State Bans Yield Spread Premiums for Reverse Mortgages, Banks Win

Competing for business in New Hampshire has become increasingly difficult for brokers after a state law banned yield spread premiums (YSP) for anyone originating reverse mortgages earlier this year.  Meant to prohibit compensation that rewards lenders for selling loans at higher interest rates, the law became effective July 31st and provides an un-even playing field for mortgage companies that favors banks.

Driven by a growing secondary market for HECM loans, lenders have been able to lower the costs of reverse mortgages using additional income from the YSP.  However, seniors in New Hampshire can only find these type of deals from banks because they’re not required to disclose YSP to borrowers.

Meanwhile, since brokers are required to disclose YSP, they’re limited in what they can offer seniors according to Nicholas DeMasse, an originator with Reverse Mortgage of New England.  “I can’t compete because of the prohibited yield spread premium for a reverse mortgage originated by a broker,” he said in an email to RMD. “My only option is to charge the borrower an origination fee.”

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When banks offer a no origination fee reverse mortgage at the same rate, brokers are finding it incredibly challenging to do business in the state.

Now, companies like Direct Finance Corp – who was the 4th largest reverse mortgage lender in the state during 2009 – that broker loans have seen volume slide dramatically.  Alain Valles, President of DFC tells RMD that while the law to eliminate yield spread premiums was well intended, it did not reduce the costs of reverse mortgages.

“The law actually reduced competition in the marketplace and resulted in an un-even playing field,” said Valles.  “New reverse mortgage programs that have significantly reduced the upfront costs and fees are not available from mortgage brokers because the costs are lowered through yield spread.”

As business once originated from companies like DFC has dropped over the last year, banks like Wells Fargo, Bank of America, and MetLife have seen their volume increase.  As a result of the law, “there are fewer mortgage brokers serving the marketplace and fewer loan originators that can go to seniors homes to explain the pros and cons about reverse mortgages,” Valles said.

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  • Of the last 20 loans I originated- only 3 were fixed rate. The upside to this article is that the senior is being served more properly by not being sold the higher paying fixed product when the LIBOR version gave them access to the same amount, keeps their balance from growing so quickly and leaves a larger credit line.

  • Wealthone says “The upside…is that the senior is being served more properly by not being sold the higher paying (commission) product..” REALLY? No bank employee Loan Originator ever steers a borrower to a loan product which provides a higher commission? HOGWASH! I have competed against bank LOs who don’t provide more than one HECM Counseling resource. If bankers are so concerned about the senior borrowers, why didn’t THEY develop a proprietary product like the HECM Saver? Banks got all that TARP money- to my fellow brokers, what did you do with YOUR TARP money? I bought a blue one!

  • The fact alone that someone gets an adjustable vs. a fixed rate does not mean the senior is being served more properly. The same can be said for cutting out mortgage brokers from the business, which it seems is what all the regulations lately have been trying to do. The senior is best served when they are being presented the best deals on ALL the products and make up their own minds about what works best for them.

    There are no guarantees with the adjustable rate-everyone knows eventually it will surpass the fixed rate again. As to the downside of having to take a lump sum, well, we’ve had several homeowners who just want to pay off their mortgages and not take a lump sum. The simple thing to do is to pay back the lump sum 30 days after the Reverse Mortgage loan closed. It’s a way to beat the system and can still provide the senior with the peace of mind of a fixed rate and the knowledge that they didn’t pay high fees for that peace of mind. This is not an option for everyone, obviously. Some people need a line of credit. But it goes to show that while a fixed rate is SOMETIMES not the best option for the senior, blanket statements, limited viewpoints and steering (toward banks) DEFINITELY is not the best option.

    • socalrm,

      I cannot agree with your comment. Yes, customers have the right to choose what they do; however, advising them to take that road is another matter.

      While paying down a fixed rate HECM immediately following funding has been in use since the fixed rate product first came into play, it could be very detrimental. Saving costs on accrued interest by paying down a fixed rate HECM could be one of the worst decisions a borrower could ever make. This assumes you can only offer closed end fixed rate HECMs.

