Since the improvement late last week, conforming  30 year fixed mortgage rates have been steady at 4.75, down from 4.875. Conforming = Freddie Mac (FRE) Fannie Mae (FNM) insured a.k.a. “standard”

The current jumbo 30 year fixed rate for a true jumbo loan exceeding even conforming jumbo limits is 5.625. 5.5 is available from several lenders including Wells Fargo for borrowers with extremely low loan to value.

The FHA 30 year fixed rate continues to mirror the conforming (FRE/FNM insured a.k.a. “standard”), 30 year fixed rate. FHA loans come with significantly higher costs thanks to MI and other FHA mandated fees Freddie Mac (FRE) / Fannie Mae (FNM) insured conforming mortgages do not have.

It should be noted that not only does the IRS home buyer tax credit expire in April, but FHA loan guidelines change as well. One of the changes includes MI, an upfront fee charged as a fixed percentage of the loan amount, being boosted to 2.25.

Ed Ferrara – FreeRateUpdate.com

Supply and demand tells us that once they exit, supply will sky rocket. Somebodies got to fill the void and buy massive amounts of mortgage-backed securities. It’s very unlikely investors will be jumping on these securities right away, they’ll wait for the price to fall a bit. They’re in the business of making money. When the demand goes away, but the supply is still there, prices will drop. When prices of mortgage-backed securities drop, mortgage rates, which move in the opposite direction will rise, but how much?

The Fed uses technology, computer software, to try and put a thumb on the figure factoring in all sorts of variables. They too have done their best to predict what the rise in mortgage rates will be. Obviously, from recent statements, like if needed they’ll re-enter MBS markets and purchase again, they’re not sure either.

In a doomsday scenario, and it is possible, demand for MBS will be so low and prices will plummet so far, 30 year fixed mortgage rates will be driven up into the mid 6’s in a matter of days. If that happens, the Fed will likely begin buying mortgage-backed securities again and over a period of time drive rates back down.

Ed Ferrara – http://www.freerateupdate.com/

Dear Public Editor of the New York Times,

Please retract the editorial of April 10, 2009 titled “Predatory Brokers”. Please issue an apology to all mortgage brokers with the retraction. Please provide space for an op-ed to accurately and honestly describe the work of mortgage brokers to correct the false statements in the editorial, and to suggest how best to regulate the industry.

***

What follows is a line-by-line examination of the 26-sentence editorial “Predatory Brokers”. I trust that after your review of my examination, you will concur with my opinion: The writer failed to grasp the basic facts and employed obvious fictions to denounce mortgage brokers.

If you are like me, you will find this misuse of the editorial authority of the most powerful newspaper in the United States to be both horrendous and embarrassing.

***

I have just begun to study this matter, but it is my opinion that the central misinformation of the “Predatory Brokers” editorial is based upon the writer’s use of an issue brief from The Center for Responsible Lending.

The statements from the center that I have seen on yield spread, a payment from a lender to a broker, and the central issue in the editorial, are more fiction than fact. The editorial writer repeated those factual errors.

The CRL  writer is Jayson Blair and the editorial writer has repeated their obvious falsehoods to create and define his policy prescriptions for a major player in a $12 trillion industry.

***

The editorial says “Many brokers do legitimate work that helps homebuyers sort through competing loan proposals and make good choices. In those cases, the fees they get from lenders — typically 1 percent or 2 percent of the loan amount — are fully justified.” (Sentence 9 & 10 of the editorial)

I personally agree with the sentiment the writer states in this passage. I agree that many mortgage brokers do legitimate work. I consider myself to be one of the mortgage brokers that does legitimate work. The next sentence, sentence 10 of the editorial, says that “the fees they (mortgage brokers) get from lenders … are fully justified”. I also agree with that statement. Payments made by lenders to brokers are fully justified when good brokers do their job.

