Brokers' Hidden Fees Led Home Buyers Astray

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yield spread premium; agent fees; YSPsIn my last post, I began to lay the groundwork for the argument as to why the mortgage (and real estate) markets need radical transparency to restore consumer and investor confidence. I described my experiences working in the industries and my resulting opinions -- most specifically about a little-known fee called the yield spread premium (YSP).

YSP was often used as an under-the-table rebate given to a mortgage broker and in exchange the borrower received a higher interest rate.

A few commenters challenged the idea that YSPs had much of anything to do with the housing demise (along with my relative acumen ... but I digress). My contention is that YSPs were an enabling factor, a root cause if you will.

YSPs provide an incentive for brokers (and bankers) to steer consumers into more expensive loans, IF NOT PROPERLY DISCLOSED.

Throw under-the-table money into anyone's decision-making process and greed will dictate action, and therein was the incentive to deceive.

Despite what anyone says, more often than not YSPs were not disclosed properly -- couched as a "fee the bank pays me, so don't worry about it" or some such. They are widely used, to the tune of 85% to 90% of all mortgages contain YSP's. Trouble is, 85% to 90% of consumers don't know they ever had an option to accept or deny the difference.

Disclosure requirements around YSPs and mortgage fees in general are the real problem, and are so nebulous that when consumers are presented with identical offers from a mortgage broker and a mortgage banker, they routinely identify the broker's offer as the more expensive option. Why? How?

This is where things get real screwy. Bankers and banks do not have to disclose YSPs, while mortgage brokers do. For example: If the interest rate and APR are identical, but there is this line-item fee for $2,000 on the Brokers GFE and/or HUD-1 -- while nothing on the bankers' -- it's not hard to see where the confusion sets in.

Mandate consistent disclosure policies by all parties, and we could avoid these abusive tactics. More importantly, if fees are not disclosed properly, a penalty needs to be enforced. Like with a substantial fine and loss of license to do business.

Despite their poor reputation, banning YSPs is not a solution since they alone are not to blame. Rather they are an obvious shot across the bow of mortgage brokers everywhere and cut into a very important financial tool for consumers hoping to secure a mortgage.

Enlightenment and education are the key, not elimination.

So who or what is to blame for this mess? After all, we must blame someone, right?

Well, everyone can take their fair share. After the dot-com implosion, Wall Street created the arena (the suddenly lucrative Mortgage Backed Securities market) and provided the pitchforks for brokers, bankers and consumers to stick each other with.

As an example, one need look no further than Washington Mutual. Was it really all their fault? Or was it the brokers' fault for selling consumers on their complex (and loaded with YSP) Option-ARM product with a too-good-to-be-true minimum payment option. Or was it the consumer for taking whatever loan would get him into the house that was way out of his price range?

Everyone was selling The American Dream of Home Ownership as a right instead of a privilege. Lenders and their conduits formed a line at the mortgage brokers' door, pining for them to sell their products.

No income, no assets, no job? No problem. Everyone put away your reservations, your logical thinking, your conscience. Just take the blue pill and sign here.

It was a matter of time before someone walked into the dark warehouse during the MDMA-infused rave, a.k.a. the Housing Boom, and turned the lights on. This epic hangover is the result of epic overindulgence and selective ignorance by ALL parties to the party.
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