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Hate Mail

posted by Elizabeth Warren

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

It is interesting how differently both sides interpret the "yield spread premium". As a renter and a prospective home owner, you know which side I am on !!

As a novice, where do I go to educated myself about mortgages? I am looking for an independent, non-biased source with serious number crunching examples. I heard good things about the book by Randy Johnson "How to Save Thousands of Dollars on Your Home Mortgage".

Any pointers / references would be greatly appreciated.

thanks.

I still dont think you got it.

If my borrower gets a quote from Bank of America for a loan at 6.75% and I can get him the same product at 6.50% and the lender I broker the loan to wants to pay me a point on the back end, who cares so long as I got the borrower the best available rate?

Having brokers disclose YSP is like asking Wal-Mart to put their profit margin on all the items they sell. I don't understand why it is so hard to understand that YSP is how a loan goes from WHOLESALE rate to RETAIL rate.

Consumers are going to pay either points, YSP, or a combination of both. A loan without YSP does not exist unless the consumer is willing to pay significant points on a mortgage (most are not). Paying points to get a lower rate does not always make sense financially.

Please let us know how brokers disclosing YSP benefits consumers? If I am making 2 points on a loan at 6.5% and competing lender is making just 1 point at 6.75%, how is a consumer better off by taking the loan with less YSP? If the consumer shops for a mortgage and my 6.5% is the BEST rate they are offered, why does it matter that my YSP is 2%?

Brokers cannot inflate YSP in a competitive market (i.e., the consumer aggressively shops for a mortgage). It simply is not possible. If a broker is trying to make 3% in YSP on a transaction that most reputable brokers will do for 1%, ONE PHONE CALL to a competitor will uncover this just as if Best Buy is over charging for a Flat Screen TV, a quick call to Circuit City will uncover it.

Brokers are upset with your column because it completely misrepresented the facts as to how brokers are compensated and how the wholesale mortgage channel works. Your column was like someone writing that all attorneys only care about billing for hours that aren't worked or will file frivolous lawsuits to make defendents settle since it cheaper than defending themselves in court. Oh wait, there are some attorneys who do these things... maybe we should have investigations into how attorneys are compensated? A wet behind the ears Harvard law grad just out of school and no real work experience really can't be worth $160k per year?

Most brokers have absolutely no problem disclosing YSP because at the end of the day, most consumers could actually careless as what matters to them is not what I am earning in compensation, but what their final interest rate and fees will be on the loan.

Miss Warren,

Politely understand that you JUST AREN'T GETTING IT!

You're treating YSP like it's a bad thing. There's an alternative to YSP and that alternative is that clients pay all the fees at the closing of the loan. 70% of the purchases in the Unites States wouldn't have been possible, over the last few years, without YSP. It's a way in which the BANK can pay the borrowers closing costs. It's what enables mortgage brokers to get paid for what they do, without the client having to foot the bill.

Please understand just how ignorant you sound to those that do this for a living. If you want to educate yourself, take a few years of your life and LEARN by DOING. Don't catch wind of some fancy acronym (YSP) and automatically draw fire. It really makes you look foolish.

Kindly,

David Kendall
Remken Financial Corporation
Mortgages/Project Funding
Domestic and Abroad

Ms. Warren, it obvious, your "hate mail" was an effort by professional in the mortgagebroker business to educate you on how yield spread premiums actually work. Yes, it is monies paid as compensation to the broker, but also in many cases the ysp is used to help a cash poor customer pay for closing costs on their first home purchase. Likewise it is the mark up between wholesale and retail. Same as any toher consumer product.
Is your paycheck to write your "op-ed" cloumn a bribe? Is the difference between what walmart pays for a gallon of milk compared to what they sell it for considered a bribe? I think not. You have joined the rest of the panderers that want to villify brokers.
I'm very disappointed that an educated professional can't seem to wiegh all sides of a story. What you consider "hate mail" wouldm be considered by open minded folks as constructive criticism.

Feeling the pressure so you're ready to cave in?

Regarding your post, Forget about #'s 1 and 2, they do not apply to mtg. brokers. I would say that 99.9% of ALL mtg. broker originated loans have a rebate paid out. These aren't little bribes, they are 100's,$1,000s and many times 10's of thousands of dollars. These are additional fees for no more than 4 total hours of work. These people have no skills, minimal training, little education,(certainly not a finance or business degree). Many have a high school education or less, terrible credit, a BK in their history, and 0 brains. Do borrowers realize that they are paying these people $1,500.00 and more per hour to make a couple of phone calls, take a 1003, and send it through an AU system! Go to the broker blogs and read things like, " I can't wait to do FHA loans because I can charge 7% rebate".

