Utah home prices are on fire

From this morning's Salt Lake Tribune:

I just posted this on my other blog, and I note that there are probably three or four other posts over there since the last one here, that could certainly be put here as well. I'll get to that in the next several days - I don't want to neglect this side of my blogging, it's just been a hairy few months around here, and I end up doing lots of other things.


Utah's home price appreciation, the worst in the country just three years ago, is now the best nationwide.

Home prices statewide rose 17.6 percent from the fourth quarter of 2005 to the same quarter of 2006, according to a report released Tuesday by the Office of Federal Housing Enterprise Oversight, a government agency that tracks housing values.

Nationally, home prices rose only 5.9 percent during that time period, reflecting the downturn seen in cities that have experienced a rapid run-up in prices in recent years. Meanwhile, housing prices in all of Utah's major metropolitan areas posted major gains in the past year.

The Provo-Orem metropolitan area had the third-highest appreciation among 282 cities in the survey, with a 19.9 percent increase in home values. Salt Lake City was No. 4, with a 19.8 percent increase. Ogden-Clearfield was No. 14, with a 15.3 percent increase. St. George was No. 28, with appreciation of 12.3 percent, with Logan a distant No. 94, with an increase of 7.3 percent.

The increases over the past year alone have made it increasingly difficult to find homes - or condominiums - in the Salt Lake Valley that sell for less than $200,000.

In Salt Lake County, median selling prices are $225,000, according to 2006 data from the Salt Lake Board of Realtors. Utah County's median is $212,900, followed by Davis County ($197,500.)

The most affordable areas are Weber County, where the median selling price is $144,975, and Tooele County ($161,000.)

Strong home value gains in Utah undoubtedly have made it more difficult for some families, especially those with low and moderate incomes, to buy their first home now. But many other families have benefited from the home-price increases - especially those who purchased their properties several years ago.

Carine Henderson, of Salt Lake City, is one who plans to profit from her good timing. She and her husband purchased a three-bedroom, two-bath condominium in downtown Salt Lake City for $117,000 three years ago. "A neighbor of mine just sold a unit like ours for $220,000," said Henderson.

The condo is just blocks away from Howa Capital's planned mixed-use development along 300 West between 500 North and 600 North that will include an 80-unit condo and town-home development with prices in the $300,000s to high $600,000s. And Henderson expects the relatively high prices in that development to boost hers.

The Wasatch Front housing market last peaked in the early to mid-1990s, when home sales, buoyed by the state's strong economy and job growth, rose dramatically and values increased by a larger margin than any other state. By the late-1990s, though, the market had slowed considerably, and in the years that followed, housing values in many areas of the state barely budged or increased only slightly.

By 2005, home prices began to climb once again as Utah's economy began to boom. Much of Utah's current real estate boom has to do with the state's strong job market, said Andrew Leventis, economist with Office of Federal Housing Enterprise Oversight. Job growth in the state, among the highest nationally, is expected to continue strong through this year and next.

"Employment and house prices are closely linked," Leventis said.

Another factor in Utah's favor is affordability.

Utahns struggling to afford a home may think otherwise, but Utah still has "fairly affordable housing," Leventis said.

Just a random thought on Interest rates, economy, international concerns, etc...

You know, I am beginning to wonder if the Utah real estate market might be gearing up for being the eye of the perfect storm. In a good way. Let me explain:

In the rest of the country, the economy is not as strong as it is in Utah. The real estate boom that the rest of the country enjoyed in the last two years pretty much sidestepped Utah altogether. In other areas, it was fueled by a large school of nationally motivated real estate investors, primarily from California, who were only looking at one factor in making purchase decisions: real property value appreciation. These were "paper-rich" people whose only increase in net-worth was through a massive increase in the value of their own real estate. Nobody was getting paid more at their jobs, nobody was winning the lottery, etc. When this happens, there is no local support for that increase in value - the local wages haven't changed to support the new values, so the locals aren't the ones buying homes, they're essentially locked out.

This, among a couple of other factors, produces a classic real estate bubble. By definition, the bubble is not self-sustainable, and is therefore susceptible to bursting - where the bottom drops out just as fast as it grew in the first place - which means the investors move to other places, like flies.

