Just recently, Senator Christopher Dodd [D-CT]sponsored a bill to amend the Truth in Lending Act, "providing protection to consumers". Let's see if it really does just that.
I want to focus on the two main parts of this bill, that I believe (and others) will eliminate the role of the mortgage broker. If this happens, we will revert to a bank-only industry dominated by the big banks (due to the elimination of 205 banks this year here).
Title I, Section 102, subsection (c), part (m) states, "No Yield Spread Premiums" and goes on to labour the fact that no mortgage loan originator can receive any YSP (Yield Spread Premium) from the bank they broker the loan to.
What does this mean? Well, the broker buys the interest rate at a wholesale price (typically 0.5% less than retail banks), and they increase the interest rate to earn a commission from the bank and lower the borrower's closing costs. For example, if I get a 30 year fixed interest rate at 6% and sell it to you, the consumer, at 6.25%, then that typically means I will get 0.75% of the loan amount. If the loan amount is $300,000, that means I will get $2250. This can reduce your closing costs by $2250. *As a sidenote, easy loans with high credit and down payment normally experience of about 0.75% YSP and 0.75% Mortgage Broker Fee with maybe a $300-500 processing fee from the broker as well. More difficult loans get charged anywhere from 2% to 3% total, these would be 100% financing loans or FHA loans with poor-average credit. Don't believe me? Take a look at your former HUD-1 Settlement Statement.
Effectively, then, the elimination of Yield Spread Premium will make the mortgage broker a discounted interest rate provider. While providing interest rates 0.5%+ less than retail banks, they will charge all fees upfront, thus increasing costs to the borrower.
Section 102, subsection (c), part (o) states "Restriction on Financing Points and Fees" and goes on to practically state that the mortgage broker's fee (including processing fee and any other fee) cannot be financed into the loan. This means that the borrower would need to pay for this out of pocket.
So, the mortgage broker cannot be paid YSP by the bank, and the fee cannot be financed into the loan amount. This, I predict, would effectively eliminate the role of the mortgage broker.
Why? Aren't Yield Spread Premiums not beneficial to the consumer?
Let's take a look...
By going to a bank, you'll typically find lower closing costs, but a higher interest rate. By going to a good, honest broker, you'll find lower interest rate with higher closing costs. Which is more important? Well, if my interest rate is 0.25% lower because I'm using a broker, but my fees are $3,000 higher on my $300,000 loan...that means that after 48 months I will start saving $750/year because of my mortgage broker.
But, you say, the average American only keeps their home for 36 months before upgrading or relocating!?!
Ok, I'll take that argument. That argument, right there, proves why mortgage brokers need to be allowed to receive Yield Spread Premium--to keep the borrower's out-of-pocket costs low. (I'm not saying it's wise to move around so often, though!)
If Senate Bill 2452 is enacted under its current form, we will see a recurrence of the big banking industries controlling mortgage lending practice. We will, in short, see a monopolization. It's plain and simple logic to those who understand that 2+2=4, that, the fewer people participating in a business, the less the competition. If you have less competition, you will have higher fees ultimately.
Banks make a Yield Spread Premium, it's just called "Service Release Premium". Think there's really a No Fee Mortgage? See this. Remember, you can't get anything for free. Ultimately, with less competition, the banks will charge more Service Release Premium, which means higher interest rates.
What is the solution?
The solution is less federal government interference, with state goverments regulating both bankers and brokers. Both thriving retail and wholesale lending businesses should be allowed to enjoy free competition with eachother and amongst themselves. It should never be only brokers nor should it be only bankers. Let the consumer educate themselves, shop around, and decide who has the best loan scenario. It should be up to you how to get your own loan.
Vote Ron Paul!
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2 comments:
Let the free market (with reasonable regulations to prevent fraud) work! Which is another way of saying let customers do the research, made decisions, and take responsibility for those decisions.
That's a good point. I think the question of debate is 'reasonable regulations'. Thanks for the comment!
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