One industry, two faces
Here is the issue with mortgage brokers in a nutshell: A new study finds that among borrowers with good credit, those who go to mortgage brokers get better interest rates than those who go directly to a lender such as a bank. Which is great. But among borrowers with bad credit, those who go to mortgage brokers get much higher interest rates. Which is not.
In fact, the typical subprime borrower who uses a mortgage broker pays more than $1,000 a year in additional interest.
It's as if there are two industries using the same name: One that helps its customers, and that doesn't.
The study was released today by the Center for Responsible Lending. The borrower advocacy group has been hammering on this issue for years. It wants the government to regulate and restrict the fees that mortgage brokers receive -- particularly "premiums" they are paid for convincing customers to accept a higher-than-necessary interest rate. The higher the rate, the larger the premium.
The authors argue that brokers are less likely to try overcharging customers with good credit, because the loans are relatively easy to process and the customers are presumed to be knowledgeable. By contrast, customers with bad credit may seem vulnerable.
Brokers anticipate that borrowers with weaker credit will have fewer financing options and be less knowledgeable and confident in their credit dealings. Accordingly, it is logical that brokers would use this leverage to extract greater payments from such borrowers.
The group looked at 1.7 million loans made between 2004 and 2006, and compared the interest rates received by borrowers with similar financial profiles. That may seem a bit historical. Mortgage brokers are independent contractors who offer borrowers a choice of loans from multiple mortgage companies. Both lenders and borrowers relied heavily on these brokers during the housing boom. But that was two years ago.
These days, lenders increasingly want to make their own loans, so they can evaluate the borrowers directly.
Borrowers with credit problems are having a hard time finding lenders willing to make anything resembling a subprime loan.
But CRL, is concerned that the end of the mortgage bubble is being mistaken for a long-term solution to the things that went wrong. The federal government has yet to change the rules of the lending business. If investors decided tomorrow to start making loans again, they would be able to resume many of the practices that CRL and other groups consider responsible for the problems now unfolding, such as the exploding number of foreclosures.
The group probably will continue to release repetitive studies until Congress shows an interest in the lending business.
Just to even things out shouldn't there also be a Center for Responsible Borrowing? Or better yet maybe the public schools should teach something in the area of life long finances.
Sure there were predatory lenders, but why can't any one be telling people that they need to be informed before making huge financial choices.
You can't put everything in the lap of lenders/ brokers to educate people on what is the best interest rate.
There are educated and uneducated consumers in all areas of the economy. only putting the blame on the lender is like a large person blaming Hostess Cupcakes for their weight problem. I think both sides should be held accountable not just the brokers/lenders.
I have been in the banking/mortgage field for well over 20 years and I have seen a lot of changes including the S&L debacle of the mid 80's. My wife and I began our own mortgage business in November of 1996. I have been fortunate enough to have limited my clientele and ezpertise to prime mortgage or "A" paper only. The subprime mortgage debalce has the left the industry in turmoil. The loan products initiated by Wall Street , Fannie Mae & Freddy Mac and then the presented to the borrowers has tarnished the reputation of many mortgage brokers. Some of whom have never written a subprime , or no doc / no verification loan product. It's a pity that the actions of a few have to destroy the reputation of many. It's like the old saying -- "you shouldn't condemn the children for the actions of the parents" -- in this scenairio, the mortgage brokers are the children of the unscrupulous Wall Street giants who created these programs to begin with assuming home values would constantly go up and borrowers could just refinance at a later date. The mortgage brokers didn't create these programs!!
The role of the mortgage broker is to serve as a real estate financing professional of entity who neither represents neither the borrower nor the lenders but works with both to obtain a mortgage loan. Mortgage brokers must be licensed by the Division of Banks in each state they wish to originate loans for that
lender. In addition, the newly organized Nationwide Mortgage Licensing System that is being implemented at this time hopes to be a fantastic method of regulatin and monitoring mortgage originators and brokers throughout the country.
The compensation earned by a mortgage broker for originating a loan can be paid in a variety of ways. It can be paid in the form of a Yield Spread Premium ('YSP") or it can be paid in the form of origination points or a combination of both. It is a requirement that mortgage brokers provide all borrowers with a Good Faith
Estimate ("GFE") and state specific mortgage broker disclosures within three (3) days of making application. The GFE specifically states the expected YSP to be earned and/or the origination points and/of discount points to be paid. In addition, the mortgage broker disclosure form includes this information as well. To try to determine what that information will be in order to provide the borrower with this informaiton prior to the consumer paying a fee and prior to the consumer submitting an application would be pure guesswork. How can it be mandated the this information be disclosed prior to application when the broker does not yet have the pertinent information with respect to the borrower's financial status, transaction details, type of product sought, or amount of loan. All these factors may vary as the transaction progresses and the loan develops. That being said,
the YSP and/ or origination/discount points can vary depending on the pertinent information relating to the loan file such as loan amount, credit scores (FICO) , LTV's, type of property, etc., etc. There are many instances when the GFE's have to be revised during the application process and just prior to closing due to pricing adjustments being made for various reasons ane market conditions. To give an an example, because most of the country is in a declining real estate market, appraisals are coming in way short of expectations. Therefore, LTV;s are higher than originally expected and the secondary market including Fannie Mae & Freddie Mac and available wholesale lenders are imposing stricter guiedlines and fees imposed by the lenders in the form of origination and/or discount points some of which is the compensation to the mortgage broker. How could we forsee that information?
