Hate Mail

Last Tuesday I published an Op-Ed in the Boston Globe about mortgage companies that pay brokers to sell higher priced mortgages to customers. (E.g., a customer qualifies for a 6% mortgage, but the mortgage company pays the broker a higher fee to sell him a 7% mortgage.) I called the payments "bribes" paid by the mortgage companies to the brokers to boost mutual profits at the expense of the homeowner. I was in good company. The Vice-President of the Fannie Mae Foundation called them "kickbacks." After the op-ed was published, I was flooded with hate mail. It was so bad that when there was no let up by the end of the third day, I thought I might have to change my email address.

Some of it was funny ("your stupid"), weird ("I thank God my son went to BU instead of Harvard"), or silly ("you must be a Communist"). But most of the correspondence fell into three main buckets:

• This never happens; you are making this up
• This happens sometimes, but it is a few-bad-apples problem
• We all do this; it's how we make money

There were some very thoughtful comments. Several brokers correctly pointed out that the banks have ways of doing the same thing, but it is even less visible. Others said the disclosure has become a bad joke that doesn't help anyone. The most interesting letters were from the ex-brokers who said they couldn't stand making money by jacking up mortgage rates for families already stretching impossibly hard to buy homes, so they quit.

A letter to the editor was restrained by the standards I've seen on my email. The president of a mortgage company made two points: Only a small number of brokers do this (Bucket Two above), and it is all disclosed up front. (I checked with another broker today who said that the full YSP is not disclosed until, at most, 24 hours before closing, and then only if the buyer knows to ask, and nothing in the disclosure links the payment to the broker with the fact that the rate is higher than the one the buyer would qualify for).

The letter also argues for Buyer Beware Big-Time. It seems that it is the customer's responsibility to police the broker to make sure the broker isn't cheating.

If you think the practice doesn't happen, look at a rate sheet and explanation.

I don't have any data, but I'm willing to believe that the practices I described are not the norm and that most brokers are ethical agents. But shouldn't the ethical brokers want regulations that shut down the unethical brokers? Why be forced to compete with someone who cheats? And why not work to build a good reputation for mortgage brokers everywhere?

Comments

[AJ]

There are also 3 huge fallacies in Ms. Warren's attempt at an expose:

1) The mistaken assumption that Subprime lenders give more YSP than a Prime lender, which is absolutely 100% false.

2) The mistaken assumption that any lender gives more than 3% in YSP.

and, most importantly...

3) Posting a Rate Sheet as 'evidence' without knowing how to read one. Now, Ms. Warren, the burden is upon you to explain to the public exactly what you are hiding from them... 'Rate Hits'. These are adjustments that SUBTRACT from the YSP a Broker can get, even such as to nullify it completely. You, of course, failed to mention this when you offered up that sheet for viewing. My guess is because you either DIDN'T KNOW or DON'T WANT ANYONE ELSE TO KNOW. Either way it affects your credibility on the matter as you are either badly uninformed or just being a sleazy amateur journalist looking for an angle.

You are doing nothing more than blaming a preacher for an expensive wedding, when the blame is actually upon the two people who decided to go through with it by saying "I do".

[Jeff]

Did you, or should you have, consulted with the Massachusetts Division of Banks to educate yourself and your target audience of the mandatory disclosure we, as brokers, provide every client with?

For example: The “LOAN ORIGINATION AND COMPENSATION AGREEMENT”. Here is the exact language on this disclosure word for word:

SECTION 2. OUR COMPENSATION. The lenders whose loan products the Mortgage Broker distributes generally provide their loan products to the Mortgage Broker at a discounted interest rate.
- Your interest rate, points and fees offered to you by the lender may include our compensation.
- In some cases, the Mortgage Broker’s compensation may be paid by either you, or the lender, or some combination thereof. For example, in some cases, if you would rather pay a lower interest rate, you may pay higher up-front points and fees.
- Also, in some cases, if you would rather pay less money up-front, you may be able to pay some or all of our compensation indirectly through a higher interest rate in which case the Mortgage Broker will be paid directly by the lender.
- The Mortgage broker may also be paid by the lender based on services, goods or facilities performed or provided by us to the lender.

In my experience with working with Massachusetts borrowers, when given complete explanation with a written breakdown including pros and cons to the scenarios, most would opt for not paying any fees.

When reading the language of the disclosure it seems pretty straight forward wouldn’t you agree?