      What if the borrower needs more money out of their mortgage later, what will that person do then? We saw that mess with seniors who maxed out their HECMs and needed to refi post 2008. In most cases they were underwater because of lower home values. Even if that was not the case, in many cases accrued interest plus the costs of refinancing had grown faster than the principal limits, especially after 9/30/2009.

      The future can bring even more complications. You are in Southern Cal. What if the lending limit drops to $417,000 on 10/1/2011 and your borrower was eligible to use a home value of $625,500 on the fixed rate HECM? What if the principal limit fails to grow as quickly as the accrued interest and lenders no longer pay any upfront costs, will your borrowers be able to get back what they paid down?

      Adjustable interest rates rising above current fixed rates mean little. It is the overall costs of the loan one must look at. It is the balance due on the date of termination which is determinative if the decision to go with a fixed or variable rate HECM is a good one or a bad one. We have been dealing with this issue for years longer than the current era where we have fixed versus adjustable rate monthly HECMs. Our problem back then was helping seniors who needed lower proceeds upfront decide between an annually adjusting rate HECM (with its higher margins but lower life-time cap) and a monthly adjusting rate HECM. I wish lenders were offering an annually adjusting CMT (or LIBOR) HECM Saver; I think they could be a great cash management product for seniors who need some help but do not need anything close to the gross principal limit.

      Yes, peace of mind that a fixed rate provides may be a huge benefit but it may not be so if your borrower needs the cash they paid back at funding. Cash management issues can easily conflict with interest costs. That is why adjustable rate HECMs are ideal for many seniors. However, there is no question that borrowers need to make these kinds of decisions, BUT we should not “guide” them into making them unless the answer is obvious – which is seldom.

  • Another example that over-regulation like this will end up hurting consumers. Once the big banks have eliminated competition they’ll increase costs to consumers. The regulators don’t seem to understand that the banks continue to earn rebates in New Hampshire. Let the markets determine prices!!

    • Lance,

      I agree except what do regulators have to do with the issue? My understanding is this is New Hampshire law, not some regulation. That makes it far more political and far more costly to undo.

      I doubt if the NAMB has the financing to get the lobbyists they need to undo this law. It would be surprising if the MBA did not fight such a move tooth and toenail.

      What is the position of NRMLA? Probably neutral at best!!

      It is the NMLS requirements and state laws like this which are driving many non-FDIC mortgage bankers to look at acquiring small FDIC banks.

  • Mortgage brokers as well as all loan originators have lost the yield spread premium issue. The banks won big time with the Federal Reserve Boards’s final rule. As of April 1st there will be very few mortgage brokers left.

    • zi_zou,

      The Fed did not act on its own. Section 1403 of The Financial Reform Act (PL 111-203) eliminated YSP not the Fed. Thank goodness the Fed is delaying it until next year. You like many others blame the wrong parties. Blame the Democrats in Congress and the President for the elimination of YSP if you want to blame someone.

  • “the simple thing to do is pay back the lump sum 30 days after…” makes no sense if they ever want to take any money in the future- once its paid back thats it- no access to it again

  • It’s been my unfortunate experience that many brokers in my area sell the borrower loans that they don’t need inorder to get the YSP. I’ve known borrowers who were convinced to take $200K when they only needed $20K, or were given higher interest loans when the lower rate was more advantages. The YSP do not make the playing field level. Brokers are able to lower their fees upfront (MIP, etc), as they get so much bloody money on the back end.

    • thehappercooker1,

      I hate innuendo. It paints all of us with the same brush. It makes you look good but the rest of us bad. If this is a common practice in such and such a city, name the city. You are not picking out any particular company. Of course you may not be loved by those RM originators in that city.

  • Any regulation that creates an uneven playing field is bad regulation. Politicians rarely see or it seems care about unintended consequences. Its much more important to them that they appear to look good. I believe that according to the pols, the only good broker is a retired broker and that all business should be done by the HONEST BANKER. Once that is accomplished, there will no longer be competition and the senior will truly get to suffer. ITS TIME FOR NRMLA TO STEP UP TO THE PLATE AND ADVOCATE FOR THE BROKER. After all, the broker makes up the bulk of the NRMLA membership base.

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