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Wholesale Lenders Can Limit What Brokers Charge You.

Wholesale lenders can have different internal policies about a variety of things, and one of them can be how much income the broker can derive from any particular loan. There are various predatory lending laws around the country that are designed to protect the consumer from bad loan officers, but lenders may also add another level of protection.

This new protection can come in two forms: It can place a cap on the annual percentage rate, or APR, or it can simply limit the revenue to the mortgage broker to a certain percent. We'll discuss the APR in detail in Chapter 4, but if the APR has a wide variance from the actual mortgage rate that's being used on the mortgage, then the lender won't accept the loan from the broker.

A wholesale lender can also simply say, "You can't charge more than 3 percent of the loan amount on any loan you send us," and that includes any YSP. If the broker charges a 1 percent origination fee, a 1 percent broker fee, and a YSP of 1.25 percent, the wholesale lender might reject that loan because the total compensation to the mortgage broker was 3.25 percent. The broker would then have to reduce either his origination fee or his broker fee by 0.25 percent.

YSPs Are Not Bad for the Consumer.

Is there something the matter with YSPs? Is the wholesale lender paying the broker to place a mortgage loan with it?

Some people claim that the yield spread premium amounts to nothing more than one lender bribing a mortgage broker to send your loan to it by paying the mortgage broker a sizable YSP. But to claim that a consumer gets an unfair rate simply because of the existence of a YSP is not accurate.

There is absolutely no doubt that the YSP can be abused, but so can any loan product. If you can get the very same loan program down the street, but at a rate that is 1/4 to 1/2 percent better, your loan officer is taking advantage of you and abusing the system. A loan program itself is not bad simply because of the existence of a YSP.

When you get a rate quote from a mortgage broker—or any lender, for that matter—and the rate quoted has no points and no origination charges, the only way a loan officer can make a profit is through a YSP. Without YSPs, mortgage rates overall would be higher for the consumer because there would be less competition in the mortgage market. If a broker can't offer a no-points loan just like her counterparts in the mortgage banking industry, then there is less competition. Less competition in the mortgage marketplace means higher rates.

Mortgage brokers can't find interest rates that are significantly lower than those offered by anyone else in the market. They can't. It's impossible. Okay, a broker might find a rate that is 1/8 percent or sometimes even 1/4 percent lower than what you can get from your mortgage banker, but what brokers certainly can't do is find a loan that is 1/2 percent or more better than what anyone else in the marketplace can find.

So if a mortgage broker finds a competitive loan program from a wholesale lender, who exactly is this lender, anyway, and are you sure that you'll like the lender that the mortgage broker found for you?

Sometimes a mortgage broker keeps this information secret for as long as he can. He does this for three reasons:

1. The broker is afraid that you'll bypass him entirely and go directly to the lender making the loan.

2. He hasn't officially locked you in, although he has told you that he has done so.

3. He doesn't have the loan or rate you're looking for, but he has told you that he has, and he is frantically searching for it.

Mortgage brokers' prime asset is the knowledge they have. Their job is to scour various lenders' offerings each and every day to find the best rates, the best service, the best loan programs, and so on.

Mortgage brokers apply to a mortgage company's wholesale division in order to begin doing business with that wholesale lender. A mortgage broker must be approved by a wholesale lender in order to market mortgage loans for that lender. These wholesale divisions recruit mortgage brokers to market their loan products for them. So, each day, an account representative from the wholesale lender makes sales calls all day long to different mortgage brokers in her area for the sole purpose of recruiting new brokers.

Each wholesale lender will market itself much the way a broker would: "Send us your loans because we have great rates, great service, blah, blah . . ." or "We have a loan program designed specifically for second-time buyers . . ." or whatever.

The mortgage broker will make an application to the wholesale lender to be one of its brokers. The wholesale lender will require that the broker be duly licensed in the state he does business in, that he have a minimum net worth (sometimes), that his office not be a den of thieves, and so on.

It is to a mortgage broker's advantage to sign with as many wholesale lenders as possible because maybe, just maybe, one particular lender will offer an interest rate that pays a lot more money than other wholesale lenders will.

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