by Brian Brady
Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL
Leave it to Todd Carpenter.
I was on Rain City Guide, wishing Jilayne a happy birthday, today. I scrolled through the posts to see the typical “Do Away With YSP post” that dominates the internet today. It’s another example of heading South to eventually go North.
Todd has the answer (comment #1):
I have another idea. If YSP’s supposedly stress everyone out at the closing table, just stop making brokers disclose it. Then the consumer would start focusing on the true cost of the loan.
Brilliant ! I’m actually giddy. Todd may not realize it but he just fired the shot heard round the world.
Todd Carpenter says:
Thanks Brian. Some day I’m going to write an article on the value of being the first to post a comment on another guy’s blog.
I find it entirely annoying that so many RE and title agents have the gaul to criticize a broker for charging to much, or any YSP at all, AFTER the deal is closed, and they’ve all been paid as well.
November 17, 2007 — 12:39 am
Brian Brady says:
“Some day I’m going to write an article on the value of being the first to post a comment on another guy’s blog”
You set the tone of the discussion.
Todd, this idea is simply brilliant. It allows consumers to compare banks and broker alongside each other. What’s that you say (the masses)? You don’t understand how mortgages work? All the more reason to do your homework and start treating this with the gravity it deserves.
November 17, 2007 — 1:46 am
Lenn Harley says:
O.K., I suppose I’ll have to say it again. The “Gentlemen and Gentleladies” on the committees of Congress who are designing ways to either put brokers out of business or execute a price control on mortgage brokers haven’t the foggiest idea what they are talking about.
They mouth the words written by staff and only ask questions of witnesses without the need to answer questions in which case they would be reduced as blithering, likely slobbering, incompetent power grabbing incompetents they are.
All you need to do to understand what is behind this entire mess we are in with respect to the YSP and other matters related to the financial messes is follow the money.
I did and found, surprisingly, that Barney Frank, of all people is in the pocket of big banks.
Who woulda thunk it??
November 17, 2007 — 6:12 am
Bob in San Diego says:
Brian,
When I started in Real Estate it was working for a Mortgage Banker… We also brokered loans and I can tell you that most of the agents at that office when given a choice between two loans that has the same RATE and FEES they would choose he one that they didn’t have to disclose the YSP.
On the other had Why shouldn’t the consumer know what the true Fees are for every type of loan?
Is is fair that a Banker doesn’t have to disclose yet a broker does?
November 17, 2007 — 7:06 am
Rhonda Porter says:
“Is it fair that a Banker doesn’t have to disclose yet a broker does?”
That’s the part that gets me…Congress and consumers don’t understand that just because it isn’t there (what lenders and bankers are paid on the back end); doesn’t mean it isn’t there. Hey, that sounds like a Yogi Berra quote!
Because of the transparancy that mortgage brokers have by all ready disclosing what is being paid on the “back end”, they’re being prosecuted. It’s those of us who work for lenders and banks that are allowed to hide something and are smelling like roses when we’re compared to our broker brothers and sisters.
November 17, 2007 — 9:07 am
Todd Carpenter says:
Brian, I’d love to agree, but brilliant ideas are the ones that can be implemented. I’ve often commented that disclosing YSP confuses the issue, and it’s almost uniformly dismissed as me being a broker who’s embarrassed to disclose what he makes.
November 17, 2007 — 9:50 am
Jillayne Schlicke says:
I seriously doubt that RESPA is going to be reformed to allow Todd’s idea.
Todd says:
“I have another idea. If YSP’s supposedly stress everyone out at the closing table, just stop making brokers disclose it. Then the consumer would start focusing on the true cost of the loan.”
The stress-out at closing happens because the broker didn’t disclose YSP at the beginning, failed to disclose it on the GFE the way RESPA directs, or low-balling their estimate.
Customers do not get stressed out when the YSP on the GFE matches the YSP at settlement or when the YSP is lower, they only get stressed out when the opposite occurs.
It is the behavior of the mortgage broker that is being questioned here, and by the Mortgage Reform Act, not YSPs.
