About 15 years ago Fannie Mae and Freddie Mac, the two quasi-government sponsored agencies that buy most of the loans done in America these days, started offering pricing that allowed mortgage lenders to make increased fee compensation by offering loans that carried interest rates higher than the going market price. That meant if a lender could find a customer who was too trusting or too stupid and who would not question the rate, the lender could significantly increase its income. How much?
Let’s say that the market rate was 6% and that the lender could earn 1 percentage point as income, say $3,000 on a $300,000 loan. If they could talk the borrower into paying 6.25%, perhaps telling him the "market moved" or that he wasn’t qualified for the 6% program, they could earn $4,500. Note that they already cover costs and earn some profit with $3,000 income, so the extra $1,500 is really gravy!!!
This extra income is called Yield-Spread Premium – YSP for short – and is the main vehicle by which dishonest lenders diddle their clients. According to HUD rules, this payment must be disclosed to the borrower, but as a general rule, it is only disclosed too late in the game to do anything about it. Plus, most borrowers don’t know how to read the documents anyway. They don’t know that they are paying an extra .25% in rate so their lender could go to Hawaii and bask in the sun!
The regulators and the courts have been waltzing around this topic for years and no one in power ever seems to want to step up to the plate and start enforcing CONSUMER PROTECTION laws that are already on the books.
Good news. A court in Washington state has agreed to hear a suit and has even made it a class-action suit. It looks as if some concrete action is liable to come from this action. I sure hope so as it could be the biggest news on the YSP front in years. For those who are interested in learning more, check out http://brokerwatchdog.com/2006/11/26/pierce-v-novastar-mortgage/
Stay tuned!
Randy Johnson Randy is a Credit.com contributor and seasoned mortgage expert. He writes about home buying, mortgage laws and real estate finance issues. He has financed over $1 billion in properties, is the author of How to Save Thousands of Dollars on your Home Mortgage and he is a feature columnist for Savvy Borrower.
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