Giving them a choice is my responsibility. Explaining in complete detail is my responsibility.

Why wasn't the main point of your article about trying to help consumers with their choices like we do with our clients everyday?

There is no one loan program that is right for all borrowers. Everyone's circumstances are different. Everyone's goals are different as well.

Just yesterday I was able to obtain an interest rate of 1/2% better from a National Lender on the wholesale side versus what they had put into their print advertising on their retial side. The same product from the same lender but at considerable savings. The broker has to disclose all fees but the retail would not. If access to the broker channel was not available, the only choice would be the higher rate and your article would ensure that they would be receiving loan terms that are far worse.

[Dan]

Mortgage brokers are thieves everyone now knows this or should. Too bad they had a good thing going but got way too greedy and now we have a housing Bubble Pop and the Government is going to step in and Regulate it. let me now how that works out for you all ?

[Thor E. Smith]

Ms. Warren-

Well, you got one thing right.

"I don't have any data,..." That was the brightest thing I have seen from the two writings of yours I could stomach reading. You are probably asking yourself, why are all of these people condeming me so much. You cast the first stone Ms Warren. Look at yourself in the mirror. You obviously don't know what on earth you are talking about. You obviously don't do research before spewing garbage about a topic you have no knowledge of.

By the looks of what you wrote it looks like you needed to meet a quota of "published" articles for the year and heard something on the news about mortgage fraud and thought you would write it.

By what your thinking is, you are the "bad Broker" of the teaching profession. You are exactly what you are labeling us brokers as. You are worse because you are using a position of percieved authority and knowledge to project some underlying personal motive. How is what you do any different than what I do? PLEASE tell us this. How is it different to get paid a high fee (salary) to put people in a worse knowledge base than they were previous to taking a class from you. If you teach anything like you write (with "no data") then why should you get paid a fee for that? You are taking advantage of the people that take a class from you.

If you think it is so important to disclose what I make for a living, then why don't you post what YOU make for a living? Let's have it! How much? What is the difference? I'll tell you the diference, I DO disclose how much I make on every single client. I tell them directly that the bank pays me a fee to place loans with them. I make money on YSP. Not on every loan, but on most. And, when I do I let my clients know that and I disclose it up front! You are no different than anyone else except for your arrogance.

As I have stated in previous emails, you should truly be ashamed of yourself

Thor E. Smith
Matcom Mortgage Consultants
Edina, MN

[Steve Dibert]

Dan,
Do you know how ignorant you sound? Obviously, your a student of Ms. Warren's or been smoking the bud in corridors of Harvard.

[Bob Lawless]

As the blog administrator, I wanted to jump in and encourage vigorous, civilized debate. Please keep in mind, however, our policy on comments:

"Comments are open. Individual blog authors may decide not to allow comments for all or some of their posts. Readers are welcome to post their comments, and we welcome open debate. We will remove comments that we find inappropriate such as comments that are profane or vulgar, commercial marketing, ad hominem attacks, or nothing but inflammatory rhetoric. We get very few such comments."

Please respect this policy.

[K]

K-

I don't know what is so funny about people from other professions choosing to work as a mortgage broker. The surgeon you doubt focused almost entirely on working with doctors as his client base. Most successful mortgage brokers are able to establish very good relationships with a circle of influence.

Who do you think doctors are more likely to work with on their home purchase? The guy that is a Doctor and decided to pursue residential finance as a career OR the used car lot guy hawking mortgages? And yes, a successful mortgage broker can make as much if not more than a surgeon.

Once again, personal attacks and no ability to refute the post on this blog. Pathetic.

[Jay]

Professor,

Selling rates are same as selling any other goods. Brokers "buy" rates at wholesale price then sell to consumers. Just like Wal-Mart buy goods at wholesale price from China. Does Wal-Mart disclose how much profit they made to consumers? = YSP I don't think so. You should be praising brokers for showing the customers how much profit we made. Should the customers get Par rate where brokers get no YSP = no income? Should you teach students without getting paid? Should any business sell goods to consumers at what they paid for?

Teach me professor...

[mickey]

Perhaps Ms. Warren doesnt realize that I will be paid the same for an Arm as I would for a fixed rate mortgage. However the rate on the arm would be lower. SO the borrower decides which payment they prefer.

I'm, referring to 3/1 and 5/1 arms.

Not option arms.

