Skip to main content

Credit Plus Inc. launches new unit

Nov 01, 2007

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
About the author
Nov 01, 2007
The Sale, The Risk & The Trend

The chronicles of Norcom Mortgage

Jul 08, 2024
A Reading From The Book Of Kyle

A Texas coach and former pastor felt a calling, spawning a best-selling how-to for loan officers

Jul 08, 2024
Mortgage Applications Increase Slightly In Latest Survey

Applications increased 0.8% from one week earlier.

Jun 26, 2024
FHFA Approves Freddie Mac's Second Mortgage Pilot

The GSE's limited program will permit cost-effective cash-out refinances

Jun 24, 2024
Former Rocket Mortgage SVP Turned UWM Broker Partner

Zoom Home Lending, headed by former Rocket Mortgage executives, partner with their old wholesale rival, UWM

Jun 20, 2024
Potential For Declining Rates This Summer, Following CPI Report

Norada Real Estate Investments said "rates likely to decline" after the latest CPI report.

Jun 17, 2024