It's bad enough that some loan officers, aka MLO (mortgage loan originator), make less than what they should on a borrower for several reasons.
1.) If I spend countless days and hours helping someone work on their credit instead of them going to a credit repair person that could charge from $500 to $1,000. And just by helping them, this is already included in my total pricing, and is just another part of my service to my borrower's.
2.) Or if some issues come up to where the borrower doesn't have some of the money for closing now and or has to pay off something, I will dip into my profit margin to make the deal work.
Where am I going with all of this? It's about the big guy, aka the government, pushing out the small guy who wants to help out the consumer. Can we say conspiracy, that the big banks might have a hand in this? Possibly, but that is not my argument here.
Janet Guilbault wrote this excellent post :
This post couldn't be more spot on and you need to read her post before you continue on with mine, to get the best understanding of what I am about to talk about. In the cliff notes version, Janet talks about the Dodd-Frank act that will abolish YSP, which is yield spread premium. Truly understand what YSP is and what it can be used for, before you state that it's just another way for lenders and or loan officers to make more money. From wikipedia - Yield Spred Premium
Janet mentioned a few things on how taking away the YSP could hurt the consumer. The biggest ingredient/issue? More cash required to close for the borrower. My other complaint is that it could hurt those buying properties of $100,000 or less or those that are strapped for closing costs to begin with. Before I continue, I don't want the debate about people needing more money to buy or more skin in the game. I have written about this and that is another subject.. so thanks
Let's break down a few scenarios.... Scenario #1, the total profit margin is $4,500, for both the company and the loan officer combined. Scenario #2 is $4,400. In both scenarios, I am not including the cash needed for the down payment. Assume that the down payment is already covered.
So as we can see, you have $500 left over. Sorry, but I am a firm believer that cash is king and that you should have a few months reserves, if not, more. So what does having $500 do for you when buying a new home? I wrote this series comparing different down payments, mortgage programs, and how to utilize your cash.
In this scenario, the borrower is now going to be short $1,400. I am not talking about getting seller help or gift funds, etc, etc. Each borrower is different and each seller is different. KISS
Key points : It's hard enough to save for a lot of cash. And even if you save a lot of cash, why should you be forced to put it all into the purchase of a new home. I truly believe that less skin in the game is better, just so you can have more reserves for emergencies. PS : to those that scream more skin in the game. FHA loans and VA loans were doing pretty well until the last 3 years. Gee, not only are people foreclosing on FHA and VA loans, but those that did put 10% to 20% down on conventional loans. Just think about this before you scream "more skin in the game needed." Think about unemployment, job losses, divorcees, and deaths in the family; that could be some of the major causes for the high foreclosure rates.
Conclusion : What about the fact that many buyers could be affected by this new act. What about the MLO, mortgage loan originator, who wouldn't take the time on someone buying a $100,000 or $80,000 house because the profit margin will be reduced. What about those deals that take a lot of work, a lot of elbow grease, but that I might not make more than $1,000. To some, $1,000 might seem like a lot of money per deal. But not if you know what goes into many of these deals. And what does that say for my expertise and knowledge? How much is that worth? Would a doctor or lawyer spend years of extended education and higher expenses, just to make little to nothing when it's all said and done? What about athletes? Don't they have a rare talent and get paid for it? (don't get me started, I think some salaries are just ridiculous - just trying to make a point)
What does it do when you have a loan officer that gets in over their head, realizing that it will be a lot of work to close that deal, but now drops the ball and the deal doesn't close now. People, it happens now. Wait until this new act goes into effect.
It's never to late to let those on Capital Hill know what this could do to the real estate market and industry. Let's get Janet's post and my post out to the public, to our congressmen and women, and get more people involved.
You, Me, and the YSP: Dirty Rotten Kickback or A Borrower's Best Friend? By : Janet Guilbault
Examples of eliminating Yield Spread Premium - Thanks to the Dodd-Frank Act By : Jeff belonger
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