CalGal_IHB
New member
Cool - thanks, jwbrown77
NEW -> Contingent Buyer Assistance Program
J
Janet_IHB
Guest
<p>Bix,</p>
<p>(If I understood you)</p>
<p>The 3 points wasn't the minimum in the example, the dollar amount of $1,500 was.</p>
<p>There is no economy-of-scale in very small loans, so the dollar floor gets converted to a higher number of points than it would on a larger loan.</p>
<p>Many lenders won't even fund a loan that small.</p>
<p> </p>
<p> </p>
<p>(If I understood you)</p>
<p>The 3 points wasn't the minimum in the example, the dollar amount of $1,500 was.</p>
<p>There is no economy-of-scale in very small loans, so the dollar floor gets converted to a higher number of points than it would on a larger loan.</p>
<p>Many lenders won't even fund a loan that small.</p>
<p> </p>
<p> </p>
J
Janet_IHB
Guest
<p>Graphrix makes a good point about (defacto) flat fees.</p>
<p>Many brokers already price loans in the exact same way as he describes.</p>
<p>(Which is to say, they just make sure they hit a number that makes it worth doing.)</p>
<p>Most brokers who work on referrals-only operate this way.</p>
<p> </p>
<p>Many brokers already price loans in the exact same way as he describes.</p>
<p>(Which is to say, they just make sure they hit a number that makes it worth doing.)</p>
<p>Most brokers who work on referrals-only operate this way.</p>
<p> </p>
bishie_IHB
New member
I know referral-only brokers who push through 4 points on every deal. Depends on your clientele and the level of service you provide. Yes even $20-30k to the broker may make sense for many borrowers. If you deal with clientele that are likely to shop and/or you want more transparency from the start then a fixed fee may make more sense from the broker's perspective.
J
Janet_IHB
Guest
<p>Ouch!</p>
<p>I guess it's not impossible that they could really earn it.</p>
<p>I'm also sure plenty of clients really may not care.</p>
<p>Your life is laid bare when you go through this process, and you may not want just anyone to know your business.</p>
<p>I can't think of a more invasive experience (with the exception of a colonoscopy)!</p>
<p> </p>
<p>I guess it's not impossible that they could really earn it.</p>
<p>I'm also sure plenty of clients really may not care.</p>
<p>Your life is laid bare when you go through this process, and you may not want just anyone to know your business.</p>
<p>I can't think of a more invasive experience (with the exception of a colonoscopy)!</p>
<p> </p>
Laing_Lies_IHB
New member
<p>Thanks for explaining how points work and affect your payments.</p>
<p>Can you explain to me how brokers/loan officers get paid - I mean, even with zero point (to the customer) loans, aren't they still getting quite a bit of money?</p>
<p>Can you explain to me how brokers/loan officers get paid - I mean, even with zero point (to the customer) loans, aren't they still getting quite a bit of money?</p>
J
Janet_IHB
Guest
<p>They get paid either on the "front end" (origination points), the "back end" (YSP) or a combination of both.</p>
<p>(They may also be paid on extra fees, such as "processing" fees, etc.. The real money is from the above-mentioned items.)</p>
<p>On a zero point loan, virtually all of their earnings will likely come from yield spread premium (as mentioned in the original post).</p>
<p>Lenders are different.</p>
<p>Some lenders put up their very own money to make loans, and then hold on to them. This is called "portfolio lending". They make earnings throughout the life of the loan, in the form of ongoing interest payments.</p>
<p>Most lenders are not of this type.</p>
<p>Most lenders utilize single-purpose credit lines called "warehouse lines", that they are provided with by major institutions.</p>
<p>(The reason so many lenders have gone under, is really because these lines have been curtailed or pulled completely due to a lack of confidence by the warehouse line provider).</p>
<p>Those credit lines give them the ability to "fund" your loan. Your loan is collateral for the warehouse line, until it is taken off the line because it is sold. Most loans are sold off to either the GSEs (the government, or "quasi-governmental" entities like fannie-mae, etc.) or to the "secondary market". The secondary market includes players who bundle these loans into "pools" which are often collateral for "mortgage backed securities".</p>
<p>If they are doing it right, lenders will make a profit on this transaction! There is risk in this transaction, so lenders rightly make a profit from this activity - which is separate from the profit of originating the loan.</p>
<p>(Recently, the secondary market has all but disappeared, so many lenders are sitting with loans on their warehouse lines that have no buyers. Some have sold them at a loss, because the terms of their warehouse lines do not allow them to sit on them.)</p>
<p>From this profit, they pay the person who you are interfacing with on your loan, your "loan officer".</p>
<p>When you do a zero points loan with a lender, you are charged a higher rate than you would be on a loan with points (just like with a broker).</p>
<p>That makes that loan more valuable to an investor (either the GSEs or the secondary market) when it is sold.</p>
<p>(They may also be paid on extra fees, such as "processing" fees, etc.. The real money is from the above-mentioned items.)</p>
<p>On a zero point loan, virtually all of their earnings will likely come from yield spread premium (as mentioned in the original post).</p>
<p>Lenders are different.</p>
<p>Some lenders put up their very own money to make loans, and then hold on to them. This is called "portfolio lending". They make earnings throughout the life of the loan, in the form of ongoing interest payments.</p>
<p>Most lenders are not of this type.</p>
<p>Most lenders utilize single-purpose credit lines called "warehouse lines", that they are provided with by major institutions.</p>