What makes the statement embarrassing for the editorial writer and for the New York Times is that the fees the writer is referring to in sentence 10 are yield spread premium fees. The primary argument of the editorial is that “the most clearly unethical form of payment (to mortgage brokers) is the so-called yield-spread premium” (sentence 17) and they should be outlawed.

In other words, in the same editorial, the writer has stated that yield spread payments “are fully justified” and that yield spread payments should be made illegal. There’s only one logical explanation. The writer didn’t understand yield spread. As you will soon see, that’s not a hard argument to prove.

Nobody should take an editorial seriously which has committed this error, but 20 senators have. They are asking that the editorial’s call to ban yield spread be implemented. The whole world is growing dumber after reading The New York Times.

***

I believe the editorial writer made this mistake based upon his reading of an issue brief from The Center for Responsible Lending. The center’s brief is a short collection of falsehoods about yield spread, but a perfect starting place for a quick editorial by a writer who thinks he already understands the subject.

The Nov. 5 2007 issue brief by the Center for Responsible Lending states that yield spread is a “bonus” paid to a mortgage broker “for placing, or steering, a borrower into a higher-cost loan” (The issue brief is titled “Bans on Yield-Spread Premiums and Steering: Protecting Homeowners and Strengthening the Mortgage Market”).

The most important falsehood which the issue brief used, and the editorial writer incorporated, is the assertion that yield spread is a payment for a “higher-cost loan”. This is false. Yield spread is paid on almost all loans originated by brokers. Yield spread is paid if the loan is high-cost or medium-cost or low-cost or no cost.

By describing yield spread as a fee only for high-cost loans, the issue brief and the editorial both legitimately argued that yield spreads should be banned.

If they have both incorrectly defined yield spread, however, and if yield spread is paid on good, bad and indifferent loans, then a ban on yield spread would have the effect of taking away good, bad and indifferent loans. The ban on yield spread is in fact so Draconian that it would bankrupt all mortgage brokers. Do you think you should have been aware of that when you issued your policy?

If all mortgage brokers are bankrupted, then the role of small business in mortgage lending will be destroyed. If small business is destroyed in mortgage lending, then retail banks, the most expensive and slowest source of mortgage loans, will be the only choice consumers have.

I provide further argument later in the article that YIELD SPREAD IS THE KEY AND ESSENTIAL TOOL OF GOOD MORTGAGE LOANS. Until then, please trust me when I say the following: As a banking professional working as a mortgage broker, and as a person with 17 years of daily work in real estate lending and real estate investment, calling for a ban on yield spread is not very different from calling on a ban against words in newspapers.

It is a statement of such shocking ignorance that for those who understand the industry, reading your editorial can and will destroy all faith and deference which a reader might previously have given based upon your reputation. I cannot imagine what people will think if you do not retract the opinion and issue an apology. For any person in my industry, you will forever be both a joke and a menacing influence promoting evil falsehoods.

Right now it is only your editorial which is a joke. Failing to take responsibility for its errors will make the newspaper a joke.

***

Yield Spread: 1. A payment from a mortgage lender to a mortgage originator which is equal to a small percentage of a mortgage amount, normally 1% to 3%, determined by the difference (the “spread”) between a wholesale interest rate and a markup to a higher-yield retail rate. 2. Broker compensation based upon the spread in the yield between the wholesale and retail rate.

***

Yield spread is a fee paid from a lender to a mortgage originator. It is nothing more and nothing less. A lender who wants a new loan pays a broker a fee for a new loan. The fee the lender pays the broker is yield spread.

Yield spread is a normal and ethical payment for a broker to receive. It could cross the line into an “unethical” payment if the broker charges too much for their services. That can be a problem. It is true that there were too many bad players in the business, but a huge section of them are already gone. I don’t think the editorial writer is aware that 380 major lenders including many brokers have gone out of business since the beginning of the financial crisis, according to The Mortgage Lender Implode-O-Meter, and a ton of unethical companies and players have been washed away in this blood bath.

