Thousands of mortgage brokers in Iowa have looked for new careers as the housing market collapsed over the past three years, and a new Federal Reserve rule will likely drive even more of them out of the business of setting up homebuyers with loans.
The Dodd-Frank Act ordered the Fed to create a rule that prohibits mortgage brokers and loan officers from making money based on a higher interest rate for the homebuyer - what's known in the mortgage industry as the yield spread premium.
In January 2008, Iowa had 3,874 licensed mortgage loan originators - mortgage brokers and loan officers. Now there are 1,175, according to the Iowa Division of Banking. The new rule has mortgage brokers - already beleaguered - so frightened about the future of their business that their trade groups have filed lawsuits to stop the Fed from imposing the rule, which is set to go into effect Friday.
The rule is one in a series of battles - each with distinct local implications - set off by the landmark financial reform legislation signed into law by President Barack Obama in July.
Here's what's at stake: When people borrow money to buy a house, they usually pay a loan officer or an independent mortgage broker to arrange the loan. The obvious payment is an upfront fee based on the amount of the loan. For instance, brokers generally charge a 1 percent origination fee. On a $200,000 home loan, the broker would get $2,000 for his or her services.
There's another way mortgage brokers get paid, and the Fed wants to do away with it.
Brokers can be paid a portion of the borrower's interest rate - in a lump sum, by the lender. Any interest rate percentage points above the best possible rate the borrower qualifies for - the yield spread premium - can be paid to the broker.
The Fed's problem with this is that it motivates the broker to lock the borrower into a higher interest rate. The larger the yield spread premium, the more money the broker can make.
"When the yield spread premium is used to compensate the loan officer or mortgage broker's employee, that employee has a personal incentive to deliver a loan with a high interest rate in order to maximize his or her own compensation," the Fed wrote in its response to the lawsuits. "This is in direct conflict with the consumer's interest in paying the lowest interest rate possible for which the consumer qualifies."
Consumers often don't know about the yield spread premium, and mistakenly believe the flat fee they pay their broker is the broker's only compensation, the Fed argues in its court filing.
Mortgage bankers say the rule is well-intentioned. But they think it will further decimate the ranks of independent mortgage brokers, leaving consumers with fewer choices.
"Do I think there will be less brokers involved in transactions as a result of this? Yeah," said Dan Vessely, president of the Iowa Mortgage Bankers Corp.
Mortgage brokers argue the yield spread premium is a tool that gives them flexibility as they mediate between borrowers and lenders. For instance, a broker can discount the closing costs in exchange for a higher interest rate on the loan.
This might be desirable for homebuyers if they're short on cash or if they calculate they'll sell or refinance before the higher mortgage payments catch up with the front-end savings.
Tyler Osby, who used to be a mortgage broker and now is a branch manager for a mortgage banker, said mortgage brokers who abused the yield spread premium will be driven out of business. He's not sure what to think about the rule, and is waiting to see how it's implemented.
"If someone is looking to buy or refinance a house, these changes will likely offer lower rates and costs," Osby said. "But depending on the lender you're working with, you may have less flexibility on how to structure the loan."
(Source http://www.desmoinesregister.com)
The Dodd-Frank Act ordered the Fed to create a rule that prohibits mortgage brokers and loan officers from making money based on a higher interest rate for the homebuyer - what's known in the mortgage industry as the yield spread premium.
In January 2008, Iowa had 3,874 licensed mortgage loan originators - mortgage brokers and loan officers. Now there are 1,175, according to the Iowa Division of Banking. The new rule has mortgage brokers - already beleaguered - so frightened about the future of their business that their trade groups have filed lawsuits to stop the Fed from imposing the rule, which is set to go into effect Friday.
The rule is one in a series of battles - each with distinct local implications - set off by the landmark financial reform legislation signed into law by President Barack Obama in July.
Here's what's at stake: When people borrow money to buy a house, they usually pay a loan officer or an independent mortgage broker to arrange the loan. The obvious payment is an upfront fee based on the amount of the loan. For instance, brokers generally charge a 1 percent origination fee. On a $200,000 home loan, the broker would get $2,000 for his or her services.
There's another way mortgage brokers get paid, and the Fed wants to do away with it.
Brokers can be paid a portion of the borrower's interest rate - in a lump sum, by the lender. Any interest rate percentage points above the best possible rate the borrower qualifies for - the yield spread premium - can be paid to the broker.
The Fed's problem with this is that it motivates the broker to lock the borrower into a higher interest rate. The larger the yield spread premium, the more money the broker can make.
"When the yield spread premium is used to compensate the loan officer or mortgage broker's employee, that employee has a personal incentive to deliver a loan with a high interest rate in order to maximize his or her own compensation," the Fed wrote in its response to the lawsuits. "This is in direct conflict with the consumer's interest in paying the lowest interest rate possible for which the consumer qualifies."
Consumers often don't know about the yield spread premium, and mistakenly believe the flat fee they pay their broker is the broker's only compensation, the Fed argues in its court filing.
Mortgage bankers say the rule is well-intentioned. But they think it will further decimate the ranks of independent mortgage brokers, leaving consumers with fewer choices.
"Do I think there will be less brokers involved in transactions as a result of this? Yeah," said Dan Vessely, president of the Iowa Mortgage Bankers Corp.
Mortgage brokers argue the yield spread premium is a tool that gives them flexibility as they mediate between borrowers and lenders. For instance, a broker can discount the closing costs in exchange for a higher interest rate on the loan.
This might be desirable for homebuyers if they're short on cash or if they calculate they'll sell or refinance before the higher mortgage payments catch up with the front-end savings.
Tyler Osby, who used to be a mortgage broker and now is a branch manager for a mortgage banker, said mortgage brokers who abused the yield spread premium will be driven out of business. He's not sure what to think about the rule, and is waiting to see how it's implemented.
"If someone is looking to buy or refinance a house, these changes will likely offer lower rates and costs," Osby said. "But depending on the lender you're working with, you may have less flexibility on how to structure the loan."
(Source http://www.desmoinesregister.com)
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