Ten Things Your Lender Won't Tell You

Michael Moskowitz doesn't mince words. "It's the mother of all potential snookering," says the president of New York-based mortgage lender Equity Now, "and it's a game being played on even the most sophisticated consumers." The name of the game is yield spread premiums — and homebuyers often end up the losers.

In some circumstances, these premiums are legal, and even helpful: the lender will help you pay closing costs such as the broker's fee; in return, you agree to a higher interest rate over the life of the loan.

But things can get a bit shady when the deal's done behind your back. Say your mortgage broker says you're eligible for a loan at 6.75%. A month later interest rates drop and you qualify for a 6.5% rate. Trouble is, your broker won't tell you. The lender is paying him a yield spread premium for keeping you in the 6.75% loan.

The result? Your broker gets a kickback of several thousand dollars. Your lender gets a more profitable loan. And you pay an extra $12,000 in interest on a $200,000, 30-year mortgage. After reviewing more than 3,000 mortgages, Howell Jackson, an associate dean at Harvard Law School, found that such premiums were paid more than 85% of the time. How can you spot one before you sign on to a loan? The payment will appear on your HUD-1 statement, a federally mandated list of loan expenses you'll receive prior to closing. Usually it's noted cryptically as a "YSP." If you see one, find out whether the increased interest rate is really justified by lower closing costs. If not, start shopping for a new — and better — loan.

Like many homeowners teased by rock-bottom interest rates, Michael and Sharon Krasowski were hoping for a quick mortgage refinance on their Cicero, N.Y., home. After paying $300 to lock in a 6.1% interest rate last October, they were told by a rep at their bank, Wells Fargo, to expect a November closing. But as November passed and December wore on, the bank refused to commit to a closing date.

One morning in mid-January, on the day the loan was finally scheduled to close, a bank rep called with more bad news: There would be several hundred dollars in additional closing costs. Frustrated but unwilling to wait any longer, the Krasowskis closed on the loan. Sharon, still fuming, says, "The people who write the loans try to process too many and don't service the customers. They were uncaring." A Wells Fargo spokeswoman, Ahnalee Luchtel, says, "We're confident we did the best we could given the environment we were in."

The Krasowski's tale of frustration is hardly unusual. Many banks can't handle the heavy demand spurred by a drop in interest rates. "Lenders don't staff for peak periods, so when you have a refinance boom, the whole process slows down," says Jack Guttentag, a former chief of domestic research at the Federal Reserve Bank of New York. "When that happens, lenders give priority to new home purchases, not refinances."

To avoid delays, ask the bank how long it's taking to process loans before you get started (typically, 45 days for a refinancing, 60 days for a mortgage). Even better, speak to customers who've completed a transaction similar to yours. If you hear tales of woe, look elsewhere.

You've seen those great deals being offered by the auto industry: No money down and zero% financing! Sure, it's a sweet offer — but cool your engines before you speed down to the dealership.

Turns out, just 25% of car buyers who apply for zero% financing actually qualify for the advertised terms. "It's only available to people with top credit," says Rob Gentile, manager of the new- and used-car price service for Consumer Reports. And even if you do qualify, you might not be able to swing the payments. Zero% financing is generally available only on 36- or even 24-month loans — on a $25,000 loan, your payments could be more than $1,000 a month.

Unless you're certain you'll qualify for zero% financing, get loan quotes from at least three banks or credit unions before you head for the dealership. That way, you'll still be prepared to negotiate a loan from your dealer that at least has better terms than the banks are offering.

Once you've negotiated the car's price and interest rate, you're set, right? Wrong. Unscrupulous dealers will quote you a monthly payment supposedly based on the car's price plus finance charges. What they don't say is that the payments include undisclosed add-ons you don't want or need. "It's a widespread practice in the used-car industry," says Paul Richard, executive director of the Institute of Consumer Financial Education in San Diego.

Common add-ons — loan application fees, warranties, credit insurance and tow insurance — serve only to profit the dealer. "In most cases, the dealer gets to keep half or three-quarters of the premium on these products," says Richard. You can avoid getting ripped off by asking the dealer to detail all charges before you sign for the loan. Then, reject everything beyond the original negotiated price of the vehicle.

Soon after you close a loan, you'll likely get a letter from your lender offering a new payment plan. The claim: You can save thousands in interest by sending half your monthly loan payment every two weeks. You'll just need to pay a third-party program provider an upfront fee (typically $300) and then $5 every two weeks.

Tempted? Lots of people are. In fact, Paymap, the largest provider of such services (it offers its program through lenders such as Chase, Wells Fargo and Citi Mortgage), says more than 622,000 borrowers are currently enrolled in its Equity Accelerator plan, twice as many as in 1997.

But here's the real deal behind these plans: Payments are applied to your loan only once a month. The only reason you save interest is because the biweekly payment forces you to make the equivalent of one extra monthly payment every 12 months. You could save just as much by making that extra payment yourself — and your bank won't charge you a fee.

