I've been asked this a couple times this week…I'm wondering if it's possibly caused by Aubrey Cohen's recent article in the PI about mortgage brokers, subprime mortgages and outrageous yield spread premiumsor if consumers are more savvy and aware of YSP.

Loan originators who work for mortgage brokers may receive a yield spread premium from the lender they are brokering the loan to.  This YSP is required to be disclosed on the Good Faith Estimate and the Loan Application Disclosure Form (if you're providing a mortgage for property in Washington State) and as well as the HUD-1 Settlement Statement.  YSP has not only been used for loan originator compensation, it has also helped pay for closing costs or provide mortgages with "no points". 

Loan originators who work for banks, credit unions or correspondent lenders are not paid YSP (unless they are brokering the loan).  However they may still be receiving compensation on "the back side" of the transaction.  It's just not required to be disclosed.  Part of the reason for this, with correspondent lenders, is the inherent difference between them and mortgage brokers.  Correspondent lenders underwrite, prepare loan documents and fund the transaction from their credit lines.  The mortgage is sold to the lender after closing.  A mortgage broker merely originates the transaction and may do some processing/coordinating with the lender.  They do not underwrite or fund the transaction.  A correspondent lender assumes greater responsibility for the transaction and may be compensated after the loan is closed.  Often times, correspondent lenders may receive favored pricing over a traditional mortgage broker as they assume more risk and are performing more of the work (underwriting, drawing docs and funding) than the broker. 

With the media focused on YSP, many consumers have become misdirected on how to select the person who will be advising them on one of the largest transactions they may face in their lifetime.  Focusing on how much they believe a loan originator is compensated will not provide them with the lowest rate, best service or most qualifed Mortgage Professional.  For example, if:

• Lender A is a mortgage broker who quotes 6.00% priced with zero points and a YSP of 1% of the loan amount.
• Lender B is a bank who quotes 6.00% priced with zero points (nothing is reported on the back end).
• Lender C is a correspondent lender who quotes 5.875% with zero points (nothing is reported on the back end).

All loan originators are being compensated in the scenario above…I would bet pretty close to the same.   If the going rate is 5.875-6.000% (as based on this example) why would anyone care how much someone is compensated?  I could totally understand if they received a rate of 6.500% (assuming all loans are locked at the same time/date as rates are currently changing on average three times a day and a 0.25% swing is not uncommon).   When you're shopping for a big ticket item, such as a TV, do you care what the salesperson is making or do you care how much YOU are paying?

If you're a long time Mortgage Porter subscriber, you know that I believe that selecting your mortgage by rate is not the best route to go.  Especially considering that you're making this decision based on a rate that is moot unless you are ready to lock at that moment.  Rates are a moving target.  For this reason, the YSP the mortgage brokers are forced to quote are only a best guestimate because they do not know what they will be paid until the loan is locked.

I don't have a problem letting clients who want to know what the compensation may be "on the backend"…just ask.  I question why a consumer would care if the rate is the going market or better.

Related post:

How Am I Paid?

Picking Your Next Mortgage by Rate Shopping?  You Might as well be playing Liars Poker.

Now is the time to work with a Correspondent Lender

With the passage of HR 3221, we knew that the calculation used to determine what the "economic stimulus loan limits" (aka "temporary jumbo limits") would be reduced from 125% to 115% of the median home price.  What we didn’t know, until this morning was what figure would be used for the median price.  The new conforming loan limits for 2009 are actually lower than what I roughly anticipated in an earlier post.

If you are considering a mortgage with a loan amount of $506,001 – $567,500 or if you’re in a county that will no longer qualify; you don’t have a lot of time to take advantage of conforming-jumbo rates.   Lenders may begin implementing the new loan limits before the end of the year so that once loans are delivered to Fannie or Freddie (this takes place after your loan is closed), the loan limit will fit the new guidelines.

2009 Conforming Limits are unchanged:

1-Unit  $417,000

2-Unit  $533,850

3-Unit $645,300

4-Unit  $801,950

2009 Conforming Jumbo Limits. 

King, Snohomish and Pierce Counties effective January 1, 2009

1-Unit $506,000 (reduced from $567,500)

2-Unit $647,750 

3-Unit $783,000 

4-Unit $973,100 

San Juan County

1-Unit $483,000 (reduced from $593,750)

2-Unit $618,300 

3-Unit $747,400

4-Unit $928,850

Only Washington State counties listed above benefit from conforming jumbo limits in 2009.

