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National Mortgage Professional
May 10, 2009

The fading yield spread premiums: Trends and opportunityJeff Mifsud FHA, YSP, wholesaler,, 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 originator. 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 mortgage industry: • The implosion of the sub-prime industry, with a trend back to traditional lending practices and a resurgence of FHA, and • 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 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. Go FHA! Jeff Mifsud founded Southfield, Mich.-based Mortgage Seminars LLC in 2004, has been an FHA originator for 12 years, is a contributor to and is a former FHA underwriter. Jeff may be reached at (877) 342-9100 or e-mail [email protected]
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