As a father of 6 I see the need to know the difference between the baby and the bath water.
Many of you may have heard about Senate Bill S. 2452, the Home Ownership Preservation and Protection Act of 2007.
There are some good points to this bill -- raise the FHA maximum loan limit; make the down payment requirements more flexible.
However, nestled in there not so discreetly is the opposition of Yield Spread Premium. Here it is in a nutshell:
As a Loan Officer, my job is to originate new home loans. My company asks me to build in to the transaction a certain amount of revenue -- that 'revenue' goes to operating the company and paying me. Generally in Washington State, the 'revenue' that is charge is 1-2%.
There are two types of fees that can be charged in order to generate this 1-2% of revenue: up-front fees typically paid at closing, often shown as an Origination Fee; and premiums paid by the lender an above market interest rate, referred to as Yield Spread Premium (or YSP). Generally the revenue is derived from some combination of these two ways.
At face-value it may appear that Yield Spread Premium is harmful; however, please consider this:
The average life of a loan is somewhere around 4.17 years last time I checked. The difference between a par interest rate (no cost to the borrower and no YSP to the originator) and an interest rate with 1% YSP is typically a quarter of a percent. Translated into break-even, bottom-line numbers, it generally takes about 5 years to break even on the additional costs charged up-front when going with the par-rate. That's longer than the average life cycle of a loan! See the issue?
This most directly affects first time home buyers who may not have a lot of funds to cover closing costs or down payments, and military personnel who want to own a home but know they may need to sell within a few years if they are transferred.
As credit guidelines tighten and require larger down payments to qualify, this would put pressure on consumers by increasing closing costs.
Why do we want to do this again?
Eliminating YSP will create a higher level of instability in the housing and real estate markets and act like a mudslide toward the ever-increasing likelihood of a recession (yes, I dabble in poetry, that was nice, eh?).
Ahead of this new bill, The Washington State Department of Financial Institutions has stepped up this year and required licensing of Loan Originators which paves the way for controls to make sure consumers are not being taken advantage of and we're getting there. But we need time to make necessary changes and we need to push for those changes! Clearly there are issues regarding YSP. But LET'S WE DON'T WANT TO THROW THE BABY OUT WITH THE BATH WATER!
(I apologize for yelling, I'm calm now. Really.)
Instead of eliminating YSP, here's my thought:
Create higher disclosure standards to make sure the consumers understand their options This will empower borrowers to make an informed decision on how they want to pay for their loan.
If YSP is eliminated, it will effectively put that much more power in the hands of large banks who already have lesser disclosure requirements and are not required to have their loan originators licensed.
This would result in fewer financing options for consumers, unfavorable market conditions to mortgage brokers who are the only ones currently required to disclose YSP, and create very little need for the remaining lenders (the big banks) to be competitive.
You might think that giving the big banks more business might make them more competitive -- here's the real irony though: the big banks get most of the business anyway! The brokers just originate the loan and send it to the banks to underwrite through their wholesale business instead of walk-in retail customers. So they're getting the business anyway but then they'll cut out the little/middle, um, person, and charge whatever they want for a home loan!
I believe Sen. Christopher Dodd (D-CT), who authored this bill may not have had that good of an experience last time he financed a home. He may possibly have been taken advantage of -- maybe the loan officer did not disclose up-front the YSP he was being charged and he only found out about it at closing. The irony is that Sen. Dodd was one of the first to speak up when the credit crunch/housing/issues/mortgage meltdown began to pick up steam earlier this year. Frankly Senator, I'm stumped. Befuddled. You Sir, have befuddled me.
Certainly there is fraud and under-disclosure and people out there who are taking advantage of the system, but the YSP is not the issue, it's the lack of disclosure. YSP is a legitimate charge that 7 out of 10 of my clients knowingly choose. I just want us to call this what it is and work to provide MORE options for home owners, not less.
Will anyone second that motion?
Respectfully,
James Wirth, WA Lic #: 510-LO-34536
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