Since the average borrower will not likely understand the true cost of a mortgage, the relationship between the borrower and LO must change so that the LO cannot take advantage of the consumer.
The Mortgage Reform Act starts us down that path.
No piece of government legislation will ever be perfect. Government was not designed to “know what we do.”
WE know what we do. INDUSTRY self-regulation will keep the government off our backs.
Only then, can Todd take his idea to DC and say, “The industry is ready to reform RESPA.”
November 17, 2007 — 10:57 am
Todd Carpenter says:
“The stress-out at closing happens because the broker didn’t disclose YSP at the beginning, failed to disclose it on the GFE the way RESPA directs, or low-balling their estimate.”
I couldn’t agree more. Those LO’s should loose the ability to originate loans. In some cases, they should go to jail. There’s laws against this already, which makes me question why we need more laws.
What irked me off about that post is how Tim was talking about the uncomfortable silence when all the other professionals at the closing table bit their their lip (waiting for their slice of the pie) while the consumer was supposedly being screwed.
My comment was more tongue & cheek as I know it would never fly. It is a good idea though as YSP is largely irrelevant to how good a deal the consumer is getting.
November 17, 2007 — 1:14 pm
Tim says:
The hell the YSP isn’t relevant. In just one of many examples in my office, the YSP was very relevant when the borrower’s disclosure AT SIGNING indicated the exact fee the LO was making due “to the borrower obtaining an interest rate higher than what they could have received.” That is the exact language right off the disclosure. Silence, yes. From who? The LO. Dead deal? Yes. Was our client (the borrower) pissed off. Yes.
In another example, you should been at our office about a week ago. The drama unfolding due to another loan officer clown would have made all the reality TV shows about agents and house flipping pale in comparison. Fortunately, there are some good, professional loan officers out there that we work with.
Did our office get paid for professional service because of this clown. NOPE. Do I agree with your statement at RCG? In spirit, yes.
Thanks for the love. LOL.
November 17, 2007 — 1:55 pm
Brian Brady says:
Jillayne,
You understand this ugly machine we’ve built better than most anybody. What Todd suggests is a complete overhaul of the machine itself.
Eliminating YSP disclosure is CONSUMER focused for the reason Todd cites; it forces them to focus on the real issue- rates and fees.
Now everyone knows that I advocate consumer responsibility. How can a consumer take responsibility when we tell him that he has to worry about an originator’s profit? It’s immaterial.
November 17, 2007 — 2:09 pm
Larry Morris says:
I agree with Jillayne, Todd and Brian. As long as we are required to disclose YSP we need to. We need to educate our clients nad let them be a part of teh decision making process. Up front discuss our fees and let them decide how to pay us. If it’s a short term loan, maximize YSP and minimize fees. Long term, just the opposite. If we do this, YSP becomes a tool taht the banks can’t compete against.
November 17, 2007 — 2:35 pm
Brian Brady says:
Larry:
What if we didn’t disclose YSP? What would the consumer look for when comparing our offering to, say.., one from Bank of America?
November 17, 2007 — 2:52 pm
Kaye Thomas says:
I hate to be the dullard of the group.. but it seems to me that YSP is always going to be a problem. Consumers tend to get a wee bit annoyed when they find out the lender quoted them a much higher rate then they really qualified for so the lender could make more money off the loan.
It’s not a matter of disclosure as much as it is one of acting ethically and in the best interest of your client.. the borrower. If a borrower can only get a high rate because of things he did to his credit and that higher rate gives a lender a higher fee.. then that’s the fault of the borrower for making poor choices.
However if the borrower is in good shape financially and the lender deliberately tells him he only qualifies for the higher rate to make more money.. that’s a lender who is not very ethical.. and I would never recommend him if I found out.
November 17, 2007 — 4:16 pm
Brian Brady says:
Kaye:
You bring up a good point.
If I see two identical homes on the market, same model, same age, identical lots and upgrades, and they’re priced differently, which one should I buy?
The lower priced home, of course. If the lower priced home is paying a 7% commission to brokers, and the higher priced home is a FSBO, which is the better deal?