I'm not a mtg. broker but I make my living selling them products and services. I've worked with these idiots on a daily basis for 15 years and can attest to the "dumbing down" of the industry.

Hey mtg. brokers! If you think you add any value RE transaction, why not elimnate the YSP, guarantee a closing cost total, and charge a fair origination fee. Make it all binding and totally visible. If you are worth all that you claim you are, people won't mind paying for quality fair service. You don't need to hide.
Ya I suck but guess what, it's going to be the law of the land real soon. So it's back to Walmart for you.

Elizabeth, you wrote a great article. It's too bad that you don't have the guts to stand by it.

Russ and David,

I think I'm about to puke.

Now tell us Russ and David, how many "stated income" loans have you done over the years for W2 borrowers? If your answer is 0 then we might believe what you have to say otherwise...
the gravy train is over for you guys and Angelo too.

Yield spread is a way for a broker to offset fees charged to the borrower at closing. Retail lenders to the same thing. They just don't have to disclose it. Brokers routinely provide their customers with more choice, better rates and superior customer service.

Ms. Warren, did you read what you wrote? You made a very insightful statement about yourself, "I don't have any data..."

Mr. Seth Ramsey, I am a mortgage broker. I have a BS in Business and a MBA degree. I spend anywhere from a few hours to many days or weeks working on a specific transaction depending upon the complexity of the deal. I complete many hours of continuing education every year. My pay is often "cut" due to state regulations which federally chartered bank, S&L's and credit unions do not have to abide to. By the way, I also have a credit score above 800.

Professor Warren,

You make me glad I never went to Harvard. Your Op-Ed piece shows you know nothing about banking or how money flows in this country. I won't go as far as calling you a communist but you are ignorant about economics (it's apparent you failed Econ 101) especially for a professor at one of this country's premier universities. If you are passing your ignorance on to the best and brightest of this country, then we are surely doomed to go the way of the Roman and British Empires. The later by the way, developing the current lending structures that most banks use such as the LIBOR Index. You do know what that is don't you?

What you don't get, is banks do charge YSP or an SRP. The difference between the bank and the brokers who is the bank doesn't legally have to disclose it. Mortgage Brokers at least have to disclose that it's there and we receive it. Banks have been doing it that way for over the last century. So what brokers do is no different then banks.

As mortgage brokers, we deal with a lender or a bank's wholesale division. Unlike when you walk into a bank you are dealing with their retail division. What you neglected to mention in your Op-Ed piece is that when a mortgage broker charges that 2% Yield Spred Premium it is generally an eighth to a a quarter point lower than the bank's retail rate. As an experienced mortgage broker, I can generally beat any bank's retail rate and I do it on a continual basis.

In your Op-Ed piece you blamed mortgage brokers for the current mortgage crisis. Again, it shows your ignorance about American economics. Do you have any idea how mortgages work in this country? Brokers sell products offered by lenders who then sell these loans on the secondary market. They sell them to servicing companies that are either run by the major banks or by private funds which borrow the money from pension funds, hedge funds and mutual funds. There was a demand on Wall Street for mortgages and the American consumer was happy to oblige. In the September 24th issue of Newsweek, which I read while taking my morning constitutional, former Fed Chairman Greenspan said when asked if brokers were responsible this crisis he responded, "You had Wall Street securitizers basically then talking to mortgage brokers saying, 'We'll buy what you've got.'...The big demand was not so much on the demand of the borrower but on the part of supplier." In other words, if Wall Street didn't offer these programs and the debt ridden American consumer didn't want them, I wouldn't be able to sell them.

