Mortgage pros brace for hit to pocketbook

When the Federal Reserve Board invites comments on proposed changes to one of its regulations, a few hundred responses typically trickle in.

But before its recent deadline for feedback on amendments that would revise the disclosure rules for closed-end mortgages, or mortgages that can’t be paid off until they mature, the agency was deluged with nearly 4,000 comments.

Many came from loan originators, in New York and elsewhere, who alleged that the Fed’s proposal to restrict a compensation practice known as yield-spread premiums –YSPs for short — will put mortgage brokers out of business and hamper lending.

A yield-spread premium is a commission paid to a loan originator for selling a consumer a loan with a higher interest rate than the consumer qualified for. (The Fed officially defines a YSP as “the difference between the lowest interest rate a lender would have accepted on a particular transaction and the interest rate a loan originator actually obtained for the lender.”)

Mortgage brokers portray YSPs as helpful to consumers who do not have the cash in hand to pay originators’ fees that banks often charge. Consumer advocacy groups, however, deride the upcharges as kickbacks that encouraged some brokers to steer borrowers into more expensive loans.

While exact figures are not available, mortgage industry sources agreed YSPs represent a substantial portion of many New York area brokers’ compensation.

Richard Biondi, the past president of the New York Association of Mortgage Brokers, and a Long Island-based mortgage broker, attributed 98 percent of his compensation to these premiums. “If we eliminate the YSP, the first thing you’re going to do is eliminate all the brokers,” said Biondi.

So before the Fed hands down a decision, the industry is ramping up lobbying efforts to fight a ban on most YSPs (at least those where there’s the potential for a broker to earn more from the lender for steering a client into a more expensive loan).

Insiders expect the Fed to prevail in this unprecedented effort to curtail YSPs. They said the ailing mortgage industry will likely see a radical shift away from YSPs to other forms of percentage-based compensation.

Some mortgage brokers forecast lower profits and more defections from the already shrinking industry. “Regulators have been dancing around YSPs for the last 10 years … but until now, no regulator has actually proposed prohibiting it,” said Guy Cecala, CEO and publisher of Inside Mortgage Finance Publications, a Maryland-based publisher of newsletters and research.

“Basically they’re going to force the industry to come up with an alternative compensation system.”

Passions are running high because there’s a great deal of money at stake for everyone involved. According to a 2008 report by the Center for Responsible Lending, borrowers paid an estimated $20 billion in extra interest on loans made from 2004 to 2006 — largely because of YSPs.

Brokers defend YSPs as tools for consumers to finance their loans through the interest rate rather than shelling out cash up-front in the form of points. But YSPs can “create financial incentives to steer consumers to riskier loans for which originators will receive greater compensation,” the Fed notes in the Federal Register.

Now, with the possible Fed rule change, loan originators — both mortgage brokers and individual loan officers at banks — may not be able to receive payments based on a loan’s terms and conditions. Originators can still receive payments from lenders for delivering loans, and fees will be disclosed to borrowers.

Eric Appelbaum, president of the Midtown-based Apple Mortgage Corp., expects that in the new compensation scenario, banks will decide what a broker makes regardless of the interest rate a consumer pays. He noted that savings banks have been using such a system for years. “I’m guessing Wells Fargo [or other lenders] will decide how much Apple Mortgage is going to make,” said Appelbaum. “‘If you’re a Tier 1 broker, we pay you 1.5 percent, Tier 2, we pay you half a percent’ — that could happen.”

Others agree that lenders paying brokers a flat percentage is one likely outcome. At issue here, however, is the fact that origination costs are typically capped at 1 percent. If a bank pays a broker 1 percent and wants to charge another 1 percent to keep that revenue stream coming, common sense says consumers are likely to balk.

“Most likely we’ll see a combination of, for example, giving brokers half a percent and charging half a percent [to the lender], and then basically ending up with the 1 percent origination fee,” said Cecala.