Lender Paid/Consumer Paid

by Snets ~ May 19th, 2011. Filed under: Blog.

Not to get all esoteric on y’all but as of April 1st, companies like mine are compensated in two distinct ways. We have to choose one or the other and combining them is not allowed. We can be compensated in what are called Lender Paid Transactions or Consumer Paid Transactions. In both cases the net effect to the consumer can still be a rate plus points or a rate plus no points. So what are the differences:

Lender Paid Transaction – in this type of mortgage, we set up agreements with wholesalers to offer the consumer a mortgage at a fixed compensation. We cannot make less we cannot make more. The interest rate can change but what we make won’t change. In most cases a rate will be chosen that completely covers this contracted amount of compensation but if a rate is chosen that doesn’t cover – then the consumer must pay the difference as a closing cost. We are not allowed to waive it. If a rate is chosen that more than covers the amount – it must be given back to the consumer to defray his other closing costs. As an aside, in the past, we were allowed to pay for things that came up at the end – say a rate lock extension or chip in to pay some minor fee that rose at closing – well the powers that be have said this is verboten – why, no one has given me a good answer yet – basically it’s “because we said so”. But you poor addled borrowers don’t know any better, so they will protect you from us helping you.

Consumer Paid Transaction – in this type of mortgage, we offer a rate to a consumer. Now it gets a little confusing here but we will typically offer you a rate that is over par, or in other words, the rate will have built into it a premium that we just used to retain for our compensation. The premium still exists but we can no longer retain it for our compensation. However, we can rebate it back to you to pay part or all of your other closing costs. I said it was confusing – stay with me here and remember this because this is what I am bitching about today. This premium used to be called a YSP (Yield Spread Premium) and we were duty bound to disclose to you exactly how much it was. Somehow the YSP got singled out as one of the problems that caused the mortgage mess. They were called kickbacks – well I suppose they were, but it is how we were paid. When we offered you a rate with zero points – how the hell were we supposed to get paid? It was with the YSP. The bottom line – did I provide you a no points deal lower than the corner bank – well yes I did and in its lowest common denominator, if you will, I was kicked back a YSP – but you got a lower rate and fees – I mean every commercial transaction has a profit margin, from buying a candy bar to a car. It was a very convenient bete noir for politicians to hang their hats on as something that was screwing the consumer.

Ok now here’s the rub – you take two mortgage transactions that are identical in every respect – same interest rate, same net closing costs, same payment, same amount of cash brought or received at closing EXCEPT one is Lender Paid and one is Consumer Paid. Now if no one told you and you didn’t look at any paperwork – you would not have the slightest idea that the two transactions were different – you would end up with the same interest rate, you would have the same amount of net closing costs so that would mean you pay or you would receive the same amount of proceeds at closing, you would make the same payments for the 30 years of the transaction – so what is different???? Well what is different is the APR. Now the APR is defined as the actual cost of borrowing – but the truth of the matter is the APR is higher on the Consumer Paid Transaction. Now you ask – how is that possible? Well this is how – when you receive a Lender Paid Transaction – the lender pays me so the there is a zero sum of origination fee and credit that will JesExtender not affect the APR. On a Consumer Paid – you have the origination fee but the credit must be used to offset costs OTHER than the origination fee. So as the origination fee is part of the APR calculation and most of the other costs are not – even though everything is identical – the APR is higher. How can this be – did you pay more somehow – no you didn’t – were your costs of borrowing higher somehow – no they weren’t – they were just different. Doesn’t this make the value of looking at the APR when comparing lenders kind of useless?

To my mind this is not a good thing – there are other nuances of difference between the two types of borrowing but they’re not germane to this conversation.

Consider

1. All retail Loan Originators – i.e. people who work for banks offer their deals at almost 100% Lender Paid – so put their deal beside my deal – everything identical and their APR will be lower than mine. Normally you are instructed to compare APR’s because a higher APR means you must be paying more somehow. So from a financial standpoint, are you paying more dealing a company like mine – of course not but this idiotic rule makes it look that way – banks love it. (I should also point out that this is a really dumb example because banks charge so much more for a mortgage than we do, its absurd. Look at our rate sheet – I post our rates and then below that the bank rates taken right off their websites daily – they make SOOOOOO much more than we do on a transaction, its beyond criminal – and yet you are being protected from us rather than those bloated bastards.  In some cases, because of the way this works – it is entirely possible that they could have a WORSE deal but a lower APR – yep you consumers are really protected with this!

2. Now as we cannot offset the credit in a Consumer Paid transaction – the origination fee, which is a form of pre-paid interest may possibly be considered a tax deductible cost. On a Lender Paid this is not so because our compensation or origination fee is completely offset in a Consumer Paid – it is not offset as by definition, the credit has to be used to pay for OTHER closing costs. Again, does that make sense – the transactions are basically identical but you may get something extra to write off if you pick Consumer paid (check with your CPA before trying this)

3. Some of the OTHER closing costs are APR related, but we don’t give an APR credit because it is impossible to decide if the credit we gave you paid for an APR related item or a non-APR related item – so the value of the APR is further diminished

Well you have a taste of how political expediency is messing up everything these days. The pols are still trying to make you believe that mortgage brokers got us into this mess – yeah, there were some bad ones but the damage done by them wouldn’t add up to a hill of beans compared to the big lenders and Wall Street – we just can’t defend ourselves like they can – kick our asses so you can say you’re doing something to improve the situation when all they did was jump all over the folks who had the best rates but contributed far less to political campaigns. Personally, I like most of the changes – we have gotten rid of quick buck artists. And man sakes alive – it has illustrated very clearly what a killing banks make on transactions. When we can offer MUCH lower rates and make a living, plus our wholesaler makes a profit and then compare that to much higher rates that a bank charges – and you know the dirty little secret, they get paid after the fact also in something called an SRP or Service Releast Premium – we don’t get that – they have marginalized us so well that they don’t have to have as sharp a pencil anymore – (Today I’m 4.5% and 0 points and BofA is 4.75% and 1.25% and don’t forget the SRP – isn’t a competitive marketplace grand!!!!).

Well as my nephew told me – when in doubt – Rum! Give us a call, anytime, round the clock – I will answer and I will give you a lower rate than the banks – Can’t Hurt!

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