In the late 1990's, lenders offered 125% financing to people with C and D credit. People refinanced their homes in droves and the foreclosure rate quadrupled. But no one said a word in the corridors of Harvard or in the editorial boardrooms of the Wall Street Journal or the Boston Globe. Why? Because all of this was all unimportant because property values were increasing 10-40% annually depending on what part of the country you were in. Money was cheap and people wanted to cash in. The common man began to believe the Gordon Gekko mantra of "Greed is Good!" They bought the big house, the plasma TV, the BMW. All of which was leveraged against the home. The home that was just a shelter, now through the creative wonders of marketing could now serve as your personal bank. But while the consumer was living the lifestyle that would make even Robin Leach envious, there was a problem in the midwest. This problem caused property values to plummet. Homes were fully leveraged. The consumer couldn't refinance because their values were gone. This caused foreclosures to increase tenfold. This created a cascading effect across the country which caused the housing market to crash.

This problem was simple. Manufacturing jobs and other jobs were being outsourced overseas and oil prices began to increase. The two major weaknesses of the American economy. We don't want to produce anything here any longer and we are dependant on foreign oil. That and the fact that the glutonous American consumer has turned our god given right of the pursuit of happiness into a nightmare. We have become a nation of spoiled and morbidly obese children demanding immediate self-gratification. The comsumer is as much to blame for this crisis as Wall Street is and no self-imposed or federal regulation would have stopped this crisis from happening. The late Canadian Prime Minister Pierre Trudeau once said, "It is not government's responsibility to regulate morality or to regulate sin." If I remember Sister Mary's teaching from my second grade catecism class, glutony is one of the seven deadly sins.

Steve Dibert


Bob:

I will gladly put my resume up against yours any day. I have a undergrad business degree as well as a MBA from arguably the best business school in the country. I also have a number of years working at very prestigious consulting firms. In my office, we have former attorneys, traders, surgeons, corporate execs who are top producing mortgage brokers.

While I am sure you have dealt with some of the used car lot types, realize the vast majority of us are not like that and are very well educated and look out for the well being of our clients.

It sounds to me like you are jealous since you can't hack it as broker. Just so you know, I can count on one hand the number of stated income loans I have done over the past five years. I have never had a loan go into foreclosure either.

I find it amusing that you can't address the points that have been made logically or factually, so you just resort to personal attacks.

Ms Warren,
As many of my colleagues have mentioned, you still obviously just don't understand finance or economics. What difference does it make if we are making money on Yield Spread, if we are still giving clients a better deal than what they would get at a bank?? If you would understand the concept of retail vs. wholesale, you may get this...but judging by how you have yet to even come close to grasp the concept, I doubt it. So, even though clients could go to say a retail bank like Countrywide, Wells Fargo or someone along those lines, and pay 6.75, with nothing disclosed, because its SRP, and we could take the customer through the SAME lender, only on the wholesale channel, make 2 points YSP, and still beat the rate, with the SAME lender..we are doing the client wrong??? Please explain!
By that theory, car dealers should sell cars at the same price they get them from the auction. McDonalds should sell cheeseburgers at the cost of production, and Wal-Mart should do everything at cost! Do you see why you are getting the communist comments??

As for Seth, I do have a BS in Finance. I'm guessing by your response, you really know nothing about doing a loan for a customer whatsoever. But you did say you sell services to us...were you the guy that stopped by trying to show us your vaacum cleaner presentation last week???

From my yield spread premium I pay 1/4 point for your fico, 1/4 because you dont want impounds, 1 point because you are self employed and cant provide your tax returns and 1/2 point because you want cash out.

Yet you dont want to pay any points.

Show them THESE rate sheets, Ms. Warren.

Russ,

I suppose the whole subprime meltdown is occurring because of the few isolated brokers who put their clients into ill-advised loans, right?

Fees are fine. I don't have a problem if the broker gets paid a fee for finding me a better rate for the SAME PRODUCT. I'd let someone else pay an mortgage broker a million dollars if that broker can get me an identical loan for a lower interest rate.

However,

The problem as I see it is that IF a broker shows me an ARM and a fixed rate alternative, I want to know how they are compensated on those two products.

If they get paid more for an ARM than a fixed rate loan, I need to take that into consideration when they are explaining to me WHY the ARM is better than the fixed rate loan. If there is a differential in what a broker is paid, they are not necessarily looking out for my best interest. Financial incentives can be quite powerful.

If they get paid the same either way, I would feel better about trusting their advice--although with an ARM, they are more likely to be getting a call for my business again in the relative near term, while with a fixed rate loan, I may not call them for a decade or longer, so the "same rate test" won't always get you an unbiased opinion from your broker.