I think option arms are a big problem as it appears that some lenders did not disclose how they actually work.

Maybe that is what you are trying to say but it sounds like you needs to spend a few years learning your products and guidelines.

[BG]

FYI in the future maybe you should learn more about a subject before you write about it . Considering you look like a fool.

[Ray]

Ms. Warren,

I think one of the reasons for the volume of hate mail and phone calls you received was due to your decision to use the term “bribe”. Well, your lack of research or clear understanding of the topic didn’t help either.

Unfortunately, although I’m sure your article was meant to inform, you really did not do a service to the general public. Had you actually spent the time to understand and then explained how rates are determined, and what rates a person may be eligible for, based on their specific and unique situation, you would have gone a long way toward helping consumers, and I believe your effort would have been applauded by most in the industry.

However, your article did a great disservice to people in the mortgage industry, and consumers in general. Yes, there are bad apples in the mortgage industry as there are in any industry. Painting everyone with the same brush is really just wrong, and shows a true lack of understanding or intelligence.

I hope your article doesn’t drive consumers to banks with higher rates, simply because the banks were not painted with the “bribe” brush in your article (although you hopefully understand by now that banks are similarly compensated). But, it may harm many good mortgage brokers who are doing good things for their clients, and simply trying to support a family.

I think you have an opportunity to elaborate on how mortgage brokers and bankers are compensated, and inform the public at large, so the public can fully appreciate and understand how a mortgage rate is determined and what rates a person may be eligible for based on their specific and unique circumstances. I’m certain you can find good information from the state bankers association, and the National Association of Mortgage Brokers, should you really want to understand and educate.

In fact, I challenge you to do the right thing and take this step. But, I suspect you will not. Hopefully, it’s not a “bribe” or pride keeping you from truly educating rather than inflaming.

[Seth Ramsey]

In response to David Boyd: That wasn't my quote. I believe you mistook "Bob's" quote for mine. My quote is the one above. Don't worry David, I too have a college education and am on your side. I appreciated your enthusiasm though.

[Wayne Timothy Rubis]

Ms. Warren,

Really? I am at a loss for words. It's honestly people like you that mislead the public with almost every public statemetn you make. You are the sole reason why socitey is the way that it is. Please I beg of you to take off the horse blinders and really look around. Its amazing how ignorance is bliss with you and maybe it's you that needs to find another calling in life. YOU WILL NEVER GET IT!!

-Wayne

[Mike]

Be careful what you ask for, you just may get it.

It's a no wonder citizens of this country don't actually vote for the President, because you don't know enough to be trusted to do it.

Learn what YSP is and how it is used before you make dumn comments, because without it, you WILL PAY A LOT MORE IN FEES IN THE FUTURE. Be careful what you ask for, you just may get it.

When I hear "your gravy train is over" and "down with the mortgage people", it really is sad. You really have no idea what you're talking about.

Do you not understand what drives your Real Estate prices up? Lack of mortgages surely won't be doing it. Be careful what you ask for, you just may get it.

Where where you crying out when your homes doubled in value over the previous 5 years?

Where were you when every American in the Country had the ability to purchase a home?

Why didn't you cry out then?

I'll tell you why. Because you were enjoying it then.

You were enjoying your rise in equity.

Be careful what you ask for, you just may get it.

[Jeff E]

E.g., a customer qualifies for a 6% mortgage, but the mortgage company pays the broker a higher fee to sell him a 7% mortgage.) I called the payments "bribes" paid by the mortgage companies to the brokers to boost mutual profits at the expense of the homeowner....

Good stuff. The other day I went to breakfast and they charged me $9.00 for steak and eggs but didn't outline on the receipt how much the food companies bribed them.

[Carlos]

Mrs. Warren and any other broker haters.
You guys obviously do not understand how our business work, and what the difference is between an ARM and a fixed rate mortgage. you have no clue what the rate sheet means and what the guidelines are as to know who qualifies for what program. there are many factors besides a credit score to determine the risk of the borrower and what program they qualify for.

