocket the entire "SRP". Do you think they will pass these savings to the consumer? It is so convenient to throw the Mortgage Broker under the bus and demonize them while keeping all of the profits! Now the big banks can become "Oligopolies" and control the mortgage market and do what ever they want to the interest rates with no competition. A small bank in Idaho could never enter the market in Florida if it were not for the Mortgage Broker. The capital outlay for a small Bank in regards to investing in office space, personnel, equipment, etc. would be too large. Through the Mortgage Broker a small Bank can in affect have a Florida market presence buy paying a small percentage of their "SRP" in the form of a "YSP" to the Mortgage Broker based in Florida. The Mortgage Brokers serve an incredible service to consumers and make banks compete against each other. In a free market economy when firms compete prices go down and consumers reap the benefits. Can't you open your eyes to the truth and see that the Big Banks want to eliminate any form of competition? Especially with the government running the show?

Gabe1234

October 27, 2009 12:41 PM

Clearly Dod's good intensions are visible and I appreciate his desire to protect the consumer. I have the same desire but now have to pay the price for the actions of a few ignorant people. I agree that there are some Mortgage Brokers who are scum. Just like in any field. I am sure you will agree that there are many crooks and scumbag attorneys,Doctors, CPA's ect. but the majority of professionals are good people. The same holds true for Mortgage Brokers. First and foremost the biggest crook here are the Banks! They are the people who created all of the products brokers sold. NINA, negative amortization, no doc loans, etc. There is not one mortgage broker on this entire plannet that came up with not even one of these destructive products. These banks would practically bribe mortgage brokers to sell these loans. They would visit the office and bring Starbucks and offer tickets to sports events, etc. all the while assuring brokers the products were great for the consumer. Where does the bank get the "YSP" paid to brokers from? So that you are very well informed the banks make a profit called a "SRP" from every mortgage. This fee is built into the interest rates they offer. The higher the rate the higher the "Service Relief Premium" payed to the bank by the invester. When a bank makes a mortgage they sell the loan and make this profit. Sometimes this fee is up to 10% of the loan amount. When the bank pays a YSP to a broker they pay the MB a percentage directly out of this fee. Now that "the law" has banned the mortgage broker's "YSP" the banks will pocket the entire "SRP". Do you think they will pass these savings to the consumer? It is so convenient to throw the Mortgage Broker under the bus and demonize them while keeping all of the profits! Now the big banks can become "Oligopolies" and control the mortgage market and do what ever they want to the interest rates with no competition. A small bank in Idaho could never enter the market in Florida if it were not for the Mortgage Broker. The capital outlay for a small Bank in regards to investing in office space, personnel, equipment, etc. would be too large. Through the Mortgage Broker a small Bank can in affect have a Florida market presence buy paying a small percentage of their "SRP" in the form of a "YSP" to the Mortgage Broker based in Florida. The Mortgage Brokers serve an incredible service to consumers and make banks compete against each other. In a free market economy when firms compete prices go down and consumers reap the benefits. Can't you open your eyes to the truth and see that the Big Banks want to eliminate any form of competition? Especially with the government running the show?

Gabe1234

October 27, 2009 12:41 PM

Clearly Dod's good intensions are visible and I appreciate his desire to protect the consumer. I have the same desire but now have to pay the price for the actions of a few ignorant people. I agree that there are some Mortgage Brokers who are scum. Just like in any field. I am sure you will agree that there are many crooks and scumbag attorneys,Doctors, CPA's ect. but the majority of professionals are good people. The same holds true for Mortgage Brokers. First and foremost the biggest crook here are the Banks! They are the people who created all of the products brokers sold. NINA, negative amortization, no doc loans, etc. There is not one mortgage broker on this entire plannet that came up with not even one of these destructive products. These banks would practically bribe mortgage brokers to sell these loans. They would visit the office and bring Starbucks and offer tickets to sports events, etc. all the while assuring brokers the products were great for the consumer. Where does the bank get the "YSP" paid to brokers from? So that you are very well informed the banks make a profit called a "SRP" from every mortgage. This fee is built into the interest rates they offer. The higher the rate the higher the "Service Relief Premium" payed to the bank by the invester. When a bank makes a mortgage they sell the loan and make this profit. Sometimes this fee is up to 10% of the loan amount. When the bank pays a YSP to a broker they pay the MB a percentage directly out of this fee. Now that "the law" has banned the mortgage broker's "YSP" the banks will pocket the entire "SRP". Do you think they will pass these savings to the consumer? It is so convenient to throw the Mortgage Broker under the bus and demonize them while keeping all of the profits! Now the big banks can become "Oligopolies" and control the mortgage market and do what ever they want to the interest rates with no competition. A small bank in Idaho could never enter the market in Florida if it were not for the Mortgage Broker. The capital outlay for a small Bank in regards to investing in office space, personnel, equipment, etc. would be too large. Through the Mortgage Broker a small Bank can in affect have a Florida market presence buy paying a small percentage of their "SRP" in the form of a "YSP" to the Mortgage Broker based in Florida. The Mortgage Brokers serve an incredible service to consumers and make banks compete against each other. In a free market economy when firms compete prices go down and consumers reap the benefits. Can't you open your eyes to the truth and see that the Big Banks want to eliminate any form of competition? Especially with the government running the show?

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About

BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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