When investors become successful in areas, lender follow suit, and the whole industry balloons up, supporting this increased activity. If interest rates are a problem, in relation to the Federal Reserve rates, they will simply come up with programs that will allow these investors to be successful regardless. Note here as examples, Option Arm Loans, 100% financing, 2- and 3- year Arms, "Alt-A" lending, etc. Lenders will always to find ways to produce programs that make it possible to acquire the business of these investors. Lenders are in the business of selling money, that's what they do.

So, with all that being said, our little local state-wide economy, with the possible exception of Washington county (the fourth-fastest growing county in the nation, at last count), we have just chugged along. Sure, there are investors here from out-of-state buying homes they never intend to live in, or even hold for more than a year, but on the whole, these people are balanced out with the other members of our community.

Our unemployment rate is among the lowest in the nation, and employers report having difficulty attracting and keeping talented workers. It's so low, it basically is at the point where those who want to work, are doing exactly that. This does things to the housing market as well. When everybody who can, or wants to, is working, they are confident en masse. They are willing to buy homes, move up, or make improvements. This balances the investor pool as well, and makes the entire picture more stable.

So on to the "perfect storm" theory. When an economy is burgeoning, as ours is, and rates are fairly low and stable (5.625% 30 year fixed in Utah right now), and there is relatively low investor activity (because they have been taken out of the game from losses in other unstable markets - like Vegas, Phoenix, etc,), balance comes to the whole, and stability ensues.

Couple that concept with the following thoughts:

1. The economic bounty will likely last well into and through the next 24 months, or longer.
2. While we are on an interest rate upswing, that will only last for about that much longer as well, maybe 36 months or so.
3. Utah is not, and will not be, bothered by the mass of national real estate investors, because they are pretty much out of the game at this point.

This gives me the thought that we may well be insulating ourselves from that rate upswing with a strong local economy, allowing Utah to move through the next 24-36 months without much of a real estate downturn, either in valuation or in market inventory.

I think this is good for us, into the foreseeable future. Our job growth economy will carry Utah through to the next interest-rate downturn, and then we'll have another refi boom, people will be happier with borrowing money, lenders will be happier to sell it, and rates will be driven even further down, default rates will lower, international monetary investors will like the dollar better, because the nation's GDP will be better, and all will be well in happyville.

So, contrast this happy story to this one, in California, where values went through the roof, unsupported by the local economy: here

At some point, the borrower HAS to be accountable

A news story out of California. Under the heading of "A Loan That'll Get Ugly Fast."

Every day, Will Hertzberg owns a little less of his three-bedroom house in Corona. Like hundreds of thousands of other homeowners around the state, Hertzberg has a mortgage that lets him choose how much he pays each month. Like many of them, he always chooses to pay as little as possible.

His debt is swelling, and his mortgage company controls his fate. 'I am rather screwed,' he said.

Hertzberg could sell now, but his lender would charge him an $11,034 prepayment penalty, money he doesn't have. Yet if he stays, the housing market may tank, vaporizing what little equity he has left. 'I made choices, and they happened to be the wrong choices,' said Hertzberg.

One of his options is to pay $2,513 a month. That would cover the principal and interest as if it were a traditional 30-year loan. A second possibility is to pay $2,279, which would cover only the interest. But each month he always takes the cheapest option: paying $1,106 and promising to make up the shortfall later.

In 2003, only about 8 of every 1,000 people buying a home or refinancing a mortgage in California got a pay option loan, according to First American LoanPerformance. Last year, 1 in 5 loan applicants got one.

In the first eight months of 2006, even as the real estate market began to weaken amid fears of a downturn, the appeal increased again. Nearly 1 in 3 California loan applicants are now choosing them. The state boasts about 580,000 active pay option mortgages, about half the U.S. total.

Hertzberg bought his house 11 years ago for $129,995. With fresh paint and a few repairs, Hertzberg could probably sell his place for $275,000 more than he paid. He would see little of that, however, because he's already seen so much. Over the years he has taken out $190,000 in cash through refinancings.