Jon Leon Guerrero, Paymap's corporate training and development specialist, concedes that biweekly payments have no advantage over an extra annual payment. "But only 3% of mortgage holders across the country make extra payments on their own," he says. "Our program helps people who wouldn't pay off their loan any faster if left to their own devices."

If you're a model borrower, shouldn't your lender report your payment history to the credit bureaus? After all, it's the only way you can boost your credit score and get a lower interest rate on future loans.

Unfortunately, there's no law requiring lenders to report your payment history, and too often they don't. "They don't want to lose accounts to other lenders who can offer better rates," says Jan Davis, an executive vice president with credit bureau TransUnion. Before you take out a loan, find out if the lender reports to at least one of the three major credit bureaus: TransUnion, Experian and Equifax. If you already have a loan, check your credit report to make sure payments are recorded. If they're not, call your lender and request it. And if the lender refuses? "Consider moving your business elsewhere," says Davis.

Oscar Recalde was delighted when he found a bank willing to refinance his mortgage at 6.625%. "I had spent hours researching the lowest rates," says the Fairfield, Conn., graphic designer. But just before closing, his wife noticed the fee schedule. There were dozens of inexplicable charges totaling more than $4,000. There was a lender inspection fee, for example. "That's a new one!" chortled one mortgage expert whom Recalde contacted. And what about that $195 notary fee? Most lenders charge $30 for the same service. Disgusted, Recalde pulled the plug on his loan.

As he discovered, shady banks sometimes charge for nonexistent services, or boost the fees charged by third parties such as property inspectors. What to do? Jack Guttentag warns against questioning individual fees since it's hard to tell whether the bank's explanations are bogus. Instead, compare the total fee package charged by several lenders before you make a commitment.

Keep in mind, just because your lender asks for a fee doesn't always mean you have to pay. "The fees are usually negotiable," says Robert Withers, CEO of First Alternative Mortgage. "If a good applicant says, "I'm paying an application fee and an underwriting fee, why not waive one?' I'll say, "Why not?' I want the borrower to be happy."

Investors know that when they buy stocks through a broker on margin, they'll need to cover their loan should their stocks take a dive. The hope: They'll get an opportunity to deposit some cash rather than liquidate stock. Deborah Tang never got that chance. She was shocked when she discovered that her broker, E*Trade, had sold off four-fifths of her stake in AOL to meet a margin call last May. "They never gave me any notice," says Tang, a Sacramento program analyst.

"If they had called or e-mailed, I would have covered the call. As it is, I lost $19,000." When she called customer service, all she got was a lecture on the importance of checking her account on a daily basis. "They said I can't expect E*Trade to contact me," she says.

Connie Dotson, E*Trade's chief communications officer, says that in typical market conditions, a margin call will trigger an alert sent to the customer's online account, along with a next-day mail-gram and a phone call. Still, she says, "there's no guarantee, because there may be extraordinary circumstances."

Surprise: While most brokerages will notify you of an impending margin call, no regulation requires them to. You can question your broker about its practices before you trade on margin, but don't bank on what you hear. Most brokers don't have a notification guarantee you can hold them to. "The deck is stacked against the investor," says Vincent DiCarlo, a former SEC lawyer who represents individuals. "Most times people who have margin blowouts are completely out of luck."

You finally got your MBA, and now you're hypnotized by ads touting the benefits of student-loan consolidation. It's no wonder. This past July rates on these loans dropped to a 40-year low: 4.125%. For many, it's a great time to refinance your variable-rate loans with a single fixed-interest loan. Just be careful.

Patricia Scherschel, consolidation product executive for education lender Sallie Mae, warns that some borrowers lose important benefits by consolidating. If you always make your payments on time, for example, you're likely enjoying a reward rate just over 2%. Your postconsolidation rate would be higher, costing thousands in interest. You could also lose the ability to defer your loan payments, and if you consolidate your debt with your spouse, you become responsible for that loan, even if he or she bolts to Mexico.

Unfortunately, some lenders don't care whether consolidation is really in your best interest. "We've been getting calls from consumers who say their lender advised them to consolidate even before the rate dropped in July, which is crazy," says Barry Morrow, CEO of student-loan provider Collegiate Funding Services.

After property values rose in Coon Rapids, Minn., John and Corrine Lee Thomas were certain that their home equity topped 20%. That meant (or so the Thomases thought) that they would no longer have to pay $60 a month for Private Mortgage Insurance (PMI) — insurance to protect against foreclosures that lenders require of borrowers who make small down payments. Federal law lets homeowners request cancellation of PMI if they can prove their home has appreciated enough to create 20% equity, and some states, including Minnesota, let them cancel it outright. Unfortunately, as Richard Roll, president of the American Homeowners Association, puts it, "PMI only protects the lender, and they don't want to weaken that protection."

