Friday, June 05, 2009


Angelo Mozilo, the head of Countrywide Financial, a mortgage lending company, has been charged with securities fraud. This brings up the sore subject of home mortgage lending abuses.

If you've purchased a home, you'll probably recall all the fees tacked on the to basic mortgage obligation. Document preparation fees, loan origination fees, and various fees by various names, all are tacked onto the loan to be paid by the borrower.

Consider the loan origination fee. 1% is a common amount for this fee, but it can range up from there. So, you might have walked into Countrywide, or WaMu, or any of the zillion loan originators, to arrange a home loan, and by the time you were done, the originator would earn 1%. On a $200,000 home, that $2,000 you paying the originator, right on the spot, as a fee for services rendered. And for what?

The originator does just that; starts the loan. It's not a lender, that's usually a bank or some other financial company. The originator might make a few calls to an actual lender, will type your data into its computer, will pull a credit report and shuffle some paper, and with often less than an hour's work, will earn $2,000. It's hard to believe they really earn that money. It is closer to the truth to say they are just in a good position to skim it off the top of your home purchase transaction.

If you're buying a home, bear in mind, the origination fee is negotiable. Offer $200, see what they'll accept.

Also realize that the person you initially deal with is probably not the person processing your loan. Many originators are just sales people, bringing in business, then handing off the paperwork to secretaries.

Here's another little jewel: Yield Spread Premium (YSP). Keep an eye out for this if your buying a home, or refinancing. Or go back and check to see if you've been screwed.

Say that you qualify for a 5% loan from a bank. Well, if the originator gets you into a 6% loan, the originator and the broker (who places your loan to the lender) get to split that one percent. It's disclosed on your closing statement, but would you really know what Yield Spread Premium meant? 1% interest on a $200,000 over 30 years is a lot of money.

If you ask, the originator will say, well, you don't pay the YSP, the lender does, which is how it looks on the closing documents. No, you're paying it through the 1% higher rate you're paying.

People don't buy many houses so it's foreign to them, and they're usually excited about closing, so if they stop to question things it feels like it could queer the deal. Plus, so much money is involved that it's easy to overlook 1% here and 1% there.

Shop around. Go to a bank. Don't let these rapacious vultures, like Mozilo, steal money from you


Sisyphus said...

News you can use. Thanks Alan.

fortboise said...

We're careful shoppers (to put it charitably), and infrequent home buyers. As in once in my life, so far. In 1984 (the good old days when 10% was on the low side of what you might get for an interest rate), we bought a seller-financed FSBO, and I wrote the purchase and escrow agreements (with the help of Les Scher's fine book Finding and Buying Your Place in the Country, even though our house is in the city).

We (buyer and seller) split a $150 escrow filing fee, and a $187.50 escrow closing fee at Pioneer Title. Those "additional costs" totaled slightly more than 0.5% of the total. (Scaled up to a $200k purchase, that would be $5-600 for the buyer.)

If you want or need commercial financing, you'll have to pay for it; but I suspect that a lot more is negotiable than you think if you prepare yourself with understanding and knowledge of the process.

One thing I can guarantee: if you don't do your homework, you'll pay for your omission. You might pay a lot.

fortboise said...

Oh, and more stabs from the past: we paid almost 25% down, made sure the payment was well within our means, insisted on no prepayment penalty, and paid off the note as fast as we could. The 10-1/2% interest rate was ample motivation!

alan said...

As they say, if you think education is expensive, try ignorance.

A bit more on the YSP. It's paid to the broker by the lender, and the broker splits it with the originator. It's an up-front lump sum payment, and is one reason for pre-payment penalties. Becasue it's directly paid by the lender, the originator can say "you are paying the YSP." But you are through the higher interest rate.

A perverse incentive to screw you for the guy you're trusting to get you the best rate.