The best advice is to figure out where your risk tolerance lies, choose the type of loan accordingly, and stick to your guns--don't let any broker tell you what KIND of loan to get unless they are willing to sign on the dotted line with you.

All you mortgage brokers,

Try to step back and see the bigger picture.

Why does a client come to you? Not to watch out for themselves. They come to you for *you* to find them the best loan.

They likely have no experience and don't know how to estimate what they can pay. Many probably have never heard of the rules of thumb (such as debt to income ratio being 3 at most etc).

When you do not strongly discourage them from taking loans that history has shown will result in foreclosure with high likelihood, you are neglecting an implicit fiduciary duty than most clients expect of you (even though you aren't currently legally required to provide it).

Put this in perspective. When you go to the dentist, do you expect that you need to go and verify that the filling material used is the best for the type of cavity you have? No, you take it on faith that the dentist has your best interests in mind or they would be liable for malpractice.

When you optimize for your own profit over the client's benefit, you violate that trust. When you claim that the lender provides a higher yield spread on a loan that will result in better terms for the client (meaning that the bank gets the raw end of the deal both ways, i.e. less money in interest from the client *and* pays more money to the broker), you're not making any economic sense.


You actually believe the doctor or a dentist doesn't maximize his profits? Do live in a fantasy world? Of course he does. You may not pay it directly or never see the bill but he does it.

By federal and state law we have to disclose that we get paid YSP. A Bank does not. I have to disclose all third party fees. A bank does not. Have you ever shopped for a mortgage comparing a broker and a bank? Probably not. If you did, you would find that the rate the bank quotes you is comparable to what the broker is quoting with YSP.

Sure Doctors and Dentists maximize their profits, but they do not maximize their profits at the expense of their patient's health unless they want to get sued.

They can push you to a drug, or a procedure where they get paid more, and they will ESPECIALLY if the patient doesn't see that cost. But, if they do so without full, honest disclosure regarding the risks/rewards of the drug/procedure vs. other treatment options (that may get them less money), they will be sued, and they will lose.

This is perfectly analogous to the broker situation. Brokers can absolutely maximize their profits, but if they do so without full disclosure of the risks and rewards of the various options, and ultimately the borrower's financial health suffers, that is a major problem.

I don't want to curtail broker's fees. Brokers are a necessary part of real estate on a number of fronts. If you can help get a deal done in tough times, you should get paid even MORE!

But, if you are giving a customer two options that are quite different (and may be both be better rates than what you would get directly from a bank for the same products), it is VERY relevant what you are being paid when the customer is weighing your advice in their decision.

Ms. Warren,

You deserve every piece of hate mail that you got, because you wrote a slanted editorial with absolutely minimal understanding of your own topic. You further skewed it by hand-picking the few friends that you interviewed and bypassing leaders and representatives of broker associations.

Perhaps you should ask yourself why a lender would have the ability to offer YSP in the first place?

Perhaps you should research what SRP isandexplain why that is not a 'kickback', especially since lenders are not required to disclose it to anyone, including to the Broker?

Perhaps you should ask yourself how a consumer who cannot pay for closing costs would be able to get a home?

Perhaps you should ask yourself why only the rich, beautiful, and 'perfect' people in the world deserve to own a home?

Perhaps you should ask yourself how many homes would be owned by people who aren't 'perfect' if their only alternative was to walk into a local bank?

Perhaps you should ask yourself why a Broker is barred from collecting a fee upfront and should not get paid for the hundreds of loans they work on that do not close, working for free on over 95% of their 'clients'?

Perhaps you could explain why every single business in the entire world is allowed to charge a profit, but a mortgage broker should not?

And perhaps you should ask yourself why a lawyer (such as yourself) does not have to return a fee for a lost case, or provide an advance written estimate of their fees and total costs of the lawsuit, or is able to charge a retainer upfront, or charge 40 dollars to send a fax, or is perfectly willing to accept money from a person who admits guilt right to their face?

So, if someone does not pass one of the good Professor's classes, I assume that they are fully-refunded for that class?

J'accuse!

YSP is not a problems, figure this without this the client would pay points, and it takes 5-7 years to recover any upfront fees. Secondly the average borrower refinances before 5 years. Banks also have SRP or back end profits, the only difference is they do not have to disclose. The bottom line is the actual rate the borrower that they will receive. Brokers vs Bank it is about the same, although a broker can shop many banks and typically get a better rate overall. I as a mortgage broker went with a back end YSP to pay my closing costs and no upfront fees out of my equity or pocket. One must look the the whole picture before making such comments. Mortgage professionals understand this, by the way a broker can become a direct lender and do th same loan as a bank with no disclosure but the same rebate back, does this make it better or worse???