Hertzberg's home equity paid off his credit cards, financed trips around the world, bought a $32,000 Toyota Avalon and enabled some lousy investments. He bought dot-com stocks and lost money. To recoup those losses, he bought commodities, and lost money faster.

'Free money always has the unfortunate effect of making people go overboard,' said Hertzberg, whose living room is strewn with financial publications including American Cash Flow Journal and Donald Trump's 'How to Get Rich.' 'You'd be surprised how fast $190,000 can go.'

Last fall, he went to a mortgage broker and refinanced again to make his payments easier to bear. He thought he would have a five-year window before the principal started coming due.

But the day of reckoning is arriving early. By paying the minimum, Hertzberg has increased the size of his loan in a little over a year from $320,000 to $332,616. His lender, Countrywide Financial Corp., recently sent him a letter warning that when his loan hits 115% of its original size he'll run out of credit with the company.

That will happen in about two years if he continues to take the smallest payment option. Then his minimum payment will automatically go up 150%, to $2,848 a month. 'If I could afford that,' he said, 'I wouldn't have needed this loan in the first place.'

It's a sorry situation, and Hertzberg is generous in assigning responsibility for it. To start with, he blames his mortgage broker, who didn't advise him how risky these loans were.

Few brokers do, U.S. Comptroller of the Currency John Dugan says. In an October speech, Dugan said the marketing materials for payment option loans often 'emphasized the low initial payments but glossed over the likelihood of much higher payments later.'

Although Dugan and other regulators are taking steps to address both problems, Hertzberg said they never should have allowed these loans to become so prevalent in the first place. 'The government wanted to keep the housing party going,' he said.

Yet who didn't want that? Hertzberg admits he was a willing co-conspirator. 'I got spoiled and complacent and was not prepared when the bottom fell out,' he said.

Several times a week, he gets a refinancing offer in the mail. Hertzberg always looks at these fliers, hopeful in spite of himself. 'I'm waiting for a 100-year loan,' he said. 'My heirs can worry about paying it off.'

This unfortunate borrower is right to blame his mortgage broker, but I would wager that, if pressed about it, the great preponderance of borrowers who find themselves in this situation knew what the pitfalls were with this particular loan type. (If you want more detailed info, look for it here.)

MANY homeowners over the last 3 or so years have ended up purchasing a home that they had no business even looking at. Whether it was simply that the price tag was too high, their credit too bad, their income situations too unstable... whatever. Having been in this business for a while, there are always people who are buying too much house. I can tell who they are every time they walk into the office. They have no money to put down, and most of the time (95%) have no money to even pay for closing costs, and have negotiated these with the seller.

Who is to blame for this? Some will say that the lender is to blame - while others will say that it is the buyer who shoulders the blame. In reality, and in a perfect world, the buyer is the one who is to blame here. Remember that in that "perfect world" the mortgage broker has educated the borrower on all aspects of every type of loan program under consideration, and the buyer has enough information upon which to base an educated decision. You would think that this fact alone would alleviate this entire problem, but you are wrong. By and large, with visions of sugar-plums dancing in their heads, a buyer reaches a point where it makes no matter whatsoever what the risks are, "all we want is to get into this house and have a $1200 payment, because that is what we can afford. You have a way to get me into this $500,000 house for that payment, and that's what I want."

A mortgage broker who does not educate his clients about every type of loan under consideration does a disservice to his client.

There has been lots of talk over the last year about how the government regulatory agencies need to crack down on this type of loan, and how those loans need to have more guidance, perhaps more disclosures to be signed by the borrower, etc. But at some point, the accountability needs to rest solely and squarely on the shoulders of the person who signed the note.

People's eyes get big, and we get this glazed thing that comes over us when we see a dream right before us, sitting there, calling our name, the song of a sexy siren right there in front of us. It happens all the time, with cars, vacations, jewelry, etc. It's bad when it happens when we're talking about a home, because it is a huge-ticket item, and it carries with it the possibility of catastrophic financial ruin. The glutinous consumption that is carried by a society's economic wealth is a problem.

