As published in Scotsman Guide's Residential Edition, October 2010.
It is increasingly common for mortgage brokers with years of experience to move their business to a retail mortgage bank. When this occurs, brokers often list four reasons for their decision:
Yield-spread premium (YSP): They don't want to worry about the regulation of YSP.
Team consistency: They're tired of working with a changing mix of underwriters and others.
Net-branch opportunity: The bank plans to give them a net branch.
Avoiding audits: They'll be able to sidestep U.S. Department of Housing and Urban Development (HUD) audits and specific net-worth requirements.
Although all these reasons may sound great, brokers should consider each one more closely before deciding that a change to retail banking is their best course of action.
The Federal Reserve Board announced this past August that it will ban YSP beginning this coming April. Moreover, the financial-reform act signed into law this past July generally prohibits retail and wholesale residential mortgage originators from receiving compensation that varies based on loan terms other than the principal amount.
In response to long-standing concerns about YSP -- a fee paid to originators by lenders based upon a loan's interest rate and other terms of financing -- some retail mortgage banks created complex formulas that result in their originators being paid hourly wages rather than receiving per-unit compensation. Others renamed the accounting classification of YSP, calling it "gross gain on sale" or "accrued servicing revenue," for example.
Changing the name of YSP, however, isn't an acceptable solution, and efforts to pay originators by the hour rather than based on commission often leave originators unsatisfied and making much less money than they previously did.
Brokers, however, already switched from receiving YSP directly from lenders beginning with the new Real Estate Settlement Procedures Act requirements this past January. Presently, YSP is credited to borrowers and then captured by brokers. Complying with the new regulation is as easy as converting captured YSP to an origination finance charge. In other words, brokers could often make more money by staying on the wholesale side without having to make any material changes.
Although the idea of working with the same underwriter every day may seem attractive at first, the reality can get old quickly, especially if you don't get along with the underwriter. Working in a retail operation also often means you're stuck with the same appraisal-management team and other service-providers, typically with no ability to change. If you find yourself dissatisfied with how a certain department handles your loans, your only option often will be to complain to management.
As an independent broker, however, if you're unhappy with a lender or service-provider, you can make a change. This freedom allows you to conduct business with like-minded professionals.
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