Mortgage Market Needs 'Radical Transparency'
One of my favorite quotes. It brings me back to an epiphany I had in my former life as the owner of a mortgage brokerage, real estate brokerage and construction firm. The epiphany was about transparency -- or the lack thereof -- in real estate transactions. Let me explain...
Sometime in the summer of 2005, after a particularly exhausting day in the life of being a mortgage broker, I sat in our conference room with my CFO racking my brain on how we could differentiate ourselves from the sea of other mortgage shops that dominated the local and national landscape.
You see, we were killing ourselves trying to convert thousands of leads into clients and keeping them once they made an initial commitment. We tried every conceivable lead generation source. All of them yielded the same results: A high cost per client acquisition which forced us to charge consumers higher fees.
For example, this little outfit called LendingTree charged mortgage professionals who wanted in on their lead network $25,000 just to sign up, a per lead fee and a 'success fee' upon a deal actually closing. At the end of the day, we were paying almost $2000 to acquire a Lending Tree closed client! In turn, my business needed to charge at least $4000 to the client to pay the bills and make a small profit.
In the days of 'No Cost-No Fee' mortgage marketing, telling a potential client our fee was $4000 put the kibosh on the potential aspect of a client...they were on to the next mortgage shop faster than I could begin my next sentence.
These days, I blog about the real estate industry, here and on my site theXBroker.com, about bringing radical transparency to the mortgage and real estate markets.
But back to the scene in my conference room in 2005...
[Thinking aloud and pounds fist on table] "You know how we differentiate ourselves, Dave? We begin telling everyone the truth about how this industry works, how mortgage professionals really make money, expose all the tricks of the trade, the bullshit marketing and explain how these third party lead monkeys are ripping us and them off!"
And so it began. Turned out that simply telling the truth differentiated us from 95 percent of the market. As we began educating instead of selling, everything changed. We flipped interest rates and fees face up, getting radically transparent, and started competing on service rather than smoke and mirrors.
The most potent component of our new 'transparent' business model was educating potential clients on how mortgage professionals made money, specifically with this little known fee called Yield Spread Premium, or YSP.
What is YSP?
According to RESPA law, a YSP is the fee a lender will pay a consumer for accepting a higher interest rate than they otherwise qualify for to finance some or all of their closing costs.
How was it typically wielded?
As a tool of personal enrichment for the mortgage professional, with the consumer being none the wiser that they ever had the right to the YSP dollars, and paying untold amounts in higher than necessary interest payments.
It was the mortgage industry's dirty little secret and played a major role in the demise of the credit and housing markets -- mainly because improper YSP disclosure methods and loopholes gave mortgage professionals incentive to push loans that paid them better, rather than recommending the best loan for the consumer. 'No/Low Cost' loans were typically LOADED with YSP's -- they were risky, high cost loans that subsequently threw many consumers and their homes to the unmerciful and inglorious courthouse steps.
The real tragedy is this sinister dynamic could have been avoided via better disclosure requirements and a mandate for greater transparency in the mortgage industry. Alas, greed prevailed. Now there are calls to ban YSP's, which would be a tragedy in its own right. But that's the topic for another post.
Stay tuned for my next installment: Yield Spread Premiums -- Breadth, Depth and their Future in Mortgage Finance.
Jeffrey Corbett is a Partner at 7DS Associates Consulting where he continues to champion radical change for the real estate and mortgage industries.