I could go on and on all day ..... My question to you is "Does anyone in the Federal Reserve now how to read a daily rate sheet from a lender?" How can you
impose regulations on mortgage brokers when you don't understand how the process works?
Short Summary of Current Mortgage Market Real Estate Conditions:
In years past a borrower would visit their local savings and loan to obtain a mortgage. The Loan Officer at the bank would approve the mortgage and fund it with cash reserves from the vault. This system worked well until the bank ran out of money to lend. Borrowers came to the S&L looking for a loan and were told to come back when a current mortgage paid off. What the bank needed was a way to sell the loans they made freeing up the capital to lend to new borrowers. This way they could lend the "same" money over and over, earning an income from servicing the loans and assisting the community by offering a near limitless pool of money.
To address this issue, FNMA and GNMA were established. The goal is to provide cheap mortgage money to prospective homeowners and a high quality bond for the investment community. The bond or Mortgage Backed Security (MBS) take mortgages with similar risk characteristics and pool them together. Investors in the MBS’s know ahead of time the return they are going to receive, much like a Certificate of Deposit. To ensure the performance of the bond, each mortgage is underwritten to specific guidelines.
During the recent real estate boom underwriting guidelines were relaxed giving way to a whole new menu of mortgage products such as 100% financing. In addition, to streamline the influx of applications, income and asset verification took a back seat to a borrower with strong credit. With housing prices rising rapidly, the property could be sold to cover the note and foreclosure costs if this occurred. This cycle worked well until the price of houses moderated in 2006. Once the housing market began to cool and prices moderated, foreclosed homes were being sold for less than the notes. To add insult to injury, the loans underwritten to the looser guidelines did not perform as hoped. With the value of the collateral in question (falling home prices) and the future performance of the borrowers unknown, investors’ appetite for this risk has waned. To attract investors in this environment, rates had to increase.
Unfortunately the liquidity issues associated with Alt A and subprime loans carried over to more secure AAA GNMA and FNMA loans. Sellers of AAA MBS’s are finding it more difficult to find buyers. Many analysts believe the reaction has been too severe. Sanity will eventually return to the markets and AAA pricing will come in line with risk characteristics. Unfortunately it may take some time for this to occur.
My husband and I consider ourselves financial responsible people and we sat tight through the housing boom and continued to save for a decent down payment. Well, here we are now with a great down payment, great credit scores and due to my being self employed, unable to obtain any loan that would get us more than a storage shed. Lenders are now in the business of not doing business with anybody but the wealthy.
So what you're saying is that the lenders shouldn't be allowed to charge higher rates for higher risk borrowers?
Oh heavens! Can't reward responsible people who are likely to actually pay the loan! That would be unfair, and someone might get their feelings hurt. Besides, don't those awful bankers know that banks are just supposed to give money away without expecting repayment? Haven't they read A Christmas Carol?
More seriously, I agree with Just Me (comment #1) Although people keep trying, you cannot honestly blame McDonalds for making you fat, and you cannot honestly blame mortgage lenders when you sign papers you haven't read.
As for congress getting involved, that's sort of what caused this mess in the first place. (Apologies, but the URL too long to put into one line. You'll have to copy each line seperately then paste it into your browser)
http://www.nypost.com/php/pfriendly/print.php?
url=http://www.nypost.com/seven/02052008/postopinion/
opedcolumnists/the_real_scandal_243911.htm
For those of you disinclined to read the article, I'll sum up: Someone did a study that said poor people with bad credit were being "discriminated" against by lenders. Of course, they were being discriminated against, but not for the reasons they were accused of discriminating. Congress pressured the mortgage lenders to meet quotas for the kinds of borrowers they serviced, and the way they did that was with sub-prime loans.
This will sort itself out. Bad behaviour by banks and borrowers alike will be corrected-- provided the government doesn't do anything stupid like socializing losses (oops, too late). Banks that make bad loans as a policy should go out of business, and people who take bad loans without doing the research should end up in bankruptcy. It's painful, but quicker than the long term damage to the economy that comes from teaching people they can do stupid things and not suffer the consequences.
Contrary to what you see on Sesame Street, nobody learns a lesson when someone says "I'll shield you from the bad consequences, but please don't do that." It's like when I was a toddler. I kept trying to eat the bar of soap at bath time. My mother stopped me once, then twice, then a third time. After that, she let me get the soap in my mouth. Blech! After that, I knew not to eat the soap. The logic of this kind of falls down when more dangerous behavior is involved-- you can't just let someone jump off a roof just because they don't know they'll die when they land, but that's why you implement disciplinary measures after preventing serious harm-- but the overall point still stands. Bad behavior will be repeated unless there are consequences for being bad.
This blogger might want to review your comment before posting it.
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