As far as the YSP, it is to minimize the borrowers closing cost to keep them under the LTV they qualify for or to not make them bring money to the table because they don't have it. We either get paid from the borrower up front...resulting in a lower rate. or he doesn't pay any points and the lender will compensate us with the YSP. it's all up the borrower whatever gives them the best monthly payment...after all a borrower does not shop for the rate, they shop for a lower monthly payment. Nobody wakes up in the morning saying "I want a lower interest rate" they want to save money by getting a lower monthly payment. i.e a 15 year fixed mortgage rate is at 6% as oppose to a 30 yr. fixed at 6.25% or even a 40 yr. fixed 6.5%. If you think the 6% is going to give them the best payment, then you obviously don't know anything about how mortgages work, and you should just keep renting.

[Nate]

When Demand = Supply there you will find the price. Money is no different. The cost of money will not be cheapened by abolishing YSP. If you know the industry, an article like this should not threaten your business. It's simply shocking to find that a Harvard Educated Professor is less knowledgeable than most of my clients. Ms Warren, the only problem with the lending industry is the absence of quality information and your article is proof that you lack the knowledge and resources to properly inform mortagors. With all the competition in the industry, apart from outright fraud, the only thing that separates the men from the boys is sales ability, and thats what this country is built on. Though I admire your intent, I'm selling the empty wisdom

[victor]

All I can say to the mortgage broker industry, is that the truth hurts. Ms. Warren's article does not condemn the entire industry, but a portion of it that takes advantage of the borrower, and is not doing the right thing for them. There are many things responsible for the recent fallout in the market and rogue, shady, dishonest mortgage "brokers" are just one of them. Similar to the thousands of unsavory and uneducated people who became stockbrokers in the early 90's. They lied and cheated customers until the market came to a boil and filtered out the rogue element within the industry. Prison terms and large fines followed. It wasn't the entire industry, just a portion of it who went out there and made 100's of calls a day to unsuspecting investors. It's funny how a majority of those people are now or have worked in the mortgage business. Preying on indivuals with bad credit and more than happy to do loans with large "rips."

Ms. Warren's article touches on a part of the industry that some brokers take advantage of. Plain and simple. Once again, the truth hurts. Seth is right on point when he says you should stand by the article.

[G Friedman]

It amazes me that every company is allowed to make a profit, EXCEPT the mortgage broker. Just like every other business, the consumer has the right to refuse to do business with a company that he/she feels is overcharging him/her. Quite often, I as a shopper will look for the same item for a lower price at 2 or 3 different stores. Did you perform due diligence when "researching" for your article, or did you merely use the points that confirmed your thesis. Upon seeing these responses, do you have any inclination to amend your opinion, or, like most academics, do you fear to admit that you may have made a mistake? There is a word for people who go off half-cocked and draw conclusions with little basis in fact, in order to scare the masses- Republican

[Jamie]

The thing is Victor, she mentioned none of that. She is completely unifnormed. This is one of the most hilarious articles I've ever seen written. Its pure Michael Moore material its so radical and uninfomred

[victor]

She's not required to do so. This was an Op-Ed piece. If anything, getting rid of all these unsavory people in the industry will help the majority of mortgage brokers in the long run. All of a sudden everyone is the ACLU and are so offended by the name she could be giving the mortgage broker industry. Yet most of the posts rip into attorney's. The bottomline is that any intelligent person knows there are good and bad in every profession. It's just when it deals with money and probably the largest purchase decision you will ever make, it becomes a sensitive issue. Go buy a box of tissues, wipe your face and go back to work.

[Brian]

Seth and Nate, hope you got a good grade on your homework (the ridiculous posts above).

Please, never buy a car (the local dealership doesn't pass the rate on to you they get from their lending sources). I assume that all finance officers at auto dealerships are guilty of soliciting brides as well, since the practice is identical. I'm sure that all banks disclose the difference between the rate charged when THEY borrowed the money and the rate at which they lent it to you. Credit card companies disclose your interest rate they charge YOU, but never what never the true rate you qualify for (on that specific day) before the bank marked it up.

I proofread my twelve-year-old's papers before he turns them in, and they have never been as extremely misinformed, blatantly biased and factually inaccurate as the op-ed piece your SIGNED YOUR GOOD NAME beneath.

[William]

Ms. Warren, According to RESPA all Yield Spread Premiums charged must be specifically identified on the Good Faith Estimate and provided to the consumer within three business days after the receipt of a full application by the originator. Anyone who has not followed this procedure has definately broken the law and should be considered shady at the least. However, I can't control a consumers accuracy to information or the fact that they may ignore my initial requirements not to quit work, not to open new credit and to be totally honest and accurate on the initial application. If they are not accurate then I cannot promise my closing costs to them and probably have to shop them to another lender if i locked them into a rate based on their initial information provided to me. There are many legitimate reasons why rates and fees change during the transaction but only if the consumer needs a different program or has not been totally honest at time of the application. Any other changes are to costs with full disclosure at least a few days before the closing for review is unacceptable and illegal based on Federal Law anyways. Those brokers and originators and even lenders who have practiced this should not be in the mortgage industry and should be prosecuted fully.