Did the buyer who paid less for the identical home get ripped off even though the “wholesale cost” of the home is 7% less?
November 17, 2007 — 4:45 pm
Kaye Thomas says:
Brian,
To answer your question.. assuming they are the same house maybe he does get ripped off by the FSBO if his price is higher and he is not paying fees and the buyer doesn’t know that..then again maybe if the buyer has a choice and knowledge about each product he isn’t being ripped off no matter which he chooses… It’s all about what is known to everyone.. not what is hidden.. I think that’s the problem.. perhaps the borrower should have a choice.
November 17, 2007 — 7:26 pm
Robert Kerr says:
After being preyed upon for the last 5 years, consumers (and Congress) are demanding transparency and accountability.
Your offer: opacity.
This is a showcase example of why people outside of finance are just shaking their heads at the hand wringing and hear-no-evil, see-no-evil denial from those within the lending biz.
November 17, 2007 — 8:18 pm
Brian Brady says:
Okay, Kaye…work with me here.
The buyer does have a choice, in mortgages and real estate. In the end, for real estate, net price is the ultimate choice (net of terms). In mortgages, rates and fee are it.
Todd’s recommendation is not to be “secretive” to the consumer, it’s to stop confusing the issue.
A buyer, today, qualifies for a rate of 5.625% for a 30 year fixed. That loan is offered to brokers at 1% cost. The same borrower qualifies for a 30 year fixed at 6.5% with no costs and a 1% credit towards NRCC. So, qualification isn’t the issue; pricing is. Each bank (or broker) offers money (the product) at different prices. Bank of America is more expensive than I am; they have to pay for the stadium naming rights in Charlotee, a NASCAR sponsorship, bank lobbies, and loans to executives. So, they charge the consumer more for money than I do.
Disclosure of my profit is immaterial to the offering UNLESS I am hired by the borrower for exclusive mortgage brokerage services. In California, it’s illegal to do just that. So, if the consumer is forced to “shop” based on rates or terms, and we introduce a disclosure that is immaterial to that shopping experience, we can confuse the issue.
In the end, rate and costs are the real way to measure the cost of a loan.
Kaye (et al): If profit disclosure on a financial instrument is all important, wouldn’t it make sense for the banks to disclose the difference between their cost of money and the cost they charge the consumer?
In the interest of disclosure, RE: above loan example:
My wholesale cost of funds= 6%
BofA 2006 COF= 3.99%
http://media.corporate-ir.net/media_files/irol/71/71595/reports/2006_AR/financial_review_02_04.html#table5
November 17, 2007 — 8:26 pm
Brian Brady says:
Not opacity, Robert, and end to the prestidigitation and a focus on what really matters: the REAL cost of money
November 17, 2007 — 8:27 pm
Brian Brady says:
Robert,
If BofA lends $200,000 at 6.0% apr with a $4,000 profit (their COF is 4%) and I lend $200,000 at 6.25% apr with a $2,000 profit (my COF is 6.0%) who has the better deal for the consumer?
Is there anything opaque about that?
November 17, 2007 — 8:32 pm
Jillayne Schlicke says:
An average consumer can’t follow all these examples.
They just want to pay a fair price for help in obtaining their mortgage.
They no longer trust LOs to treat them fairly.
If they did, LO compensation would not be an issue.
The solution is to transform the relationship between the LO and the consumer, not to try and transform RESPA. The former, LOs have control over, the latter, will likely not happen in our lifetime.
Realize that Barney Frank’s HR3915 is an attempt to move in this direction by placing higher duties onto LOs.
November 17, 2007 — 11:43 pm
Brian Brady says:
“They no longer trust LOs to treat them fairly.”
I disagree with that statement, Jillayne. Some consumer mistrust originators as a whole. More think we’re the bomb.
November 18, 2007 — 12:03 am
Todd Carpenter says:
Like I said Brian… 🙁
The opacity would be there to keep people from walking through the glass. But YSP has been demonized so completely that my idea would never fly. At least not to a politician, or the misinformed public.
