The National Association of Mortgage Brokers (NAMB) and many New England based
mortgage brokers had a rude shock last week when a well known
Harvard Law School professor slammed the profession on the Op Ed page of The
Elizabeth Warren started her column, entitled "Mortgage brokers' sleight
of hand" by saying;
"In the past five years, if you called a mortgage broker when you were about
to buy or refinance a house you may have been told, 'We can check with
lots of lenders so you'll get the best price.' Because you are a careful shopper,
this sounds good - one-stop comparative shopping. The broker most likely didn't
add, 'I'll take a bribe to steer you to the loan that is more expensive for
you and more profitable for the lender.'"
Needless to say, mortgage professionals were immediately and absolutely outraged
But Professor Warren went on to say that, while a mortgage broker can be extremely
helpful in guiding a borrower through a confusing transaction, "you are just
as likely to encounter a broker who is working only for himself." Invoking the
bribe word again she stated that some brokers will steer clients into higher-priced
products than necessary given the clients income and credit score while selling
the client on it being the best possible deal.
The Professor said that this practice of steering is so widespread that it
has a name - "yield spread premium" while it is more truly
a payment from the lender to the broker for selling the buyer a higher-priced
The real kicker, Ms. Warren says, is that the homeowner/buyer will end up paying
the "bribe" in the guise of additional fees and points added to
the closing costs and buried in the closing documents.
She quotes a Fannie Mae vice president as describing the yield spread premium
as a lender kickback but the process is perfectly legal and
Congress and the few regulatory agencies involved in the non-federal portion
of mortgage lending have "generally approved of yield spread premiums."
Professor Warren estimates that 85 to 90 percent of subprime mortgages involve
some type of yield spread premium "which suggests that some brokers are
needlessly pushing clients into more expensive products" and quotes Fannie
Mae estimates that 50 percent of borrowers who were sold onerous subprime mortgages
could have qualified for prime-rate loans. She stresses, however, that not only
subprime borrowers fall victim to the practice and asks, "How many families
are losing their homes because of the difference between paying 6.5 percent
and 9.5 percent for the same loan?
We asked both NAMB and the Mortgage Brokers Association (MBA) for a comment
on the Warren Op Ed. The MBA has not responded, however NAMB provided us with
a letter written to The Boston Globe by George Hanzimanolis, president of the
National Association and Rosemary O'Neil, president of Massachusetts Mortgage
Association. The letter reads in part:
"In response to Elizabeth Warren's slanderous editorial (Mortgage
Brokers' Sleight of Hand, October 2), let me (sic) say clearly and without
equivocation: there is no place in the mortgage industry for those who commit
fraud, accept bribes, or otherwise deceive consumers. That goes for lenders,
brokers, and other loan originators.
But Ms Warren would blame only brokers for the mortgage industry meltdown, and
this is certainly not the case.
Abuses that occur should be stopped. But let's not throw out valuable
tools that can help people qualify for appropriate loans so they can get to
the settlement table.
The Yield Spread Premium (YSP) is a good example. The Yield Spread Premium is
the mechanism used industry-wide to customize each loan to a particular borrower's
needs. It is not a bribe. It is a legal form of payment, recognized by HUD and
verified by the courts. Its main purpose is to provide the consumer with the
option of paying points to lower their rate or to increase their rate and pay
no points. The yield spread allows the broker to do a loan with 0 points and
be compensated by the lender for their services. Banks and credit unions offer
the same pricing model. A consumer always pays a higher rate when they pay no
points regardless of where they obtain their mortgage. This is a universal common
The letter states that a broker is required by federal law to disclose the yield
spread in the Good Faith Estimate provided to the borrower during the lending
process and in the HUD-1 settlement statement at closing. Quite different, it
says, from Ms. Warren's claim that the cost is "slipped into the
It is a good bet that neither Professor Warren nor The Boston Globe has heard
the end of this. We, however, are going to bide our time and bite our tongues
except to say that we hope the many proposed changes in the laws on lending
especially those relating to educating borrowers and clarifying lending disclosures
will soon make the above controversy obsolete.
The article in the Boston Globe can be found here.