So, dear borrower, if you're looking at a house for which you can only afford to make a "minimum payment", not even covering the total of the interest that is due each month, you deserve what you get. And what you will get is foreclosed upon.

Hand Cramps

When I sit down to go through paperwork with new clients, they invariably remark how much of a drag it is to have to sign so much stuff. You typically have to sign your name to 50ish pieces of paper before the process is done.

But remember, each time you sign your name, you're doing so in response to some law being broken in the past, or some law suit that was launched in the past.

It's like that box of soap that says "Do not take internally".

You think to yourself, "who would do THAT??"

But they put it there because somebody DID eat it, and the manufacturer now seeks to protect itself from future soap-eaters.

So, when you sign your name during a mortgage process, it's because somebody is protecting you and making sure you have seen everything you need to see about the process.

Are New Home Builders Skewing the Numbers?

Builders will do anything to make sure their homes sell. They will do ALMOST anything to make sure they sell at full retail "value". Why is that? It's because the largest builders, those who are traded publicly, report sales figures based on the contract price of the home. They report these numbers at the time the contract is signed, not when the home is sold and the loan is closed. They don't have to report to what lengths they had to go in order to get that contract signed.

Therefore, a builder can offer such things at great vacations, or new cars, in order to entice a buyer into signing a contract to buy. These incentives allow the builder to report a "full contract price sale" indicating a strength in the numbers that is not reflecting the cost of the incentives offered. This makes the builder appear to have sold the home at a healthy full price.

Which makes the builder appear healthier than they might be in reality. It also skews the housing numbers as reported in the media.

For example - in today's news:

From Wall Street and Washington: “Sales of new homes fell 3.2% in October to a seasonally adjusted annual rate of 1.004 million, the Commerce Department estimated Wednesday. New-home sales are now down 25.4% in the past year. Measured out over the first 10 months of 2006 compared with the same period in 2005, sales are down 17.9%.”

“Median sales prices were up 2% in the past 12 months to $248,500. Home builders have piled on incentives, including offering free vacations and new cars, to sell homes and work off inventories. Such incentives are not subtracted from the sales price reported to the government.”

Therefore, the housing numbers may not be something that should carry as much specific weight in nationally reported economic indicators.

What is the harm here then? It's this: When a home is built and sold in a subdivision by a builder, they finish and move on. They leave behind a group of homeowners who drive new Jeeps or even a new Mercedes (or some other DRASTICALLY depreciating asset - albeit one for which most Americans are HORNY), but whose homes won't appraise for what they bought them for.

Appraisers must take into account all sales incentives that were used in the original sale of a home. For example, if a home was contracted for $400,000, it is reported on the top line of an appraisal form. Any incentives or concessions used are then mentioned on the next line down and those incentives are SUBTRACTED from the home's current value, or its value as compared to the other homes in the neighborhood. A home that was purchased for (and has a mortgage for) $400,000, but had a $30,000 incentive on it, is now appraising for $370,000, all other things being equal.

This leaves a group of home owners who are most likely upside down in their homes. 99% of them didn't put any money down either, making the situation even more dire for them.

I have heard reports from places like Las Vegas, where there are vast subdivisions that have a 70% vacancy rate. Only three of 10 homes actually have people living in them.

Try getting a good appraised value in a neighborhood like that.

But the builder is apparently more healthy as a result of this wrangling, and they effectively shore up their share prices as a result, thus achieving their overall goals as a company. Lest you think a builder actually cares about you, the buyer.

You are simply a commodity.

Confessions of a Mortgage "Professional"

From BusinessWeek online
An article introducing a book (but not reviewing it)... By Douglas MacMillan

Read this with the following glasses on:
1. Somebody is trying to sell a book here
2. Media likes to trade on fear, scandal, and general salaciousness

The article is followed by a group of the most recent reader comments about the article. My comments will follow at the bottom.

The Durham (N.C.)-based nonprofit Center for Responsible Lending estimated in July, 2001, that predatory mortgage lending is currently costing Americans more than $9.1 billion each year.

Lenders will argue that each one of these dollars represents a legitimate fee stipulated by a legitimate contract, that they are only viewed as predatory by borrowers who overlooked the fine print in their mortgage.