The result: Some lenders can make it nearly impossible to cancel PMI. In the Thomases' case, their lender, Countrywide, refused to accept the first appraisal the couple obtained, telling the Thomases that they had to use a Countrywide-certified appraiser. The Thomases then found an appraiser off Countrywide's list, but that appraisal got rejected too. Countrywide insisted they had to hire an appraiser through an affiliated company. Finally, the Thomases gave up and got rid of PMI by refinancing their loan. In a settlement the state of Minnesota reached on behalf of consumers like the Thomases, Countrywide denied any wrongdoing, but agreed to compensate customers who paid PMI.

There are so many games being played by mortgage lenders today. Most of the worst games are not even mentioned in this editorial. A fews of the worst games on my list are: Mortgage fraud, in several complex variations; loan servicing schemes designed to guarantee your quick default; and patently illegal foreclosures. (Want to learn more?) But nobody listens to me, anyway, because I'm just a geezer living in the Sheeples' Republic of Oregon.

Buyer beware!! This proves that you really need to do some homework before jumping on any real estate deal. Some of the offers I've seen out there just make me shudder; ie: interest-only mortgages, mortgages for 125% of assessed value; most of the variable interest rate deals, and my personal favorite is sellers who hide the fact that thier house is a contaminated former meth lab; et al...

Bottom line is that there are lots of people who are quite willing to separate you from your money.

I am a mortgage broker. YSP is not a "kickback". YSP is how we get paid by the lender for brokering loans. Sure, the higher the rate that we sell, the more the YSP, but like any business, if you are offering potential customer's higher rates, they will seek out competitive offers and most likely go with someone else. Our business is extremely competitive. You can't watch T.V., read the papers or listen to the radio without hearing a commercial for mortgage rates. The free market and competition ensures that most borrowers are getting the best rates offered to them.

Mortgage Brokers offer their customers the ability to shop several lenders in order to find the right loan program for their situation and then have the ability to shop lenders to find the most competitive rate. Often times, the rates that we are able to offer are the lowest available. In short, we force lenders to compete with each other by offering borrowers direct access to several lenders programs and rates all at once. Sure, there are dishonest mortgage brokers and lenders, but there are those in every business.

Do not be fooled by this Harvard Professor who thinks that he has uncovered a "secret kickback". If the lenders don't pay us, we won't exist and the valuable services that we can offer will go away. This will lead to less direct competition between lenders and ultimately the customer will lose out.

My guess is that the next story this guy will break will be that Insurance Agencies and stock brokers actually get paid for their services.

Being a past owner of a mortgage company, I can agree that there are lots of unscrupulous Loan Officers out there. But there are a lot more shady homeowners. There are also man 100's of loan programs offered by different lending institutions, and a good loan officer will (should) find the best one for each case. We preached ethics, though we did have a few LO's we had to fire for poor service to their customers.

Oh yes, one piece of advice: do not do loans for lawyers!

I don't need to go past the first paragraph on this article to know the author doesn't know squat about lending.

Yield Spread Premium is paid on the WHOLESALE mortgage market. That's how lenders pay brokers to bring in the loans. That's why there's a wholesale mortgage market, because otherwise the consumer will be stuck PAYING MORE AT THE RETAIL branch, where the built-in premiums are HIGHER than the wholesale market and not disclosed to the consumer.

Don't use Washington Mutual for your home loan.

I did, and they charged me a fee every month. I didn't know what it was so got on my soap box to find out.

After receiving the run around for two days I found out it was an "inspection fee" for "my protection". When I asked, inspect what?......no one could tell me. They just didn't know.

After a WEEK. I got to the higher ups and to the bottom of this. What was it? THEY TRIED TO TELL ME THAT THEY WERE SENDING AN INSPECTOR TO MY HOUSE, ON THE OUTSKIRTS OF THE CITY, TO SEE IF I WAS STILL LIVING THERE EVERY MONTH.

Never mind for what reason (they couldn't tell me) Knowing that this was a lie, I asked why the inspector didn't come to the door and being that we park in the garage how is it they can tell if I'm here or not? They, told me they can just tell!

So, I told them I wanted to talk to the inspector that I have been paying for. They refused. I told them if I couldn't talk to that inspector and see his books, I was going to sue them for the money and get an attorney interested in a class action law suit.

I received a letter from a higher up stating he was crediting me back all of my "inspection fee's" and there wouldn't be any more.

This is bad business. Charging monthly for services, for millions of customers, which are never done. They don't even have inspectors.

These are the businesses that make all businesses look bad and give the Dems a foothold.

That would be very aggravating.

Along the same lines, I'd LOVE to get an itemized Federal income tax bill. I'd like to see every hidden tax, surtax, pork project and entitlement that each of my tax dollars goes toward.

Think of the hue, cry, and uproar in this country if every American got one of those each January.

Yup. And think of it. Most of us will gripe and complain about pesky charges that a company tacks on for useless or non-existent services, like your Washington Mutual experience. My wife spent 40 minutes on the phone the other week getting Wells Fargo to remove a $5 charge on our acount.

We're willing to go to great lengths, and rightly so, to get companies to play fair, behave responsibly, and give us a good value for our dollar.

Just think what would happen if the U.S. citizenry saw exactly how raw our deal is from "our" government. "For the people," indeed.

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