Oh, perhaps we forgot to mention the main thing that Ms Warren doesn't understand, and completely misinterpreted....about the Us "steering" borrowers towards ARMs when they can qualify for lower fixed rates. This is what caused you to lose any credibility. Thing is Ms. Warren...any client that qualifies for a good fixed rate loan..we are going to put them in it...why? Well, one it is a better deal. 2...GOOD RATE FIXED RATE PROGRAMS PAY US MORE! its not even close to be honest. If someone got an ARM, it was because they were in a bad situation, and didnt qualify, and was the best thing for them. No broker in his right mind that knows the business whatsoever, would but someone on a subprime loan, if they qualified conforming, unless it was teh best deal for the customer, because we actually make LESS money on them, contrary to what the expert of the mortgage industry says. By the way, I hope you make your students do more research on papers for your class then you did yourself in this horrible, idiotic article

Elizabeth, how do you think that brokers should get paid? You are putting all brokers in the same crowd of dishonest theives. What do people say about attorneys? Should we all assume they are blood sucking leaches?

It sounds like you actually think you are some kind of mortgage consumer advocate. And I like the way you continue to 'Select' your information to collaborate yourself at the same time you continue to "Paint us Dirty" And who the heck are you to post wholesale rate sheet and who gave it to you?!

You are Evil and Scarey and the sad reality is you even think you have right on your side......Whew!

All in my humble opinion of course

..."In my office, we have former attorneys, traders, surgeons, corporate execs who are top producing mortgage brokers."

You crack me up dude. You have surgeons working as mortgage brokers !! ROTFLMAO

How come no Rocket Scientists work at your place? Maybe they are busy selling used cars.

Thanks for the laugh though :)

Ms. Warren,
Maybe if you could spend a day (more would be better) in a broker's office and a banker's office. We face pretty much the same issues. I may have better products than the broker, but the broker is almost always going to be able to beat me on price, unless I cut into the bank's posted rates. Bankers rely heavily on realtor relationships, probably more so than brokers. Brokers can pull the loans in on just rate alone.

We co-exist in the same industry and we need each other, because no one entity can do it all. Trust me, these guys and gals work with some labor intensive files to get someone approved. I am not talking about the no doc or option arms, I am talking about the wage earner that has had trouble with credit, possibly even behind on a few accounts, but if they bought, they could hang on to a lot more take home pay.

Bankers do not have the ability to do long term credit counseling or work with buyers working on their credit. That is what CCCS is for, or any reorganizational debt management agency. Brokers fill that middle gap and almost all of the bankers have a broker or two (yes, subprime) they send customers to see, customers that want to proceed, even after the banker has told them they most likely will need to pay higher than market rates for a couple of years to show that they can handle the payment.

The world has gone off on too deep of a tangent against subprime. Over correction. Now, everyone is almost paralyzed. Let me give you an example: Last month Fannie revised the way they qualify an interest only loan, particulary ARMS. I was working w/ a single mom of an autistic child trying to purchase in the WashDC area. I found her a long-term ARM, interest only, at 5.25%. Yes, there were points, but the builder was willing to help.

This borrowers loan was turned down because her back ratio on the interest only, which qualified at index plus margin at 7.25% hit 53% (actual payment ratio was 37% on the IO 5.25%). She had over 75K in the bank afterwards and was a civil service employee, on a fast-track super-grade promotion program. Her earnings were detailed to increase, but could not be counted. Loan denied on DU, Fannnie's underwriting engine.

HOWEVER, once I switched her loan to a 30 year fixed at an amortized payment $600 higher, I was able to get this loan approved. She was now a 49% back ratio because my qualifying rate dropped from 7.25% to 6.75%.

Her credit score? 742. Professional. Excellent rent history. No one, not one person could make sense of this for me. We have penalized the wrong people and have over-corrected. I then had the pleasure of trying to explain WHY I COULD GET HER APPROVED AT A PAYMENT $600 HIGHER THAN THE SEVEN (7) YEAR ARM SHE APPLIED FOR.

It's still broken.

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