But ask Ted Janusz, who spent an interim period of his career learning the ins and outs of mortgage brokering as a loan officer in Columbus, Ohio, and he'll admit that what is really going on here is a game of subterfuge being played at the expense of borrowers with low credit ratings.

CONFESSION TIME. The strategy of lenders, he learned, is to maintain an uneven playing field with their clients. "The average person only gets a mortgage every seven years. How can you become good at something you do every seven years, especially if you're dealing with somebody who knows all the ins and outs and is doing this several times a day?" he recently told BusinessWeek.com.

After a year of putting up with what he felt was the industry's lack of integrity, Janusz left the business for good. Still, he felt he was privy to information that the public rarely gets to see. He vented his frustrations—and spilled his guts—in the 2005 book Kickback: Confessions of a Mortgage Salesman (Insight).

The book details the sophisticated traps lenders set for clients they see as suckers. "If somebody came in wearing cowboy boots and ripped-up jeans, those are the people you took to the cleaners on fees. That was the unwritten rule—we were looking for people we'd see as having less-than-perfect credit."

TUNNEL VISION. Lenders who found a mark would make sure the money was ending up in their pockets mainly through back-end yield spreads, or the so-called Service Release Premium. For example, they would tell the borrowers that they could have a 9% interest rate, but when the paperwork cleared, their low credit rating would force them into an 11% rate—often without the borrower even knowing it. The resulting dividends, thousands of dollars in each case, fell into the lenders' laps.

In his book, Janusz also highlights an array of common traps lenders use all the time, such as allowing a borrower to see an attractive interest rate offer and letting him think that's the only important consideration in a mortgage negotiation. "You hear companies offer fabulous rates, but what are they paying in closing costs to get them?" Janusz says. "It would be like comparison shopping for cars only looking at the headlights."


Nickname: TD Hawk
Review: Full disclosure, I'm a Certified Mortgage Planner. I'm wondering if BusinessWeek is running out of story ideas? A few weeks ago, a cover story about "How toxic is your mortgage?", then this biased piece and, for over a year, there's been a video "Un-ARM Yourself." In regard the latter, the cost of mortgage money is falling--the lowest it's been since March--and will continue to do so into 2007. Why? The Fed is hell bent on slowing our economy and the cost of money falls when that happens. So folks following all this sage media advice will be "buying high" if they run out and lock a fixed rate. But the bottom line folks, do business with someone you know and trust based on referrals from those you know and trust. There are no deals in financial services unless you're related to the provider. Read everything and know the cost of money is what it is for everyone in the same credit profile shoes. And don't plan your finances based on anything in the media or you'll "buy high" yet again.
Date reviewed: Oct 11, 2006 11:31 AM

Nickname: Bill and Art
Review: I read comments for an hour -skipped some, read many. I was more interested in what the real estate industry people said than the consumers - I've heard many a sad tale from borrowers that ranged from complete truth to a lack of understanding of risk (it is important to pay your bills occasionally) to total I-really-thought-my-rate-was-1 percent-forever lies. While I am not a proponent of the ugly slogan "buyers are liars," I find the exposure to the experience of two or three mortgages less enlightening than the hundreds the average, seasoned (not one year) mortgage person embraces.
Date reviewed: Oct 11, 2006 2:39 AM

Nickname: K-Dubb
Review: There are charlatans in every industry, work sector, business, for- and not-for-profit, etc. I've been a loan originator for five-plus years and I'm astounded how many times I've conducted Mortgage 101 lessons for clients - homeowners mindful of only their rate and payment. Many are unaware that even when their quoted rate and final (funding) rate are the same, their qualifying rate may have been lower. The difference went into the lender's and/or loan officer's pocket. In purchases - not just "sales" - everything is negotiable. You have to know your options, what you qualify for (not just "your rate"), the total expenses (not just "closing costs"), and to review or have assistance reviewing the loan papers before you sign. Failure to conduct due diligence is plain ignorance - the government, which many want to reduce in size and scope, can't be your financial babysitter.
Date reviewed: Oct 11, 2006 2:14 AM

