On the tail of my recent post on the nasty Times report on REO brokers who had to gall to enjoy themselves at a conference, today's Times editorial fires some skud missiles into the hides of mortgage brokers. You should read the editorial to get a sense of both the editors' contempt for, and ignorance of the industry. I have originated loans for both brokers and lenders. I would love to explain to the author how 1+1=2.
Obviously, there were and are some bad brokers out there who placed people in bad loans. I see the effects of this myself. Those are bad people and should be punished harshly for the ruinous consequences of their corruption. But this is old news. Some of the assertions in the piece are just astoundingly ignorant and misleading. For instance:
The most clearly unethical form of payment is the so-called yield-spread premium. Brokers can claim this premium by steering a borrower whose credit history qualifies him or her for say, a 7 percent loan, into a more expensive loan at a higher rate. Predatory? Yes. And perfectly acceptable under existing lending laws. A House bill introduced by Representative Barney Frank, a Democrat of Massachusetts, would rightly make yield-spread premiums illegal.
Note to the Times: the yield spread premium is the commission from the lender. The only other way for a broker to get paid on a loan is to charge up front points, which I am sure is an even greater anathema to the editors. Perhaps the Times, which NPR reported yesterday is threatening to shut down its Boston Globe division if tens of millions of dollars in givebacks are not made by labor, would be happy if mortgage brokers worked pro bono. Interestingly, the Times is OK with a 1 or 2 percent fee for the brokers. Generous souls, those editors. In their view, 1% is a "fee," yet 2.5% is a "kickback." You really don't want the Times to decide what you earn. They can't even keep their contractual word with their own employees.
Of course, it is absolutely accurate that the higher (and more profitable) the borrower's rate is to the lender, the higher (and more profitable) the YSP/commission is to the broker. That isn't corruption, it is capitalism. Yet the very loans the Times is this morning decrying are programs that haven't existed in almost 2 years, conceived by banks that are by and large gone from the industry. It is also absolutely accurate that many of the people who borrowed these loans were not boy scouts either. Even well intentioned buyers in my experience should have shopped around. You cannot legislate common sense, nor can the state unring the bell of mistakes made by the consumer. At the very least, brokers must disclose their YSP; banks do not.
Having Barney Frank do anything to fix the mess he presided over gives me chills. Notably absent from the editorial is that in the State of New York, no licensure is required for a loan officer to arrange the loan of the biggest transaction of most people's lives. Originators work under the license of their company, lender, banker, or broker. Other than a perfunctory background check, all one needs to originate loans is to not be a felon. In a state that requires licensing of home inspectors, that is not a high standard.
If the NY Times truly wants to make a positive difference, they should first understand the nature of the problems on which they opine. Rather than ignorantly (and hypocritically) decry that mortgage brokers have the audacity to profit from their commerce, the Times should support a sensible system of licensing all loan originators. That way, those loan officers have something to lose if they hurt a borrower. Then, other responsibilities can be placed on their shoulders, such a those of a fiduciary, which is the same as securities and real estate salespeople. otherwise, the "solutions" advocated by the editors will have abhorrent unintended consequences and throw babies out with the bathwater.
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