A letter from mortgage industry analyst Tom LaMalfa of Wholesale Access to Rep. Barney Frank regarding HR 3915Tom LaMalfaHR 3915, Rep. Barney Frank, YSP, steering, The Mortgage Reform and Anti-Predatory Lending Act of 2007, Whoesale Access, Tom LaMalfa
November 1, 2007
The Honorable Barney Frank
U.S. House of Representatives
2252 RHOB
Washington, DC 20515
Fax: (202) 225-0182
CC: Rep. Maxine Waters, Fax: (202) 225-7854
Rep. Melvin Watt, Fax: (202) 225-1512
Rep. Christopher Shays, Fax: (202) 225-9629
Subject: HR 3915
Dear Mr. Frank:
Over the weekend I watched and carefully listened to last
Wednesdays hearings on the mortgage market and HR 3915. I listened
to all three panels pretty much start to finish.
What I discovered at the tail end of the C-SPAN broadcast
hearing when the two of you and only three or four
others--including Rep. Watt and Rep. Shays--remained, was that
neither of you understand the term Yield Spread Premium (YSP). It
is widely misunderstood, so permit me to explain.
YSP is one of several options borrowers have to pay the cost of
the financing service ... the services rendered from point of
application through closing by the originator (whether broker/owner
of the brokerage or loan officer). Borrowers have three
options:
1) to pay for this service out of pocket, say $3,500;
2) to have the lender pay the originator (broker) the $3,500 for
this service and thereby finance the entire amount; or
3) to pay some portion, say half ($1,750) out of the borrowers
pocket and finance the other half through the lender via the
YSP.
The YSP and the Servicing Released Premium (SRP) are essentially
the same thing. They are only different in that the term YSP is
used in transactions with brokers, while the term SRP is used in
transactions with correspondent lenders. Since 1992, YSPs have been
required to be disclosed on the GFE and HUD1 Settlement Statement.
However, neither correspondent lenders nor retail portfolio lenders
are required to disclose SRPs. (How is that fair? Are LOs at banks
inherently more honest than those at brokerages?)
YSP requires a (minimally) higher interest rate in exchange for
not having to dig in ones pocket or at least to dig less deep.
Moreover, if the YSP is financed, it gets paid out monthly
amortized over (30) years. There is little pain to the borrower
when the YSP is paid incrementally and is also tax deductible.
The reason the lender can pay a YSP is two-fold.
1) The servicing (collecting monthly payments and administering
the loan) is an asset that generates a cash flow, so it has value;
and
2) the secondary market pays premium prices for debt instruments
(bonds) with higher coupons.
As a result, wholesale lenders--that is, investors who buy from
mortgage brokers--can provide originators with YSPs received from
the capital markets. No magic, certainly not kick-backs as
inaccurately portrayed by Sen. Schumer.
Since few borrowers, myself included, want to use out of pocket
cash to pay the entire origination fee and closing costs, YSPs are
commonplace remuneration for independent originators. The typical
broker receives half his/her fee at closing (say $1,750) and the
$1,750 balance from the investor. We know this from years of asking
questions of brokerage owners. In fact, our company has been
surveying brokers every other year since 1991, tracking their
business and industry. One of the 67 questions we asked brokers
earlier this year was: (Q19) What percent of your firms gross
income was from customer-paid fees vs. wholesaler-paid fees? This
is why we know the answer. The average gross income received by
brokerages for a mortgage loan financing was $3,532 nationwide in
2006, thus my approximation in the examples cited.
Ive been a mortgage market analyst for the past 30 years. Our
small, independent company does research exclusively in the
mortgage sector. I have studied the wholesale mortgage banking
business and industry the past 20 years. For 18 years, Ive annually
written, Whos
Who in Wholesale ... for the industrys flagship publication,
Mortgage Banking magazine.
If Congress outlaws YSPs, as provided for in HR 3915, it will
literally put all mortgage brokers out of business. That should be
the last thing Congress would want to do to mortgagors since
brokers are the low cost providers, and we have empirical data
supporting that assertion. Being the low cost provider explains
almost completely why mortgage brokerages, which (largely) didnt
exist 20 years ago, have attained market share of more than 50
percent each year for a decade (peaking at 68 percent in
2003-2004). This accomplishment comes despite facing down the likes
of Bank of America and all of the other Goliaths in the marketplace
every day. Would you be surprised to know that money center banks
retail branch originations generate more revenue and are more
profitable than brokerages? If you think about this, it truly was a
Herculean feat by largely mom and pop firms, a pretty fair
characterization given an average firm size of 7.1 employees. How
often in business do the Davids outperform the Goliaths? And do the
Democrats really want to end this state of affairs? One hopes
not.
Other than in the nonprime sector of the mortgage market, we
have found little evidence of steering. Originators direct their
business to firms that:
1) they are approved with;
2) where they get consistent competitive pricing; and
3) and most important, where they get good servicefrom quick
response times to useful websites to on-time closings.
In an effort to defend the Davids, we would open up our 15 years
of research about the brokerage industry to your staffs. Mortgage
brokers have been successful in large part because they provide
good service and good prices to borrowers. If they dont accomplish
both of these goals, they fail fairly quickly. Brokerage is an
easy-to-enter and easier-to-exit industry because entry barriers
are low, as they should be in an industry structured as it is. If
Congress wants to alter the mortgage markets current perfectly
competitive market structure into an oligopoly, outlaw YSPs as you
propose in The Mortgage Reform and Anti-Predatory Lending Act of
2007. Several years ago, I warned the publisher of The Mortgage
Press, Joel Berman, that the sub-prime industry was going to
turn originators into criminals. That has happened, unfortunately.
Several years ago, I also warned the HUD Secretary that his
unqualified promotion of housing for everybody would lead to
trouble. It has.
Having read through the Bill, there are only two parts--Title
II, Sections 201 and 203--that I think will be helpful. I would
argue that Section 102 should advocate national standards for the
efficiency of the secondary market. State licensing has been a
disaster, to wit the current mess. Section 103 is a disaster,
overturning several decades of precedence, years of legal challenge
and opinion and HUDs longstanding endorsement as of YSPs as per se
legal. Section 104 is also a disaster ... why hold the investor
responsible? Doesnt it make more sense to sue the loan seller if
there is fraud in the sale, or prosecute the borrower if he/she
misrepresents themselves or the transaction?
I am a McGovern Democrat who doesnt want the House, by
legislative fiat, to replace an efficient market with a less
efficient, less equitable one. And for perfect transparency, I
state for the record that Im not related to any mortgage brokers,
nor am I being compensated in any way to lobby for the NAMB or any
brokerages. I come to you only as a citizen, a taxpayer and an
observer of the mortgage market for three decades; and to remind
both of you that the only reason the country got through the refi
booms of 1993, 1998 and 2002-2004 as efficiently as it did was due
to mortgage brokerages. They absorbed the excessive consumer demand
of those periods so that Congress wasnt troubled to intervene,
since all was going well in the primary mortgage market. Less than
five years later, Congress is ready to kill off the golden goose.
What ingratitude to an industry that has done so much to put people
who wanted homes in them, and on average at less cost than the
alternative.
Sincerely,
Tom Lamalfa
