What exactly is incorrect in my blog post?

Yes, when the government intervenes the cost will be passed on to the consumer…a.n.d…the idea behind capitalism is that companies will work hard to be more efficient. Some consumers will shop for the lowest cost loan and those companies that are more efficient will win that customer’s business.

So what exactly am I ignorant about and what exactly is incorrect?

Thanks for stopping by.

The real estate industry has been getting it’s teeth kicked in since 2006 and there has not been a bail outs for a single real estate company, not one appraiser, or mortgage company. The very banks (and Wall Stret) that introduced the risky loan products got the bail out money without any consequences(and yes most have paid it back for their own self serving reasons CEO compensation… ironic…)

Can you list one mortgage brokerage firm (non-direct lender) that is the cause of the mortgage melt down…

“We” who have hung on making less and less every passing year waiting for the business to get back to “normal”. Just one more year… well now it has been 4+ years and for all of us that have hung in there and now we get our compensation regulated/cut…???

If an attorney had to put more time into a client he/she “bills” the file. If a contractor has a job that turns out to need more work than originally thought he bills the client. But LO’s are not allowed to… The attorney and the contractor both collect monies upfront retainer fee or deposit for materials and labor. You portray loan officers as order takers. One of the big complaints of realtors these days is the LO at the bank didn’t prequalify/ask the right questions up front which is always a lack of experience and intellectual capital that should be properly compensated just as top attorneys, doctors, mechanics, accountants receive/deserve/warrant/demand. Contrary to your depiction of LO’s we are not data entry people and should be recognized for our knowledge of how to structure a home loan so people can purchase a home inspite of their qualifying challenges. I have saved clients tens of thousands of dollars by knowing when to use Freddie Mac over Fannie Mae and the borrower would be happy to pay me a few thousand more just as a tax accountant or attoney would deserve compensation for saving clients money.

You paint all LO’s as crooks who dont get to deceive their clients anymore, very offensive.

Their are thousands of LO’s, appraisers, and reltors that have lost everything due to the great recesion. Reality is that real estate has been in a huge depression since 2006.

You make valid points but you show such a bias it is as if you co-wrote the amendment.

Many of the people that have given input make dead on examples of how this new amendment is not only unfair but truly is not warranted.

It is in very poor taste to argue and debate with the above persons in the manner that you have.

What exaclty is your point? The author is just pointing out the new rules and what they mean….and her take on why they have been written they way they have.

Get over it. The mortgage business has changed and it is never going back to the way it was. Yes…some banks earn SRP’s. That is not an earth shattering bit of news. The question is ….so what?

Brokers will no longer be earning large yield spreads by putting people in loans at a higher rate in order to make more money for themselves. People HAVE been paying more than neccessary for mortgages.

The idea that this extra 2-3-4 thousand dollars was the cost to get this excellent service by LO’s out there working in the public good and doing such an outstanding job of getting peoples these wonderful mortgages is the REAL joke.

People will be willing to be LO’s for less money and continue to give good service and probably make a decent living doing so. If you are not one of them…it’s real simple…..find a new line of work.

John, You’re right I mis-counted. It’s actually 29 years. LOs would only attend sales-related sessions until the state and finally the feds mandated education and training. One of my students had been originating for 5 years and had never sent out a Good Faith Estimate. Another thought I was going to lecture on the e-coli virus because he had never heard of the Equal Credit Opportunity Act.

Her insights reflect that she is very familiar with the mortgage process and the whole “Yield Spread” game. In fact, some of you commenting look like the ones who don’t have a clue.

Get over it. Yield Spreads are gone. Huge money originating is gone.

The reasons are pretty simple. People were overpaying for mortgages. They didnt understand the process and were paying thousands of dollars more that they should/could have for a mortgage.

Quit shooting at the messangers and start planning on how you are going to survive. Or get in another business.

