The fading yield spread premiums: Trends and opportunityJeff Mifsud FHA, YSP, wholesaler, LoanToolbox.com, yield spread premiums
With the great contraction of wholesale lending institutions,
the current high credit score requirements, and the resulting
decline in yield spread premiums (YSPs), many loan officers across
the country are justifiably unsure of their futures as a mortgage
originators. I'd like to give you a perspective on the current
events and help you focus on the opportunity that exists as an FHA
Given the pitiful performance of the large lender portfolios
over the last five years, it's hardly a surprise that many of them
have exited the wholesale lending arena. The default rate of
broker-originated loans, compared with their retail originations,
is drastic. I recently spoke with an internal manager from a large
wholesaler that pulled out of wholesale. She shared with me that
nearly 67 percent of the loans foreclosing in their portfolio were
from broker-originated loans! If you knew who the lender was, you
wouldn't believe it, just like I didn't when she shared that piece
of data with me. The pressure on banks to make changes to regain
investor confidence and improve balance sheets has led in part to
the fading YSPs. Although historically, lenders will worsen pricing
to process current pipelines and control volume, there is another
factor at work here.
In 2004, I spoke about two changes I could see occurring in the
• The implosion of the sub-prime industry, with a trend
back to traditional lending practices and a resurgence of FHA,
• The decrease of YSPs.
Just as you're fighting to find a way to stay in the business
and cover your overhead, imagine the pressure on corporations to
meet their overhead! It is because of this pressure that lenders
are taking huge advantage of the low fed funds rate, and using it
as an opportunity to recapitalize by paying brokers less for the
loans. The YSPs have been gradually declining over the past year,
and now that it has reached this shockingly low level, loan
officers are naturally concerned. But the truth is that as painful
as it is, this needs to happen to strengthen the lenders financial
stability. Remember, if brokers and bankers who sell on a
correspondent basis have no place to sell their loans, then they
are out of business.
So, the question is, with the current almost negligible YSPs, do
you choose to make exceedingly less on each loan, or do you
increase costs to the borrower? I think it will depend in large
part on what your average loan amount is. Loan officers in states
with lower loan amounts will have little choice but to charge
clients more to justify doing the loan, but clients will want to
know why. You will need to develop a script to use when the clients
ask why the costs are so high.
This is the response I have developed when a client asks, "Why
are the costs so high?" I answer by saying:
"That's a good question. The answer is that the mortgage
industry has changed a lot in the over the past year. With so many
banks going out of business and the skyrocketing rates of
foreclosures, not to mention plummeting real estate values, banks
have made it much harder to get a loan today. Many people are
unable to even get a mortgage because of the higher and stricter
standards. And for those who can get approved, the banks offer poor
pricing to those with credit scores less than 720. Your score is
well below 720, and given the current situation, I'm honestly just
really grateful that we were able to get you approved. You're
actually very fortunate."
Many loan officers are in shock when they see how much they have
to charge a borrower on a conventional loan. It seems the secondary
market has chosen "720" as the new score to avoid big price hits.
This is a big reason to become an expert in FHA, as the price hit
threshold is much lower at 620 and many lenders offer price
incentives for scores above 660.
Conventional originators will certainly make less because of the
competitiveness, and FHA experts will continue to be able to charge
a premium for their expertise. While the fact is that everyone is
doing FHA, it's also a sad fact that few know the product well
enough to command the confidence and trust of real estate agents.
One of the things our FHASuccessDesk.com members
enjoy is the opportunity to gain a firm grasp of the FHA guidelines
and procedures, and to stay on top of all the changes, giving them
the knowledge and confidence they need to distinguish themselves
from other loan officers.
And yet, YSPs arent everything with FHA loans. You have to work
with a company that really knows FHA and can do the "make sense"
loans. Just like loan officers, all of the wholesale companies are
doing FHA, but very few do it well. As I wrote last year, I see a
great opportunity for FHA boutique lenders to expand and capture
this lost wholesale business. With the continued loss of larger
wholesalers, many mid-sized companies are experiencing good growth
in this FHA market. One such company is Michigan Mutual Inc. (not
surprisingly, a Michigan company).
Over the past several years you have heard me speak of the
advantages of working with FHA boutique lenders, who gain most of
their business from their home state and surrounding states.
Companies like Michigan Mutual are extremely beneficial to the FHA
originator because they truly understand FHA, they offer great
service, are sized right, and a loan officer can develop a personal
relationship with the company. All these factors are crucial in
being a successful FHA originator. Having hands-on, trust-based
relationships with your lenders makes a big difference, especially
when your focus is purchase business.
Pricing is important, but don't make YSPs your main focus. I
have always selected my lenders based on my ability to provide a
good purchase experience to my clients and real estate agents. I
will always choose to make less with a lender that helps me provide
a good experience to my client (which creates more referrals),
rather than the lender that offer higher YSPs, but hammers you and
your client all the way through closing and often after. I believe
this trend of lower YSPs will continue & although I really hope
to see YSPs above three again, especially for those in states with
loan amounts under $150,000. Thus, brokers will have to adapt some
of their origination practices and their mindset in order to
compensate for this trend (and in order to stay in business). Maybe
you need more volume, higher loan amounts, or clients with higher
income. Whatever it is, it's time to take stock and focus on what
you need to change.
For some time, I've been using the "forest fire" analogy to
describe what has occurred in the mortgage industry over the past
year or so: Though a forest fire causes destructionoften
devastating and vast to the trees in the forestultimately, its
something of a "cleansing" process: it replenishes the soil with
nutrients, and makes way for future growth. It's not unlike the
"inferno" that continues to ravage the industry. Does it hurt? Yes!
Are we losing a lot of talent? Yes! But for those of you who have a
firm and unyielding commitment to the mortgage origination
industry, an unrelenting positive attitude, and a plan to work, I
truly believe you will one day see the fruits of your efforts. Our
industry is undergoing tremendous growing pains, undergoing a real
metamorphosis, which in the end I hope and believe will ultimately
improve our industry. The challenge and struggle you are feeling is
making way for new growth opportunities, and utilized properly,
will help make you a better loan officer.
Jeff Mifsud founded Southfield, Mich.-based Mortgage
Seminars LLC in 2004, has been an FHA originator for 12 years, is a
contributor to LoanToolbox.com and is a
former FHA underwriter. Jeff may be reached at (877) 342-9100 or