BILL HR 3915

[Anonymous]

I guess this question is for the brokers out there..

IF this bill passes, how exactly would this affect consumers?  I figured enough to know that if you can't make it on the back, you'd charge it on the front which equals more closing costs to borrower, but if that is all disclosed on the TIL then wouldn't borrower's go to, lets say, their bank directly where they wouldn't be charged such high closing costs?  My interest in this is two-fold, as 1. I am thinking about buying a house next year, and 2. I work for a title company and don't want to lose the business we get from brokers.  I know the potential elimination of ysp would only affect subprime loans, but still....

[ShanetheMortgageMan]

For individuals who do/need sub-prime loans this would greatly increase closing costs.. for individuals who do/need Prime loans this would have no affect.  It will increase requirements to become a mortgage broker, which I fully back.  Oddly enough, brokers can make more YSP on Prime loans than they can on Sub-prime loans.  With a Prime lender I can make up to 4% in YSP, with a Sub-prime lender it maxes out at 2%.

Basically what it was made for are a bunch of bad apple mortgage brokers who felt the need to make their entire life savings on one loan, max points in yield spread premium, and max points in origination.  This ban will prohibit cost effective loans for those who don't qualify for conforming (Prime), Jumbo (Prime) and FHA/VA loan programs... and have to use a sub-prime loan program.  Now I admit that if you ONLY qualify for a sub-prime loan program, it's probably best to wait until your credit can put you in a position for something better... but for someone who is already in a home, rate adjustment is coming up, and their only option is a sub-prime loan or their new rate/payment won't be affordable and they'll default/lose their home... a sub-prime loan is obviously the way to get it done (since they would qualify for nothing else better).  So in that situation, instead of the broker being able to make 1-2 points in YSP by giving the borrower a higher rate (in sub-prime generally the 1st 1% in YSP costs .50% in rate, the 2nd 1% in YSP costs .75% in rate, for a total of 1.25% higher in rate), the borrower would be charged that amount in origination (or more in origination if the loan that would've had YSP on it also had origination in the first place).  If the individual has no equity or funds to pay these origination fees (or increases origination fees), they can't get the loan... as brokers (nor does any lender) do a loan for free.  This isn't charity (even the not-for-profit organizations like NACA, or HUD sponsored local community organizations, don't do the loans for free, contrary to common belief).

Personally this law won't effect me, because I've always disclosed YSP/origination on the GFE (it's actually a HUD requirement that went into effect back in 1992).  GFE's can be freely compared, just because you get a GFE does not mean you can't go to another broker or lender and compare it with their GFE.  This is how competition works.  What can't be compared in the GFE is the brokers/lenders, ethics, morals, their service, and the confidence that the GFE they are providing won't change.  Those are all traits the individual who is getting the mortgage needs to determine.

What is funny though is that banks are not required to disclose SRP.  SRP is indirect compensation that is made by the bank when the release the servicing rights to someone else... like Wells Fargo releasing servicing rights to America's Servicing Company, etc.  If you go Wells Fargo (Bank of America, Countrywide, Wachovia, etc.) for a mortgage, they are not required to disclse SRP to you.  But as a consumer they don't care, correct?  And they shouldn't.  As it all comes down to who is going to give you the best deal in conjunction with the service you expect.  If broker #1 is giving a 30-year fixed 6.25% rate with 1 point origination but 2 points in YSP, and broker #2 is giving a 30-year fixed 6.125% rate with 1 point origination and 2.25 points in YSP... assuming every other factor is the same, which one is the consumer more likely to go with?  Broker #2, right?  So YSP & SRP is of little consequence to the consumer.

I know everyone wants the lowest possible rate/term for their situation, but everyone else also wants the lowest possible cost for their insurance, appraisal, and even applying it to other industries... their medical procedures, attorney's fees, car sales price, etc.  The way that is created is by competition.  Banning YSP on non-Prime loans eliminate many "smalll business mortgage brokers", resulting in few places to get mortgages from, which in turn creates less competition.. that ultimately the consumer pays.

I agree something has to be done, I would like to see there be a federal law for requirements to become a mortgage broker... rather than state requirements (which is what's going on now).  I do like California's requirements, as they require the loan officer to have a fidicuary duty to their client in getting them the best possible rates & terms.  So I'm glad I'm in California as most of what HR 3915 is proposing is basically what's already in place here.

[ShanetheMortgageMan]

Doesn't have everything to do with this bill, but an interesting read: http://www.urbancure.org/article.asp?id=3067

[Anonymous]

Thanks for the response Shane, I've been thinking about this all weekend.  I think its going for full house vote this week (or is it next week?) so we'll see what happens.  I also agree that something needs to be done because I've seen first hand what greedy loan officers can do to unsuspecting, trusting borrowers who don't know any better.  It's just too bad that it takes a market like we have now for the government to take notice and think, hey we should do something about this before it gets out of hand. 

On a personal note, I know I will not be credit-worthy to get into a prime loan early next year, but I guess waiting until I am able to will save me a lot of money regardless of the money I'm "throwing" away on rent. And so goes the fico fight!

[ShanetheMortgageMan]

We can track the progress of this bill at: http://www.govtrack.us/congress/bill.xpd?bill=h110-3915