(Sorry for the length of the “joke,” but it is relevant…)

FDA Revamps Waitress Compensation Due to e-coli Poisoning
Regulators are proposing a change in how food servers in the United States are paid due to recent e coli poisoning at a local restaurant. E Coli (short for “Escherichia coli” ), can cause serious food poisoning in humans and the bacteria is responsible for occasional product recalls due to unsanitary conditions at slaughterhouses around the country. Clearly though, it is the fault of the food server known as the “Waiter” or “Waitress”.
Here is a breakdown of the new regulation and the main components.
Waiters / Waitresses will no longer be able to have their tips or other compensation based on the type of the meal they serve, the server’s experience level, or service levels to the customer. For example: a Waiter or Waitress may not be paid more for a steak dinner than a Shrimp or chicken dinner. A Waiter or Waitress must be paid the same regardless of whether the food comes out hot, warm, or cold or due to any delay in food preparation while the server was on break.
When customers order their meal, they must be presented with a minimum of 3 different menus from competing restaurants in the area.
The customer must wait 3 hours to order their meal after signing a disclosure showing what type of salad, starch and vegetable will be served with the meal. If the restaurant owner provides these “ancillary” items – he may not charge a higher margin on one item over the other.
The waiter/waitress must be either paid by TIPS from the consumer, or by credit card – NOT by BOTH.

***Note that for these purposes, both the Restaurant itself AND the Wait Staff are considered “Servers”, thus – if the Credit card option is used to pay the cashier (owner of the restaurant), then NO TIPS may be accepted by the waitress. A “Server” may not “Steer” a consumer into a meal by a certain animal type if they will receive greater compensation from that meal, than in other meals which may have been offered the consumer – unless the offered meal is in the consumer’s best interest.

It is unclear within the proposed law how far this legal definition goes, and the FDA is offering no clarification. If the same steak dinner is available 2 blocks away, is it in the best interest to send the client to the competing restaurant? All questions that have severe penalties will only be clarified during future inspections of the restaurant, by the Food Inspector. Lastly, in another unrelated law that is being considered called QRM, or Qualified Reluctant Meals- certain Restaurant owners should be aware that they may have to eat 5% of the consumers’ meal prior to serving.

You were less than honest in saying you have been in the mortgage business for 25 years unless your resume is omissive for some reason. I can tell you that I receive no compensation for my work for brokers and originators. Can you say the same? I’m not trying to be mean, but let’s all be honest in our discourse.

Educators did not play a part in sending the U.S. into a housing bubble. Educators did not play a part in predatory lending now did we? It really isn’t an apples to apples comparison but nice try. Instead of attacking the person, (ad hominen) attack the argument.

Federal Register /Vol. 75, No. 185 / Friday, September 24, 2010 /Rules and Regulations

FEDERAL RESERVE SYSTEM 12 CFR Part 226
Regulation Z; Docket No. R–1366 Truth in Lending
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Final rule; official staff Commentary

Excerpt from Page 7:

“When loan originators receive compensation based on a transaction’s terms and conditions, they have an incentive to provide consumers loans with higher interest rates or other less favorable terms. Yield spread premiums, therefore, present a significant risk of economic injury to consumers. Currently, this injury is common because consumers typically are not aware of the practice or do not understand its implications, and thus cannot effectively limit the practice. Creditors’ payments to mortgage brokers or their own employees that originate loans (loan officers) generally are not transparent to consumers. Brokers may impose a direct fee on the consumer, which may lead consumers to believe that the direct fee is the sole source of the broker’s compensation.

While consumers expect the creditor to compensate its own loan officers, they do not necessarily understand that the loan originator may have the ability to increase the creditor’s interest rate or include certain loan terms for the originator’s own gain.

Because consumers generally do not understand the yield spread premium mechanism, they are unable to engage in effective negotiation. Instead they are more likely to rely on the loan originator’s advice, and, as a result, may receive a higher rate or other unfavorable terms solely because of greater originator compensation. These consumers suffer substantial injury by incurring greater costs for mortgage credit than they would otherwise be required to pay.

Injury Not Reasonably Avoidable
Yield spread premiums create a conflict of interest between the loan originator and consumer. As noted above, many consumers are not aware of creditor payments to loan originators, especially in the case of mortgage brokers, because these arrangements lack transparency. Although consumers may reasonably expect creditors to compensate their own employees, consumers do not know how the loan officer’s compensation is structured or that loan officers can increase the creditor’s interest rate or offer certain loan terms to increase their own compensation.

Without this understanding, consumers cannot reasonably be expected to appreciate or avoid the risk of financial harm these arrangements represent. To guard against this practice, a consumer would have to know the lowest interest rate the creditor would have accepted, and ascertain that the offered interest rate includes a rate increase by the loan originator. Most consumers will not know the lowest rate the creditor would be willing to accept. The consumer also would need to understand the dollar amount of the yield spread premium that is generated by the rate increase to determine what portion, if any, is being applied to reduce the consumer’s upfront loan charges.

