With the Senate passing another bill on Thursday that none of them have ever read and was drafted by the congressional staffers the question raised is “How is this going to affect my ability to refinance or buy a home?” Well, below is a great summarized version of the bill via Mortgage News Daily via Mortgage Bankers Association (I know, it’s the long way around but it’s the best summary of 2,000 pages of wasted paper I could find).
In reality it doesn’t do anything the industry isn’t already doing to police itself. But, Congress makes it sound revolutionary. There are some areas that are left rather vague though, and are open to interpretation. One being how a loan officer is compensated. The real issue here is that this bill addresses how mortgage broker‘s are compensated but does not address how loan officers at banks are compensated, which is the same way just with different terminology.
Right now an independent mortgage loan officer has to disclose all his or her compensation and how they arrived at that figure. The loan officer at a bank or credit union does not. So be very careful when comparing the Good Faith Estimates between sources when shopping. They are all the same in theory, but how they are presented are different and actually makes it look like the broker isn’t being competitive when in reality the broker may be a better deal. Being a small businessman, independent loan officers need to be competitive to feed their families.
Another issue at hand is with the vague wording of the bill regarding Yield Spread Premium (YSP): the “gross profit” or spread between par rate and the rate you are being quoted. To understand YSP think of the price Best Buy pays for a camera and then the price they sell you, the difference being what Best Buy makes. The lender or bank has a built in profit margin for each 0.125% increase in interest rate between the par rate and the rate you are being given, and this profit is higher for selling a higher rate up to a point, usually 3% max.
By the way, loan officers at banks have this also, internally they just call it by different names and the financial reform bill doesn’t address it.
Some would say (as Congress has) that this causes the loan officer to sell the borrower on a higher interest rate, and it could, but then if the borrower was shopping around the loan officer wouldn’t be competitive and the borrower would go with someone with a lower rate. Just like if you were buying a camera and F.Y.E. had a lower price than Best Buy, you’d buy it from F.Y.E.
But YSP doesn’t always mean more compensation for the loan officer. Many times the loan officer uses the YSP to cover some or all of the borrower’s closing costs, such as in the case of “no cost refinances”. Or when surprises come-up at closing on your new home or refinancing the loan officer issues a “borrower credit” to cover those surprises so the borrower doesn’t have to come-up with money out of pocket that they didn’t expect.
So the possible elimination of YSP could in fact cost you more money because it would also eliminate “no cost refinances” as well as you, the borrower, will have to pay for those little surprises at closing. I know, some of you are saying “I’ve never had any little surprises at closing”, but believe me there were, they were just taken care of from your loan officer’s compensation behind the scenes and you never even knew about them.
And those of you who have had surprises you had to pay for, I’ll be that loan officer is now out of the industry. Just like any business, those that deal honestly retain customers and survive and those that don’t eventually run-out of people to burn.
In short, in my opinion the reform bill does a lot of nothing to really help the consumer while it will be business as usual on Wall Street on Monday. Of course, being drafted by shills for Wall Street (Dodd, Franks) and pitched by many of the same players that got us into this mess (Timothy Geithner who crafted the big bank bail-outs under Bush, Gary Gensler the former Goldman Sachs executive, Larry Summers the former hedge fund executive, and Jack Lew, former Citigroup executive) you can see why nothing really changed that could prevent such a meltdown in the future.