Mortgages, loans, financial matters

Now, let me tell you the secret no broker or bank wants you to know.  Almost every loan has at least 2% (or 2 points), and more often than not, 3% in it for the broker or bank as the mark-up/profit. (This is a good time to toss in a little industry lingo).
A point refers to 1% of a loan amount or $1,000 on a $100,000 loan.  We will use the word “point” or “points” from here on out.  The mortgage originator will show you only what you pay him for his services in the form of origination fee, mortgage broker fee, or discount point.
In most cases this origination fee normally equals 1 point.  What he intentionally fails to show you is what the mark-up/profit pays them for your loan.  This is typically another 1-2 points! This doubles or triples the revenue for the originating company. A listener of our radio show, “The Mortgage Insider Show”, called the other day and wanted a review of his Good Faith Estimate.  All of the third party fees were in line and he was being charged a 1-point mortgage broker fee.  So far, everything looked right.  The rate was 5.875%.  At this rate, that broker was getting another 2 points from the lender in addition to the 1 point he told the client about.  The broker tripled the cost of his loan.  Every loan in America is done this way.
You may wonder, “What is so wrong with this?  If it comes from the lender and I don’t have to pay these extra 2 points, why should I be concerned?”
Two reasons:
Not disclosing all charges “paid by you or the lender” is a violation of RESPA. RESPA violations are punishable under federal law and carry a minimum penalty of $5,000 and 5 years in jail for each violation.
The money is a reward to the loan originator for selling you a higher than market rate!  For every .25% jump in rate the loan originator can get you to accept, the lender/secondary market will give him a 1-point reward.
For example on a $100,000 loan, you are told the mortgage broker/origination fee is 1 point or $1,000.
You accept the terms believing it’s the only compensation you are paying.  However, the loan originator gets you to accept a rate you think is fair, but in reality is .500% too high (6.50% instead of 6.00%).  This rate allows the lender to reward the loan originator an extra 2 points or $2,000.  From a secondary market perspective, the loan originator produced a loan worth $12,000 more in interest payments due to the higher rate.  That is why they will reward the loan originator now with $2,000!
Would you pay $2,000 to make $12,000?  You bet!  It gets even better for the lender because most of the interest you pay is paid in the first half of the loan.  You never get ahead and the lender is making big money of every loan you do.  Have you ever looked at your mortgage statement and compared how much of your payment is going to interest and how much is going to lower the principal?
On the $100,000 loan above, you pay $29,893.08 in interest and only $6,079.92 in principal reduction for the first 5 years of the loan.  Now you can see why the lenders reward the originators for selling a loan with a higher rate.  It means more interest payments for them.  It gets even worse because most people only hold a loan for about 7 years on average.  They pay the lender all of those interest payments and when the buy a new home or refinance, they start all over again.
The originator can be a bank, a broker, or what I call a broker-bank.   Brokers use the lender’s funds and close in the lender’s name.  This is called a “brokered loan”.  Banks or broker-banks use their own funds or lines-of-credit and close in their own name.  This is called a “correspondent loan”.
A broker’s income for increasing the rate on brokered loans is called Yield Spread Premium or YSP.  The bank’s income for increasing the rate on correspondent loans is called Service Release Premium or SRP.
Federal RESPA rules that govern informing you of this “extra” profit only apply to the YSP in brokered loans!  Therefore, banks and broker-banks are completely exempt from disclosing the “extra” profit they receive on their loans because technically, their loans are not brokered loans.
This reward the loan originator gets for increasing your rate is referred to in many ways.  The most common are Yield Spread Premium, Service Release Premium, Overage, Broker Rebate, Lender Paid Fees, or Lender Paid Compensation.
For the remainder of the book we will be referring to it as Yield Spread Premium (YSP) for Brokers and Service Release Premium (SRP) for banks or broker-banks.  Regardless of what it’s called, it is a clear indication your rate is not in line with the market.  Therefore when shopping for a mortgage, you must know how to eliminate YSP/SRP.

Profit is made when the loan moves from retail to wholesale.  The mark-up or profit on a loan originated by a broker is made when the loan closes.  This extra amount is on the settlement sheet and paid directly to the broker.
The mark-up/profit on a loan originated by a bank is made when the bank sells the loan to the secondary market.  The mark-up/profit is the same for both the broker and bank. However, the broker has to disclose their mark-up/profit at the time of closing and the bank does not disclose their mark-up/profit because it is made after the loan has already closed.
For example, a broker originates a loan.  At closing, the broker does not use his or her own money to make the loan.  The wholesale lender will provide the funds to close.  The broker has originated the loan at a rate that makes a certain mark-up/profit.  The wholesale lender exactly knows how much mark-up/profit this loan creates when sold into the secondary market.  The wholesale lender will pass a large percentage of their secondary market profit to the broker at the time of closing minus a small cut for themselves.
A bank-originated loan has the same mark-up/profit as broker originated loan.  The bank will use it’s own funds to close the loan, pool it with other bank loans, and simply sell it into the secondary market making the mark-up/profit.  No one knows about the extra profit except the bank.
Since you can only get a loan from the retail side, let’s talk more about brokers and banks.
Look at the pros and cons of each.
Banks (and those entities acting as banks)
Pro

• Convenience
• Less likely to use high pressure or bait and switch sales tactics

Con

• Bank-only products
• Limited number of products
• One rate take it or leave it
• Rate is much higher
• Less willing to negotiate on fees and other charges
• Exempted from disclosure rules as outlined in the Real Estate Settlement  & Procedures Act (RESPA).

Brokers

Pro

• Access to wholesale rates
• Access to every product in the marketplace
• Customer service oriented
• Able to negotiate on fees
• Not exempted from the disclosure rule

Con

• Use high pressure bait and switch sales tactics
• Minimal and possibly no licensure required in many states
• More of a salesperson than consultant/banker
• No criminal background checks