Nickname: Geezer
Review: It's hype, hype, hype designed to frighten the public, sell commercials, newspapers, and expose books. Not all lenders are bad (most aren't) and not all loan officers are bad (some are). And not all police, firemen, lawyers, politicians, in-laws, athletes and movie stars are good either. If you fall for the hype, the ads, the news, you'll get burned.
Date reviewed: Oct 11, 2006 1:59 AM

Nickname: Art
Review: People need to be responsible for their own behavior. All of Madison Avenue is trying to get your money. Lenders are no better nor any worse. We eat fast food we know is killing us. We smoke cigarettes that destroy our health then praise the tobacco companies for offering rehab programs. Lenders just got in it a little later: 1 percent loans?! Zero closing costs?! 50-year mortgages?! Come on. Grow up. It's hype. Live on less than you earn - save your money - and no one can scam you. If you don't gamble you won't meet a leg-breaker one night. Pay your bills and you won't deal with the lending liars. Daddy always said, "Don't believe everything you hear." That's pretty good advice.
Date reviewed: Oct 11, 2006 1:51 AM

Nickname: Ranchexit
Review: In all fairness here, Mr. Janusz is trying to sell a book. The "expose" is his tickler and fits in well with our overhyped media-driven world. While there is truth in what he says, such shabby and deceptive treatment of consumers is limited to a few greedy lenders (I could guess his employer's name fairly easily) and opportunists. There are to be found both conscientious lenders and the louts. Sadly, the self-serving mentality of the latter is found in other industries: Enron execs bilked life savings out of thousands and eyebrows were raised, but little justice meted out. Yet if we pay an extra point in closing costs (even if our credit stinks)-we get torqued because it's us. I am opposed to usury. I am also opposed to people overspending, living on (declining) credit, and our instant gratification mentalities. Let's all teach our kids about credit, starting at home and continuing in school. It's hard to get scammed when you have perfect credit and can get your loan anywhere.
Date reviewed: Oct 11, 2006 1:37 AM

Nickname: yogamom
Review: Are you kidding here? The purchase of real estate is by far the most important financial decision most people will make. Those who serve in the real estate profession as agents mortgage brokers and appraisers sound unscrupulous. Someone must stand up to these individuals. Be a smart consumer and walk away from any person participating in these practices. Money is money whether the person has less than perfect credit or not they still deserve the best deal and the best service. Do not call yourself a professional if you behave otherwise toward consumers.
Date reviewed: Oct 11, 2006 12:01 AM

Nickname: experience counts
Review: Seeing the comment from "Seen it all," dated Oct. 2, I have this to say: For someone who has supposedly been in the "industry" for 20 years, you must be either a) an idiot, or b) you buried your head in the sand a long time ago. Do you still use a typewriter to process applications?
Date reviewed: Oct 9, 2006 5:25 PM

Nickname: Matt
Review: My suggestions to anyone who is going for a home loan and it's either your first time or you haven't done it enough to be confident about it, talk to someone you know who has either moved a lot or is a real estate investor. I have done both. I'm to the point where I've applied for a home loan at least once per year for the last seven years (in some years, it was actually twice). I know the mortgage loan process better than some of the mortgage processors I've dealt with now. Overall, mortgage loan folks are not that experienced, and it's a fairly high turnover business. You'll see that the more experienced you become at it, you'll wind up doing the thinking for your mortgage loan processer. That's both good and bad, but I think you'll agree, you're better off when you know more than them! In short, talk to someone who's been through the loan process a lot. It will pay big dividends when you go for your own loan!
Date reviewed: Oct 8, 2006 2:43 PM

Nickname: helpingmyparents
Review: My parents are senior citizens and on a fixed income. What they both bring in together every month is probably what some make on one paycheck. They were doing fine with their mortgage until they went to refinance. Normally I'm always there overseeing their financial matters. This time my father did it alone trusting what he was told. In the end, his mortgage payment went up $200 a month with a promise that after two years he could refinance to bring it back down. Completely impossible because the gentleman assisting him combined two loans that he co-signed on for two of his children a total of $15,000 bringing his loan amount to $75,000. My question is how on earth did this gentleman refinance my dad for a mortgage for this amount with such little income? I'm thinking it's a case of predatory lending, but not sure. Dad's kids continued making their monthly payments to him to offset the difference in his mortgage payment but they are now being paid off. Anything I can do to help him?
Date reviewed: Oct 8, 2006 1:09 PM

