Big Bank Lobby’s Big Bait and Switch

The Fed’s recent decision to outlaw Yield Spread Premiums (YSP) paid to mortgage brokers by lenders is the latest success by the bank lobby to kill competition and bait and switch the public into thinking the government is actually doing something to reform the industry. It is, in fact, reaffirming a double standard that has existed in the industry far too long, and may be the death knell for mortgage brokers.

Some background: For ages, the more profitable the loan, the higher the commission paid to the originator. In mortgage brokerage, the commission has been Yield Spread Premium (YSP). For bankers and direct lenders, the commission is Service Release Premium (SRP). Even though they go by different names, they operate exactly the same: If the loan officer gets the borrower to agree to a loan of 5% for example, the commission is 1% of the loan. If the borrower agrees to 5.25%, the commission is 2%, and so on. It is not limitless, as typically the cap on commissions in my 5 years in the industry was 3%. Moreover, most borrowers are conscious of rate in a competitive market.

We can debate the morality of the system all we want, but the bottom line is that is how brokers and bankers alike were paid. Bankers always had an advantage in that their SRP was not required to be disclosed on the preliminary good faith estimate and HUD-1, which is the buyer’s closing statement. Brokers were required to disclose. Bankers were not. It was a bit of a double standard, but nothing that would put brokers out of business.

The brokerage niche served the public well for decades. If you walked into your neighborhood bank and applied for a mortgage, you were captive to that single lender’s portfolio of loans.  Brokers, on the other hand, gave consumers wide choice: often, they could place a loan with literally dozens of lenders, across the country, and they served the needs of niche borrowers who didn’t fit the rigid mold of the corner bank. Self employed borrowers had products that underwrote them based on bank deposits in lieu of a W-2. Credit challenged borrowers had different banks vying for their business instead of having to settle for a take it or leave it at the bank at the corner. It worked for decades.

Unfortunately, many of the things that worked for decades stopped working in the irrational exuberance of the 2000s credit bubble. The implosion of the financial world in 2007-2008 saw hundreds of banks fail and a massive recession.  In their lowest public relations position since the 1930s, the surviving lenders needed a scapegoat. At first, big lenders suspended their wholesale operations which had been where mortgage brokers placed their business. A guy in a diner might not recognize Argent or America’s Wholesale Lender, but these were the nom de plume for Ameriquest and Countrywide, two of the largest failed banks’ wholesale divisions. The big fish that ate their assets no longer dealt with brokers.

What then followed was as great a fraud as sub prime mortgage backed securities. Big banks successfully demonized mortgage brokers and YSP without anyone in media ever questioning the banks own practice of SRP, which was the exact same thing under another name. The New York Times, with scathing vitriol, editorialized banning YSP without a single word about banks and SRP.  The Times was not alone- major media’s kvetching about the supposed abuses of YSP, actually played into the gamebook of lenders, and industry wide reform took a backseat to scapegoating a small slice of the market. Already, prior to the ban of YSP, the PR war on brokerage had already been won by the direct lenders. No Realtor wanted a pre-qualification from a broker; it was a direct lender pre approval or nothing, even though both used the same underwriting software. Good honest brokers have closed up shop in droves, and those that have survived are scrambling to become small paper lenders, which benefit from the nondisclosure of SRP lenders have always enjoyed.

Nobody did their homework. If you hated YSP, it still exists as SRP as it always has with lenders. The only difference is that it does not have to be disclosed. What we really needed was for big lenders to play by the same rules of transparency that brokers were held to for decades. Consumers have lost choices, have fewer protections, and the big banks, if you haven’t already noticed, just get bigger.

About J. Philip Faranda  (17 Posts)

J. Philip Faranda is the Broker owner of J Philip Real Estate in Westchester County, New York. He is the author of the WestchesterRealEstateBlog.NET and is one of the top-selling broker agents in Westchester by transaction total. He has appeared on ABC World News, in the Associated Press, Smart Money, The Real Deal, Gannett, The New York Times, and other prominent media outlets.