Do you really understand all the fees you get charged as part of a mortgage transaction?
You might, and you should. But the odds are that you don't. Real estate and mortgage disclosures and paperwork are notoriously confusing.
But in the wake of a major new federal court decision, it is all the more important that you understand a particularly confusing fee that millions of home mortgage borrowers have been charged by lenders and loan brokers. It's called a "yield-spread premium," but it sometimes goes by other names, such as a "servicing release" premium or simply by the initials "YSP."
The U.S. 11th Circuit Court of Appeals in Atlanta recently handed down a decision allowing a bellwether class-action suit challenging the legality of the fees to proceed to trial. The suit alleges that yield-spread premiums paid by a lender to loan brokers amounted to illegal kickbacks for delivering borrowers at higher-than-prevailing interest rates.
Dozens of related class-actions are already pending in courts across the country, and many more are likely to be filed because of the latest decision.
But what do these far-flung cases mean to you? Potentially much more than you might guess. Here's why.
When a local broker signs up a mortgage applicant for a 71/2% loan in a 71/4% market, the loan is worth more to the lender because of the premium interest rate on the note. In exchange for that "above-par" rate, the lender typically pays the broker a fee, the yield-spread premium. It might be $1,200, as in the case of one plaintiff in the case in Atlanta. Or it might be much more--$4,000 in fees in another case. The net result for the borrower is always the same--higher monthly payments for the term of the mortgage.
But there are two sides to the yield-spread premium issue. At their best, such fees paid to brokers by lenders allow consumers to buy a house with minimal cash by rolling the customary out-of-pocket fees into the higher interest rate. In effect, a cash-short borrower gets to finance those expenses over a period of years, rather than paying them upfront.
So-called zero-closing-cost refinancings all use this concept. With well-informed borrowers who understand what they're doing and why, the yield-spread premium is a valuable, problem-solving tool.
At their worst, yield-spread premiums get tacked onto loans to unsuspecting borrowers who are already paying substantial fees to the broker, and full-freight on closing costs.
The extra fees amount to pure gravy to the broker for persuading the borrower to sign up for a higher interest rate.
All the broker has to do is check the daily rate sheets posted by competing lenders and then steer customers to the lender who'll pay the broker the most for delivering loans at above-market rates.
The federal agency responsible for protecting consumers from mortgage rip-offs sees both sides of the yield-spread premium picture. The Department of Housing and Urban Development says yield-spread premiums are not illegal in and of themselves, provided that they are properly disclosed and that they represent reasonable compensation for goods and services rendered by the broker in the transaction. But clearly, HUD says, some yield-spread premiums do amount to kickbacks to the broker, simply for serving up borrowers at extra-high rates to lenders.
What should you make of all this, especially if you plan to use a broker to obtain a home mortgage?
First, you need to know that fees from the lender to the broker are supposed to be disclosed to you. Part of your discussion with competing brokers as you shop for a loan should focus on the nature and amount of the broker's compensation: For the size mortgage I need at the lowest possible rate I can get, what are the total fees in the transaction? If I pay a higher rate, what closing costs could I finance?
Many brokers charge borrowers only part of their total compensation--say, a standard origination fee of one point (1% of the loan amount). They then look to the lender for some level of additional fees to cover their own business expenses--rent, salaries, commissions, taxes and the like.
The rationale here is that absent the independent broker pulling in new loan business, the lender would have to create "retail" offices on its own, at substantial expense. In effect, the broker provides out-sourced staffing services to the lender that the lender would otherwise have to pay for in-house.
Armed with competing brokers' quotes on fee-and-rate combinations, you ought to be able to make an intelligent decision on where to get your loan.
Distributed by the Washington Post Writers Group.