Here's the bottom line: there are people out there who don't take responsibility to learn what they need to know about this, the most important of decisions. They may also not even know what questions to ask. So many homebuyers these days have hired the moving company, moved out of the old place, are living in a trailer somewhere, have no money whatsoever, want 100% financing, have pawned the dog to buy a truck, and are waiting on the driveway of the new hoouse before they have closed the loan. Are these people REALLY concerned to go over each line item and understand the real cost of money. The answer is no. They are so horny to get the new place that at some point in the past, they stopped caring what it was going to cost them, either in the long run or the short one.

The lending industry is also full of people who will take advantage of anyone available. There are also those who understand the concept of Karma, repsect, and being able to sleep well at night. Some don't care.

A while back I discussed how mortgage lending works: as far as a broker is concerned, there are two main income producers: Origination points, and Yield Spread Premiums. Both are income - the first is an "up-front" cost, paid through a line item on the settlement statement. The second is a fee paid to the broker by the lender. This fee is based on the "spread" between the "base/par rate" and the rate that the loan is actually closed with. This total income amount is used to not only pay the loan officer, but is also used to pay the other office staff, brokerage fees, utilities, phones, rent, paper, long distance, etc. The loan officer will typically see a percentage of this total amount as actual income to him/her.

On the settlement statement, the second amount, yield spread premium, is noted but not included in the "cost" of the loan, or the cost of money, if you will. It is noted outside of the standard tabulation of costs. It is easy to miss, and one easily would think that since it is not in the tabulation of costs accrued, that it really isn't a cost at all. But this is wrong. If there is a yield spread premium noted on the sheet (anywhere) it means that you are paying more in RATE on your loan than you otherwise might, had you been educated to this, and given the choice about it.

I have also noted that I seek to educate my borrowers, both well-heeled and not, to the ways I make my income. I tell EVERYONE that my services cost ALL BORROWERS, regardless of credit or life situation, about 3% of the purchase price of the home. This is common, and it is what I think my services are worth. You don't work for free, and neither do I. My job is difficult, arduous, and incredibly stressful and time-consuming. I will educate you as to what you qualify for, what is reasonable for you, and what I think you should do. I also give you the choice as to how you plan to pay that 3%. I explain that you can get a slightly lower rate if you choose to pay your fees to me in origination rather than YSP. This is easy for almost ANYONE to grasp, and I rarely have a problem with people on this issue. They value my service, and, most of the time, refer other trusted friends and family to me as well. They obviously like what I did for them. Almost everyone chooses to split the difference and pay some origination and some YSP.

You should note as well that the relationship between your rate and YSP is NOT a 1:1 ratio. That is to say that it will not cost you 1% in your rate in order to pay me 1% in YSP. Usually the ratio is 2:1 or 3:1 - that is to say that it costs a half a point in rate to pay me 1 point in YSP. Some lenders are even more generous and offer a .365 (3/8ths) rate bump for one point in YSP. I tell people this, they do the math, and make the choice.

Now all this is not to say that there isn't room for improvement in the industry, either through some sort of ethics standards, or industry oversight... for example, NO end lenders out there require the broker to disclose YSP in dollars and cents on the good faith estimate provided to the borrower at the time of initial application. I think this should be changed. Lenders now only require that a generic notation be made that the broker "May receive between 1-3% in YSP, not paid from the proceeds of the loan." This SOUNDS like it isn't a cost, but it is.

So, after all this, ask yourself one question: If you want to quibble with an upright, ethical mortgage broker about paying 3% in fees for securing an appropriate mortgage for you, what value are you getting from paying a real estate agent? Think about that. They are making a MINIMUM of 3%, sometimes up to 6% on the transaction. Your ire is missplaced, friend.