On April 1, 2011, Federal Reserve Board regulations will limit the way mortgage brokers and mortgage lenders get compensated for home loan originations. The way regulators have gone about limiting this compensation is by restricting Yield Spread Premiums (YSPs), perhaps the primary mechanism by which mortgage brokers make enough money to stay in business.
Even though the change to YSPs are related to mortgage lenders' practices and sound pretty technical, they may affect how you will get a mortgage. A possible result of the Fed's rulemaking is that homebuyers and refinancers could have fewer options when it comes time to get a mortgage.
The yield spread premium explained
What exactly is a yield spread premium? When you get home financing through a mortgage broker, your application is submitted to the wholesale mortgage lender that's actually approving and funding your loan. The lender sets a minimum price (yield, combination of rate and fees) that the loan must come back with, and for any yield above that minimum, the broker can earn an increase in his or her commission. In this way, the wholesale mortgage lender can offer a rebate--the YSP--to the mortgage broker originating the loan. The higher the interest rate on the loan, the higher the YSP can be to the broker.
In defense of YSPs
However, the National Association of Mortgage Brokers and other trade groups say that the YSP is misunderstood and gives borrowers much-needed flexibility. They point out that the YSP is simply one way of compensating brokers--somebody, somewhere, has to pay for the services of originating loans, and YSPs are a way of keeping mortgage brokers in business without requiring borrowers to pony up cash to cover the cost of originating a home loan (such as with a no-cost refinance).
They further argue that the YSP is already disclosed by law on the standard Good Faith Estimate and HUD-1 forms that borrowers receive, so comparison shopping eventually drives unscrupulous mortgage brokers who pad their fees out of the market, whereas similar payments to loan originators who aren't mortgage brokers don't have this same transparency. Some experts worry that mortgage brokers may find it impossible to compete under the new rules altogether.
Mortgage lenders also uncertain about effects of Fed rule
The Federal Reserve's final regulation going into effect April 1 does not expressly prohibit YSPs. However, it does say that a loan agent can't be compensated by both the consumer and the lender. It prohibits loan officers or mortgage brokers from earning a higher rate of commission on a mortgage based on the loan's interest rate or other terms.
Confused? So is the mortgage industry, which is grappling with not only how the regulation language affects YSPs for brokers but also how mortgage lenders will deal with price fluctuations.
The Mortgage Bankers Association wrote to the Fed, warning that an unintended consequence may be higher loan prices for consumers.
Tips for mortgage shopping under new regulations
Even with new consumer protections, it's still up to you to shop around for the best mortgage rates. Here are some mortgage comparison tips in this new world of regulations:
- Provide the same information to every loan originator when getting mortgage quotes. Key pieces of information include the property value, the loan amount, the property type (condo, single-family residence, manufactured house, etc.), use (primary residence, vacation home, rental, etc.) and your credit score.
- Get quotes in writing with Good Faith Estimates (GFEs). You can also get worksheets to compare mortgage rates and other terms, but understand that worksheets don't commit the lender the same way a GFE does.
- Don't waste your time negotiating with the same lender. To risk running afoul of the new regulations, many lenders have changed their policies so that no matter which loan agent you deal with, you should be quoted the same mortgage rates and fees for the same loan. Most (but not all) lenders will not allow you to negotiate a better deal than what they offer to anyone in your position, so the bulk of your mortgage rate shopping should be comparing deals between lenders, not between different agents within the same lender or trying to get a better deal from a particular agent.
Why can't you get better terms if you have great negotiating skills? The reason is that someone else may be getting a worse deal than you, and that may not be legal under the new rules.
- Watch for advantages from lenders. In some ways, mortgage lenders' policies stemming from this Federal Reserve rule might work to your advantage. For instance, one problem the new rule poses for mortgage lenders is this: What if you have been working with a customer for months, you have the loan all ready to go--including a locked mortgage rate - -and then mortgage rates drop? You, the savvy shopper, threaten to leave for a competitor if the lender can't lower the rate. But can your lender offer you a better deal without violating the terms of the new regulations?
A branch manager at a national mortgage lender says his company heads off such problems by offering a free mortgage rate float-down to its clients. If interest rates are lower when the loan closes, the borrower gets the benefit of the lower rate, and the lender doesn't have to worry about pricing inconsistencies.