Changes to the mortgage market beginning today (April 1, 2011)by Tim Manni
With the current mortgage market in such a state of transition and change, it’s hard to keep track of all the different regulatory changes, let alone when they are slated to begin. Today, April 1, 2011, two changes to the mortgage market are officially underway: The banning of yield spread premiums (YSPs) and changes to Fannie and Freddie’s risk-based pricing adjustments.
If that sounds like a mouthful of technical terms and industry mumbo-jumbo, you’re not alone. However, this mortgage industry jargon is expected to shape the future landscape of the mortgage market and is highly-anticipated to affect your mortgage experience and increase costs.
Yield spread premiums (YSPs)
First off, what is a YSP? A YSP, is “perhaps the primary mechanism by which mortgage brokers make enough money to stay in business,” explains HSH.com’s VP Keith Gumbinger. Beginning today, the Fed has banned mortgage brokers from making any additional compensation solely based on increasing the interest rate on a customer’s mortgage loan.
“‘Excessive YSPs’ have been a topic of regulatory discussion for years and have even been implicated as a contributing factor in the mortgage market meltdown,” writes Gumbinger. “Yet brokers contend that there’s little proof that borrowers were injured by the normal use of the practice and that the Fed is over-reaching.”
How does this ban affect you?
“The banning of the markup on a loan’s interest rate is by no means music to anyone’s ears, since it does threaten to put many brokers out of business, thus making it harder for borrowers to find or obtain funding (especially those outside of mainstream mortgage requirements).”
Risk-based pricing adjustments
We’ve talked a lot about mortgage costs rising both now and into the future. Several of the current and upcoming regulatory changes are expected to increase costs to the consumer. The change to how both Fannie Mae and Freddie Mac are planning to offset borrower risk is no different:
As far as cost increases go, both Fannie Mae and Freddie Mac increased their “Loan Level Pricing Adjustments” (LLPA; Fannie) and their “Post-Settlement Closing Fees” (Freddie). Applied at the intersection of your credit score and the amount of equity or down payment you have, these increase the cost to the consumer to help Fannie and Freddie offset the risks of making loans to lower credit or equity borrowers.
How does this affect you?
You might be saying to yourself, “So what, I have good credit, how will these pricing adjustments impact me?”
For the first time this spring, these price increases apply to all borrowers, even those with great credit and significant equity positions. “Basically, costs have risen for all borrowers,” said Gumbinger.
These two changes, which officially begin today, are just the beginning of a slew of alterations to a mortgage market that’s stuck in a swirl.