November 18, 2007 — 1:12 am
Robert Kerr says:
Not opacity, Robert
Yes, Brian, opacity:
November 18, 2007 — 11:24 am
Robert Kerr says:
RE: Jillayne, November 17th, 2007 11:43 pm
Very good! I agree with everything you wrote.
November 18, 2007 — 11:38 am
Robert Kerr says:
If BofA lends $200,000 at 6.0% apr with a $4,000 profit (their COF is 4%) and I lend $200,000 at 6.25% apr with a $2,000 profit (my COF is 6.0%) who has the better deal for the consumer?
There’s much more to a loan than APR and term, and you know that.
There’s a reason why Macs sell so well and why loyalty is so strong, and it’s not because they have a lower price or smaller profit margin.
November 18, 2007 — 11:41 am
Brian Brady says:
“There’s much more to a loan than APR and term, and you know that.”
Actually, Robert…I don’t. How else can you compare two identical loan offerings? If both offerings are for a $200,000, 30 year fixed rate loan, what other way is there to compare them other than APR?
How does disclosure of originator profits affect the ultimate price a consumer would pay for those loans?
Isn’t the better offering better regardless of the profits?
November 18, 2007 — 1:01 pm
Bob says:
Simple. By knowing the profit, the borrower is better able to negotiate.
November 18, 2007 — 9:23 pm
Brian Brady says:
OK, I can accept that, Bob.
Please answer the second question:
“Isn’t the better offering better regardless of the profits?”
November 18, 2007 — 10:22 pm
Bob says:
At some point profit is what I’m negotiating. By squeezing the profit I can better the deal.
Just like negotiating a car deal.
November 18, 2007 — 11:21 pm
Rhonda Porter says:
Bob, is this how you would select a Doctor or other professional?
November 19, 2007 — 9:01 am
Bob says:
It is how I buy a car and many other products. A loan is a product.
November 19, 2007 — 9:33 am
Bob says:
Brian, I guess I didn’t actually answer the question. Yes, if the same loan is provided to my client by LO A for less than what is offered by LO B, then it doesn’t matter what profit LO A is making. But since YSP is disclosed, it does allow a savvy consumer (or a consumer with a savvy agent) to negotiate the best deal possible.
I see it exactly like buying a car. Car manufacturers all dictate to dealers the MSRP and rebates, so on it’s face, the deal for a specific model should be the same, but it’s not because there are other factors that dictate profit to the dealer. The consumer gets the best deal by taking as much profit from the dealer as possible. The longer the car has been on the lot, the less profit to the dealer. Find the same car at a dealer who got the car yesterday and you can negotiate a better deal.
Lenders tend to not understand that the symbiotic relationship that exists between agent and lender has to be subordinate to fiduciary.
November 19, 2007 — 9:50 am
Russ Martin says:
Bob:
If you are getting the lowest rate offered to you by calling around, why would you attempt to negotiate the YSP? You could negotiate yourself out of the best loan.
Broker A offers you 6.0 with 1% in YSP.
Broker B offers you 5.75 with 2% YSP.
Why does it matter to you that broker B is getting 2%? The fact he is getting you 5.75% which is lower than any other option you have warrants his 2% premium at the end of the day. Try to negotiate with him and you could negotiate yourself in to a more expensive loan. You either want the loan or you don’t.
Shopping for mortgages based on YSP is RETARDED. The lowest YSP does not equal the lowest rate. This is why the upfront mortgage broker movement never caught on in massive numbers. With mortgages, being upfront only guarantees the brokers/lo’s compensation but does not equate to the lowest interest rates. Most consumers are smart enough to figure this out.
YSP is nothing but a red herring by those who don’t have to disclose to make cheaper loans look more expensive (big retail mortgage bankers). Todd has the right idea. No disclosure for everyone. All that matters is rate and fees.
Better yet, why don’t we just make ALL business disclose their profits? Wal-Mart, Starbucks, GM, BMW, Dell, McDonalds. In fact, let’s just make our economy one big third world bazaar so you can negotiate everything. THe government can mandate legal disclosure of an entities’ wholesale cost and next to the retail price clearly show their mark up.
