Two weeks ago, I talked about some of the regulatory changes that have impacted the industry and what that means for you as a consumer. Now I’d like to shift gears and talk about some of the changes that could potentially be on the horizon that could rock the industry. For those of you not familiar with how mortgage brokers make income by helping put you into a loan, they typically make money on the “front” or the “back” of a loan. “Front” income is the percent charged to the customer as a fee for the transaction and can be found on a Good Faith Estimate (GFE). Income made off the “back” is income that the lender pays the broker directly and this income is not typically listed on a Good Faith Estimate. This gives brokers two potential sources of income on each deal which is why there can be such variance in the estimates you receive from brokers even if they are using the same lending source. These two sources of income are known as Yield Spread Premiums (YSP) for a Mortgage Broker and Service Release Premium (SRP) for a Mortgage Banker.
When I started in the industry, I was taught to charge 1% on the front and the back of a deal for a total of 2% off each loan. Over time, I struggled with this because a broker can move around where the percentage from the front to the back depending upon what is most important to the client. For instance, for a rate sensitive customer, brokers will load their costs on the front of the loan so they can show a lower rate. For customers who do not want to pay the percent on the front end (often known as an origination fee), the broker can build the income on the back of the loan. This will, however, bring up the customer’s rate.
A little confusing? If it is, you shouldn’t feel alone as many consumers struggle to figure out how they are getting charged, who’s making what money, and if they are paying a fair price for services they receive. Net-Net: Mortgage Brokers/Bankers have to make an income somehow and I prefer to be as transparent about how I do that as possible, which is why I moved to a flat fee structure years ago. “Hiding” the income on the back of a loan never felt right to me, and apparently the government agrees. They are advocating that the income on the back (known as YSP) be given back to the consumer rather than going to the broker as income. That seems fair, right?
Well, I think it’s fair only if mortgage brokers are doing loans, but the local “banker” sitting in your bank branch will not have to give back what they earn to consumers (SRP). This is frustrating as a small business owner as if the government is trying to create a transparent environment for consumers; they are missing the major origination of mortgage loans: Banks. Meanwhile, small businesses continue to struggle during these difficult economic times under increased regulatory pressure.
I love what I do, and plan to stay in the industry as long as possible so that I may continue to service my clients. There is likely to be a point, however, where I might have to evaluate other options to ensure that I am sustainable in the business.
Interestingly enough, they’re not doing anything to change the banking and the SRP. I guess that goes to show who has the larger lobby group – bankers or mortgage brokers? Mortgage brokers still represent a fair amount of business here in the mortgage industry, but not nearly as much as they did just a few short years ago. I’m hanging on because I love it. I love the working with my clients and providing them the best possible service. I don’t know how long I’ll stay as an owner of my own company if guidelines and regulations continue to try to force small companies out of business.
So what will be next? Where will the government find things that I’m doing special that they can copy? It’s certainly not going to be the new good faith estimate because that thing’s horrible and I know many of you would agree with me on that. Thanks for reading.