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 Boston Globe.

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 loan.

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 practice."

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 closing documents."

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.