HUD recently adopted disclosures in (RESPA) Regulation X (24 CFR Part 3500), which implement RESPA and that could enhance some consumers’ understanding of mortgage broker compensation. But the details of the compensation arrangements are complex and the disclosures are limited.

Pursuant to Regulation X, a mortgage broker or lender shows the yield spread premium as a credit to the borrower that is applied to cover upfront costs, but also adds the amount of the yield spread premium to the total origination charges being disclosed. This disclosure would not necessarily inform the consumer that the rate has been increased by the originator and that a lower rate with a smaller origination charge may be available.

In addition, the Regulation X disclosure concerning yield spread premiums would not apply to compensation paid to a loan originator that is employed by the creditor. Thus, the Regulation X disclosure, while perhaps an improvement over previous rules, is not likely by itself to prevent consumers from incurring substantial injury from the practice.

Yield spread premiums are complex and may be counter-intuitive even to well-informed consumers. Based on the Board’s experience with consumer testing, the Board believes that disclosures are insufficient to overcome the gap in consumer comprehension regarding this critical aspect of the transaction.

Currently, the required disclosures of originator compensation under Federal and state laws seem to have little, if any, effect on originators’ incentive to provide consumers with increased interest rates or other unfavorable loan terms to increase the originators’ compensation.

For example, some creditors may be willing to offer a loan with a lower interest rate in return for including a prepayment penalty. A loan originator that offers a loan with a prepayment penalty may not offer the lower rate, however, resulting in a premium interest rate and the payment of a yield spread premium.

The Board’s consumer testing indicated that disclosures about yield spread premiums are ineffective.

Consumers in these tests did not understand yield spread premiums and how they create an incentive for loan originators to increase consumers’ costs. Consumers’ lack of comprehension of yield spread premiums is compounded where the originator imposes a direct charge on the consumer.

A mortgage broker may charge the consumer a direct fee for arranging the consumer’s mortgage loan. This charge may lead the consumer to infer that the broker accepts the consumer-paid fee to represent the consumer’s financial interests. Consumers also may reasonably believe that the fee they pay is the originator’s sole compensation.

This may lead reasonable consumers erroneously to believe that loan originators are working on their behalf, and are under a legal or ethical obligation to help them obtain the most favorable loan terms and conditions.

Consumers may regard loan originators as ‘‘trusted advisors’’ or ‘‘hired experts,’’ and consequently rely on originator’s advice. Consumers who regard loan originators in this manner are far less likely to shop or negotiate to assure themselves that they are being offered competitive mortgage terms. Even for consumers who shop, the lack of transparency in originator compensation arrangements makes it unlikely that consumers will avoid yield spread premiums that unnecessarily increase the cost of their loan.

Consumers generally lack expertise in complex mortgage transactions because they engage in such mortgage transactions infrequently. Their reliance on loan originators is reasonable in light of originators’ greater experience and professional training in the area, the belief that originators are working on their behalf, and the apparent ineffectiveness of disclosures to dispel that belief.

The Board believes that where loan originators have the capacity to control their own compensation based on the terms or conditions offered to consumers, the incentive to provide consumers with a higher interest rate or other less favorable terms exists. When this unfair practice occurs, it results in direct economic harm to consumers whether the loan originator is a mortgage broker or employed as a loan officer for a bank, credit union, or community bank.”

I am a professional and a borrower should have the right to choose to work with me based on the rates I quote them. The can compare rates, fees and service. Why should the service part be mandated out of thebuying decision. Choices and disclosure is what is needed, Not a mandated pay schedule designed to force buyers to the powerful banks. Many will be lost on the wash of the football field size porocessing centers.

I live in Ohio where there are many neighborhoods with home prices in the 50,000 price point and less. Some banks are paying their employees 35 basis points in the new pay structure. That give someone $175 to completely manage their loan origination process. Do you think that an employee making that sort of money is going to help you work on your credit problems, help the realtors manage the property repair process (many of which have no understanding of what to do if they dont have experience with bank owned properties), attain the best loan program for you, and help you get to the closing table. As a loan officer, I work with my clients sometimes for months to just support them in cleaning up the credit issues that they were not aware of. Am I only worth $175 per loan? If so, I will leave the industry and many of my experienced counterparts will as well. We are not out to “overcharge” customers as you infer, we offer a fair price for a service. If we cannot charge for a service, it will not be provided. And, the loser is the loan applicant. Ohio has laws that stop overpricing loans, there are many homebuyer education seminars people can attend. There are many other options to educate buyers than to penalize the few LO’s that offer a full service to their customers.