I just received the official statement from the Federal Housing Finance Agency (FHFA)regarding the status of Fannie Mae and Freddie Mac.   It has been announced that they are now in "conservatorship".   FHFA has defined conservatorship on their handy Conservatorship Q&A page as:

"A conservatorship is a legal process in which a person or entity is appointed to establish control and oversight of a Company to put it in a sound a solvent condition.  In a conservatorship, the powers of the Company’s directors, officers, and shareholders are transferred to the designated Conservator….

In this instance, the Federal Housing Finance Agency has been appointed by its Director to be the Conservator of the Company [Fannie Mae & Freddie Mac]…to keep the Company in a safe and solvent financial condition."

From this morning’s press release:

"The goal of these actions is to help restore confidence in Fannie Mae and Freddie Mac, enhance their capacity to fulfill their mission, and mitigate the systematic risk that has contributed directly to the instability in the current market.  The lack of confidence has resulted in the continuing widening of their MBS [mortgage backed securities], which means that virtually none of the large drop in interest rates over the past year has been passed on to the mortgage markets.  On top of that, Freddie Mac and Fannie Mae, in order to try to build capital, have continued to raise prices and tighten credit standards."

This could eventually translate to lower mortgage interest rates for you and me.  Monday and the days following will be fascinating as we continue during these historic times in the mortgage industry.

I think it’s a little too early in the game for Fannie and Freddie’s Eulogy.   The Government is all over making sure this patient is stable and recovering.   Fannie and Freddie are "not dead yet"!

Effective October 1, 2008, Fannie Mae is adjusting the cost of mortgages from 0.25% to 0.50%.  Freddie Mac will follow on November 7, 2008 with an add of 0.50%.  Consumers will most likely not see this from their end–it will all ready be factored into the pricing of their rate. 

Some lenders will begin pricing in the fees before Fannie and Freddie (conventional financing) as the dates are for when loan files are delivered to them–not originated or locked.  A lender does not want to get caught with a rate where they’ll owe Fannie or Freddie 0.5% more in fees per file come October…in fact, I’ve noticed that a few lenders have all ready started incorporating these fees into rates this week.

A half point in fee (or 50 bps) typically equals about 0.125-0.25% to rate depending on what pricing is when the mortgage interest rate is locked.  The amount of the fee (referred to as LLPA or Adverse Market Fee) varies depending on credit score, loan to value and program.   Fannie Mae has added loan to value brackets from the previous guide over 70%.   The new LLPA (loan level price adjustment) matrix is more complicated than the earlier one as well.

This is one reason to work with a Mortgage Professional who has the ability to shop various banks and lenders during a transitional period such as this.  For example, assuming a lowest mid-credit score of 679 (two borrowers) at an 80% loan to value for a purchase, the difference between lenders who are all ready factoring the "adverse market fee" is 0.75% to fee.  Based on a loan amount of $400,000, this would cost an extra $3,000 for the same rate or about 0.25% more in rate!

The closer we near October, the more lenders will start pricing in Fannie’s adverse market fees.

If so, you may want to check in with the person you co-signed for just to make sure every thing’s okay.   In the event they’re not able to meet their mortgage payments,  you certainly don’t want the "foreclosure man" to show up at your door.   The quote below is about a foreclosure in Kirkland where someone co-signed for a friend and the foreclosure man is knocking, as reported by Erik Lacitis of the Seattle Times:

"I just thought I was doing a friend a favor by co-signing," she said. "And then he was going to refinance and get my name off the loan. I can’t afford for this to happen."

No one ever expects to go into foreclosure and much like the person above, intentions are to refinance the co-signer off the mortgage.   However when things go wrong and someone is not able to make the payments, the co-signer is on the hook.  Unfortunately, the co-signer may not have the same lead time as the borrower in dealing with a foreclosure situation as many who are dealing with this type of situation are living in denial.

Nearly five months can elapse while the various legal steps are taken, and right up until the morning of the auction, the foreclosure can be stopped if an arrangement is made with the lender. Only about 20 percent to 30 percent of foreclosed homes in the Puget Sound area actually are sold at auction, based on statistics from the counties.

Foreclosures are on the rise in the Puget Sound area so if you have done a friend or family member a huge favor by co-signing on a mortgage, you may want to give them a friendly call to see how they’re doing.

Hat Tip to Marlow Harris of 360Digest.