<p>(The reason so many lenders have gone under, is really because these lines have been curtailed or pulled completely due to a lack of confidence by the warehouse line provider).</p>
<p>Those credit lines give them the ability to "fund" your loan. Your loan is collateral for the warehouse line, until it is taken off the line because it is sold. Most loans are sold off to either the GSEs (the government, or "quasi-governmental" entities like fannie-mae, etc.) or to the "secondary market". The secondary market includes players who bundle these loans into "pools" which are often collateral for "mortgage backed securities".</p>
<p>If they are doing it right, lenders will make a profit on this transaction! There is risk in this transaction, so lenders rightly make a profit from this activity - which is separate from the profit of originating the loan.</p>
<p>(Recently, the secondary market has all but disappeared, so many lenders are sitting with loans on their warehouse lines that have no buyers. Some have sold them at a loss, because the terms of their warehouse lines do not allow them to sit on them.)</p>
<p>From this profit, they pay the person who you are interfacing with on your loan, your "loan officer".</p>
<p>When you do a zero points loan with a lender, you are charged a higher rate than you would be on a loan with points (just like with a broker).</p>
<p>That makes that loan more valuable to an investor (either the GSEs or the secondary market) when it is sold.</p>
graphrix_IHB
New member
<p>They get paid a yield spread premium. Brokers have to disclose it but banks and brokers with a correspondent relationship don't have to. If a 6% loan was't paying a YSP the borrower would have to pay an origination fee or some other fee in the closing costs. But at a rate of 6.75% it might pay 1.5% YSP therefore the buyer wouldn't have to pay points and get a "zero" point loan but you are paying for it over the life of the loan.</p>
<p>If you want you can email me the good faith estimate and I will go over it with you. I will let you know if the fees are excessive and if they are trying to pad some garbage fees in there. </p>
<p>If you want you can email me the good faith estimate and I will go over it with you. I will let you know if the fees are excessive and if they are trying to pad some garbage fees in there. </p>
graphrix_IHB
New member
<p>Janet beat me.</p>
J
Janet_IHB
Guest
[No message]
J
Janet_IHB
Guest
<p>I want to clarify the risks I have been mentioning.</p>
<p>Both brokers and lenders take on several types of risk when making loans.</p>
<p>One type is the risk of being defrauded. This could be anything from appraisal fraud to being defrauded by a borrower with a photoshop hobby!</p>
<p>Another risk is early payment default. That is when few, or no, payments are ever made on the loan.</p>
<p>Yet another risk is actions by disgruntled borrowers. Some borrowers falsely claim you took advantage of them.</p>
<p>All of these risks are <strong>substantial</strong>. All could require a broker or lender to get lawyered-up real good! The first two, could also require your lender to buy back the loan after it is sold. </p>
<p>Lenders face yet more risks.</p>
<p>Lenders face the risk of changes in the market value of the loans they are holding prior to their sale. Lenders typically wait until they have enough loans available to offer them in a "bulk" sale. Plenty of things can happen during this period, including changes in prevailing interest rates.</p>
<p>Lenders may also face the risk that your home's value could decline. If you then default, they could be hurt badly.</p>
<p>You could almost look at brokers and lenders as minority partners in your venture - at least in the beginning, because these risks are so great!</p>
<p> </p>
<p>Both brokers and lenders take on several types of risk when making loans.</p>
<p>One type is the risk of being defrauded. This could be anything from appraisal fraud to being defrauded by a borrower with a photoshop hobby!</p>
<p>Another risk is early payment default. That is when few, or no, payments are ever made on the loan.</p>
<p>Yet another risk is actions by disgruntled borrowers. Some borrowers falsely claim you took advantage of them.</p>
<p>All of these risks are <strong>substantial</strong>. All could require a broker or lender to get lawyered-up real good! The first two, could also require your lender to buy back the loan after it is sold. </p>
<p>Lenders face yet more risks.</p>
<p>Lenders face the risk of changes in the market value of the loans they are holding prior to their sale. Lenders typically wait until they have enough loans available to offer them in a "bulk" sale. Plenty of things can happen during this period, including changes in prevailing interest rates.</p>
<p>Lenders may also face the risk that your home's value could decline. If you then default, they could be hurt badly.</p>
<p>You could almost look at brokers and lenders as minority partners in your venture - at least in the beginning, because these risks are so great!</p>
<p> </p>
graphrix_IHB
New member
<p><em>"Lenders face the risk of changes in the market value of the loans they are holding prior to their sale. Lenders typically wait until they have enough loans available to offer them in a "bulk" sale. Plenty of things can happen during this period, including changes in prevailing interest rates."</em></p>
<p>The lenders use interest rate hedges like swaps and currency hedges to help relieve them of some of the risk in the change of interest rates. I could go on a TantaLite diatribe but I want to get a post going for the blog going today.</p>
<p>The lenders use interest rate hedges like swaps and currency hedges to help relieve them of some of the risk in the change of interest rates. I could go on a TantaLite diatribe but I want to get a post going for the blog going today.</p>
J
Janet_IHB
Guest
<p>That's right.</p>
<p>But, as you said, some risk remains.</p>
<p>But, as you said, some risk remains.</p>