If I have a loan at 2.5% with 6 points vs a loan at 3.5% with no points which is the best loan? According to the information I read the product I should offer is the 2.5% with the 6 points. There is just too much that goes into figuring the loan that I do not see how someone without the LO knowledge could decide which is the better loan.

Oh and by the way, you mentioned in another post that we should not talk about other industries, but it doesn’t work that way. Compensation is for a service, just like the person that goes to Sears to buy windows and gets a different price than if they went to Anderson. This is a free market, this is not China. You argue about upselling rate etc, but you know on a $200k loan an 1/8 of a point is $15 per month. I am not sure how that is causing all of the defaults. I am curious how you would answer, why is it okay for a real estate broker to earn an unlimited %, which hurts the all involved in the transaction? Also, tell me whats worse if your real estate taxes triple in 10 yrs or your payment is $15 more per month?

All of these rules in the fed reform talk about subprime loans that don’t exist anymore, they talk about option ARMS that done exist anymore, they talk about NO DOC loans that don’t exist anymore.

Its another plan by congress that is a day late and a dollar short.

Oh and Barney Frank, I forgot that he said that Fannie Mae was a fantastic and very stable and this is the guy we writes the fed reform bill…

“compensation and foreclosures have nothing to do with each other”

Not anymore.

One of the ways I’ve heard of for compensating LOs would be your default rate.

Just because a bank offers a loan where they’ll go up to 62 percent on the borrower’s second ratio does that mean we have to make that loan?

What if there was another, better choice for that borrower?

Nobody is holding a gun to anyone’s head forcing LOs to make bad loans.

Go ahead and continue to blame the banks. That will get the industry nowhere.

My dad always says sh*t rolls downhill in corporate America and it’s landing right in the lap of the loan originator.

More, higher duties of care are being placed onto the shoulders of LOs to take better care of borrowers in selecting loan programs.

If indeed it’s true that a mortgage broker is paid for his/her knowledge (I believe this) then shouldn’t a mortgage broker be able to help the borrower select a mortgage product/terms that will NOT send a borrower over a cliff (default/foreclosure)?

The banks will always come up with interesting products. No one is holding a gun to the heads of loan originators forcing them to sell one particular product over another.

There is a reason compensation limits are here to stay. It’s because LO compensation maximization was put first….ahead of the best interest of the consumer. Now that’s being reversed.

SLOWLY loan originators are being transformed into fiduciaries.

LO’s can’t make an “overage” by charging a higher (higher than what?) rate. LO’s also can’t take an “underage” (agree to be paid less than their standard commission) by giving the borrower a lower rate. LO’s must be paid their standard commission – and not one cent more OR LESS – no matter whether they charge rate/points/fees that are profitable to their company (or bank) or constitute a huge loss for their employer. Therefore, a LO is incented to quote pricing that is beneath their company’s quoted pricing, secure in the knowledge that their own commission cannot legally be cut by one red cent. In recognition of the danger that this system poses to creditors (banks or mortgage companies) – with LO’s quoting below-market pricing yet being paid full-boat commissions – creditors will jack up their standard quoted rates in order to insure against the danger of rogue originators who deeply discount rates in order to bring in more loans. Aside from the few consumers who stumble across a rogue originator, most consumers will pay markedly HIGHER rates.

In the old days, some people got charged higher rates than others. Merkley-Klobuchar & the Fed have fixed this. Now everyone will pay higher rates.

These rules may limit originator income. They’re certain to radically increase creditor income at the expense of the consumer. It’s the law of unintended consequences. Credulous supporters of government do-gooderism will undoubtedly think they’ve improved things, but creditors will end up making more money than ever. It will all be hidden behind the scene, though, so the do-gooders can continue to be proud and sanctimonious, never understanding or acknowledging that consumers everywhere are paying dearly.

The new Fed rule doesn’t officially go into effect until 4/1/11, but mortgage industry gross profits are already higher than they’ve ever been in history, in no small part because banks are gearing up for the day when they won’t be allowed to charge “underages” to the originator.

Thanks Merkley-Klobuchar!
Signed, John Q Smith, CEO Humongous Mortgage, Inc.