Mortgage Brokers Must Disclose Secret Fees, Says Judge
Figuring out how much you pay for a mortgage is like trying to determine the real cost of a new car, a lot of what you pay is hidden and unclear.
Now James Robertson, a federal district judge based in Washington, DC, has decided that mortgage brokers will have to disclose their secret fees under new rules set up by the Department of Housing and Development.
The judge shot down an effort by the National Association of Mortgage Brokers to block the new HUD requirement.
Yield Spread Premiums
“Broadly speaking,” said the Judge, “NAMB opposes the new GFE because of the way it discloses ‘yield spread premiums’ (YSPs). A YSP is a payment by a lender to a broker that compensates the broker for originating a loan with an ‘above-par’ interest rate. The ‘par rate‘ is the interest rate at which the lender will fund 100% of the loan with no premiums or discounts.
“If the par rate for a certain $100,000 mortgage is, say, 5%, and the broker originates that mortgage at a 5.5% interest rate, then the lender might deliver $100,500 at closing — $100,000 that will be disbursed to the borrower, plus a $500 YSP for the broker.”
Huh? What’s this all about?
Par Pricing
Imagine that you are qualified to borrow $200,000 at 5 percent. Your lender says the best rate available is 5.5 percent. Since you rely on the lender, depend on the lender for product information and understand that the lender promised to get you the “best” rates you naturally accept the 5.5 percent rate.
Or, seen another way, you might qualify for a loan with a “par” price of 5 percent and no points. Instead, the lender sells you a loan at 5 percent and two points. Again, you’re paying more than you should.
The lender in either case has actually up-sold the loan because the mortgage has a higher interest rate than someone with your qualifications should pay. By paying more the asset — a mortgage loan is an asset to the owner — is now more valuable and mortgage investors will pay extra for it. When mortgage investors pay more that money goes to the lender and the loan officer. You, of course, also pay more for the life of the loan because you have a higher rate or steeper up-front costs.
The ARE some cases where paying more points can be a good deal say, for instance, if the lender will pay some or all of your closing costs. But there are many cases where the borrowers have no idea that they are overpaying for the loan because they do not know how loans are priced in the first place.
Confusion Alleged
“District Judge Robertson’s decision effectively guarantees that the consumer will continue to be confused during the loan selection process,” says Jim Pair, president of the National Association of Mortgage Brokers. “NAMB’s legal challenge against the RESPA final rule was an attempt to ensure all loan originator competitors uniformly provide information to consumers for them to proficiently shop for a loan.”
However, Judge Robertson rejected the unfairness claim. As he explained, YSPs are known in advance while “the value of any premium a direct lender may earn depends on when the lender sells the loan, what the market conditions are like, and other factors that are not established with certainty at settlement.”
For the full decision, please see: National Association of Mortgage Brokers V. Donovan.
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Comment by Clairemont real estate agent on 31 July 2009:
It’s great that the secret fees are going to be revealed. I always wondered how that final price came to be when I never saw any of the number crunching!