November 19, 2007 — 1:40 pm
Bob says:
I’m not attempting to negotiate the YSP.
November 19, 2007 — 4:52 pm
Brian Brady says:
“Lenders tend to not understand that the symbiotic relationship that exists between agent and lender has to be subordinate to fiduciary.”
Oh, I get it. As long as banks don’t disclose their profits (which one can see is far greater to a broker’s), YSP simply confuses the issue.
For example, you Bob, as a fiduciary to your client might suggest that the YSP I’m receiving is unreasonable (in your role as a fiduciary). However, if BofA were the only other option, and their terms were inferior to mine, you might negotiate your client out of a good deal-unless you were a savvy agent (which you are)
However, you and I (and most readers here) are not the norm. One of the few places where this conversation can intelligently takw place are BHB.
November 19, 2007 — 6:50 pm
The Uptight Mortgage Guy says:
Firstly, no disrespect intended, when a broker starts loans his banks own money, he can complain about disclosure. I understand some brokers have bank backing, but, for the others, suck it up.
Secondly, the non disclosure idea is great in theory, but, does not take into account the fact that over 30% of minority first time buyers do not shop around for mortgages. Pretty much, they are at the luck of the draw.
At least give the poor souls a chance. By the way, I dislike the proposals, I just hate the standard ” We have to disclose, but , the bank doesn’t crap.
November 20, 2007 — 4:12 pm
Rhonda Porter says:
Uptight, the only thing that I don’t like about brokers having to disclose and banks not, is that in the case of both sources offering the same rate, same costs; the mortgage broker has the possibility as seeming like a schmuck when the banker may be making the same dough on the back end. It’s misleading to the consumer and not a good way for a consumer to select a Mortgage Professional to work with.
November 20, 2007 — 4:32 pm
Brian Brady says:
Uptight,
Do you think the “poor souls” understand the YSP?
Do you think say…Wells Fargo should disclose their cost of funds (about 3.88% from the last annual report) alongside the rate they charge the consumer or do you think that would be confusing?
I think that sort of disclosure would be helpful to a consumer, don’t you?
November 20, 2007 — 5:12 pm
Bob says:
Consumers are not looking for a lender, they are looking for a loan.
Not at all. I am not making a judgment about your profit.
There are always more options. It simply comes down to cost. You guys are so defensive that you are missing the point. I am not negotiating anyone’s profit. I am negotiating the best deal possible, and that means squeezing where I can squeeze.
If you have better pricing than BofA or any other lender/broker being shopped, then the YSP is a non issue. If your terms are less than or equal to, then YSP is my target if you’re a broker.
If it’s down to CW vs BofA, then I’m still grinding to see who wants to do the loan.
In our flat lining San Diego market, sales reported in the MLS for October were under 1300. That’s about 100 less than September. November will be worse. That isn’t a lot of loans. If I have a qualified buyer, more than a few will play “Name That Tune – The Lender Verion”.
With apologies to Russ, “You either want to do the loan or you don’t”.
November 20, 2007 — 8:58 pm
Brian Brady says:
“If I have a qualified buyer, more than a few will play “Name That Tune – The Lender Version””
I think you have it backwards, Bob. Qualified buyers come with loans in tow.
You get it, though- most don’t.
November 20, 2007 — 9:21 pm
Bob says:
Some do, but even then they are not married to them. Two in escrow now came with loans in tow, but those loans aren’t going to be the ones that get funded. FWIW, YSP never came up.
The typical agent pitch to a buyer is that they’ll get them the best deal, usually meaning price. They forget that just as important as price is cost.
Brian, we need to grab a cup of coffee sometime soon.
November 21, 2007 — 11:03 am
john says:
Bob,
“loans are a commodity”
same could be said for real estate agents…..if they shop me for my loan profit..why not “squeeze” as you said it…the agents commission?
Seems fair to me
November 28, 2007 — 3:15 pm