I would think that 80% of the mortgage brokers and originators under the brokers license have no formal training at the larger federal regulated mortgage banks like I have. If they had that type of experience most would be able to provide an honest and accurate Good Faith Estimate upfront like the law requires and not change anything unless outside circumstances caused such change like the consumers inability to provide loan accuracy.

[Harlan M Cooper]

My objection to Ms. Warren's Op-Ed piece is that it mischaracterizes YSP and how it is typically used in the mortgage industry. What consumers ultimately pay for their home financing should be the focus of anyone truly concerned about their best interests. Not how much compensation is being paid to those who help them obtain that financing. Ms. Warren's perspective, as I understand it, is that lenders' payments to brokers in return for higher interest rates result in higher costs to borrowers. This focus on the compensation to brokers rather than the cost to consumers is the Achilles' heel of her argument. And proof that this focus on broker compensation is ultimately bad for consumers is contained in studies done by the FTC in conjunction with HUD efforts to reform the disclosures used the the mortgage process.

Here are some links to the FTC:

http://www.ftc.gov/be/consumerbehavior/docs/LackoPappalardo.pdf
http://www.ftc.gov/opa/2004/02/mortgagerpt.shtm
http://www.ftc.gov/os/2004/01/030123mortgagetextofrpt.pdf

At the April 20, 2007, FTC Behavioral Economics and Consumer Conference, James M. Lacko and Janis K. Pappalardo, economists for the FTC, presented their research on consumer behavior with regard to the disclosure of YSP in the mortgage process. Some of their findings are:

When presented with a less expensive loan from a mortgage broker compared to a more expensive loan from a direct lender, 9 out of 10 times the consumer can identify the less expensive loan. When presented with the same loan options in conjunction with disclosures that emphasize the broker's YSP compensation only 2 out of 3 consumers were able to correctly identify the less expensive option. Their conclusion is that the emphasis on broker compensation in consumer disclosure can lead to "significant anti-broker bias that may have anti-competitive effects on the mortgage loan market."

Brokers often provide less expensive financing to consumers compared to well known national banks and lenders by marking up wholesale interest rates from those lenders to obtain YSP payments and offering those financing options to consumers at rates and fees that can be often be less than what the consumer would pay if they obtained that same financing through the retail branches of those same lenders. Consumers are free to shop at mortgage banks or mortgage brokers and there is a reason that more choose to get their financing through mortgage brokers, and it's not because it costs more. It's because 9 out of 10 times a consumer can spot the less expensive financing option if not confused by the red herring of mortgage broker compensation.

[Vanessa Powell]

You are in the legal field. Please stay there because apparently you have no idea what you are talking about. I HIGHLY doubt that you received any type of emails from such individuals. "The most interesting letters were from the ex-brokers who said they couldn't stand making money by jacking up mortgage rates for families already stretching impossibly hard to buy homes, so they quit." Because it's a choice if brokers want to receive YSP or not. There is something called a par rate and there is also something called making a living. I would love to hear what you suggest we do. Do you suggest that we don't receive YSP and we just charge the client origination so we are really taking the money out of there pockets?!?!?! The banks funding the deals are going to make far more money in the long run then a broker ever will. The bank funding the loan is charging an interest over the full loan term. Have you ever looked at a banks TIL? That's a TRUTH IN LENDING in case you didn't know. The lender provides that and let's say you have a loan for 600,000 you will have given the bank almost 1,000,000 once you've paid off the house...I'm sorry...WHO's BEING predatory? I don't see what you are suggesting here. I have seen several of the emails that were written to you as MANY mortgage brokers read your little article. And I don't think you read ANY of them. Because there we're several points made in those emails then and now as replies to your little rebuttal. And what I see is several Brokers providing you with facts and knowledge about our industry...we're doing your work for you since you apparently seemed to do such a poor job at it.

Next time...remember mortgage brokers aren't the ones who came out with the loan programs, terms, rates. Remember that.