There were too many mortgage brokers who took advantage of the less educated and charged higher fees then they should. We cannot properly regulate this central fault unless we all know and share the basic facts of a mortgage broker’s work. Your editorial does not have the basic facts and cannot make appropriate policy recommendations.

***

If you continue the analogy with a newspaper, and to provide some guidance to the general reader, yield spread is analogous to the placement fee that advertisers pay to appear in newspapers. Readers pay the newsstand price for a newspaper just as borrowers may pay points for a mortgage.

Newspaper readers don’t have the slightest care or interest what advertisers pay to appear in the newspaper. Most borrowers don’t care about the yield spread payment – so long as the terms of their new loan are good.

Lenders pay yield spread to mortgage brokers for a new mortgage investment. Advertisers pay publishers to place their business message in a newspaper.

Can anyone imagine the disbelief of an editorial which suggested that advertisements should be banned in newspapers because they are a kickback from an advertiser to a publisher and readers haven’t been told the fees the advertisers are paying? Is the call for a ban on yield spread equally dumb?

One thing is sure: If the ban on yield spread is enacted, most or all mortgage brokers will go out of business because they can no longer do good mortgage loans. Banks will still have the ability to charge yield spread and to do good loans. All business will shift to them.

***

Yield spread is paid on high-cost, medium-cost, and low-cost loans. Banning yield spread, which is the policy of both The Center for Responsible Lending and The New York Times, that ban would have the effect of banning medium-cost and low-cost loans. The clear objective of your editorial is that something should be done to stop high-cost loans to borrowers who should have low-cost loans.

We know the editorial writer did not understand what yield spread is because in the same editorial he argued against high-cost loans but he did not comprehend that a ban on yield-spread would make all mortgage-broker loans high-cost loans. His policy prescription accomplishes the opposite of his goal: If you ban yield spread, you mandate high-cost loans for any mortgage originated by brokers.

What the opinion writer could reasonably have argued is that mortgage brokers should not charge an excessive amount of yield spread. He cannot argue that a yield spread fee is “fully justified” and that new legislation “would rightly make yield-spread premiums illegal” (sentence 22 of the Times editorial).

The even more disturbing truth which the New York Times editorial hides is that YIELD SPREAD IS THE SMARTEST WAY FOR A CONSUMER TO PAY FOR THEIR MORTGAGE.

***

The reason I encourage borrowers to use yield spread to pay for a loan is obvious. Let’s review a few examples with real world numbers.

If we are dealing with a $200,000 loan which costs $6,000 to the borrower, the borrower has the choice of paying the $6,000 himself or the borrower can elect to have the lender pay the $6,000. Let’s look exactly at this choice so we understand exactly what we are talking about.

I’m going straight off a rate sheet dated Feb 1, 2010. These are real numbers.

The borrower has a choice between a loan of $200,000 at 5.4% or a loan of $206,000 at 4.875%. The first choice, the $200,000 loan, pays the broker 3% of the loan amount with yield spread. The loan costs the borrower nothing. The monthly payment is $1,123. This is the choice that a ban on yield spread would outlaw.

In the second choice the borrower pays the broker and close costs of $6,000 by adding that amount of money to their loan. His interest rate is better because he is paying the $6,000 and the lender can afford to give him a better rate. The borrower’s rate under this choice is 4.875%. The monthly payment is $1,090.

Which one do you prefer reader? If you use yield spread, your monthly payment is $33/month higher, but your mortgage balance is $6,000 less. If we ban yield spread, and we force clients to pay points and closing costs themselves, then in this case it will take the borrower more than 15 years to make the $33 monthly savings pay off ($6,000/$33 = 15 years).

***

There is barely one fool in the world who will pay the points and wait out the 15 years it takes to make this loan make sense. And if you forced 100 fools to make such a choice, it is unlikely even one would attain some financial benefit by paying points.

Yet the New York Times editorial argues not just that the borrower have the option of paying the points and closing costs, they argue that the borrower MUST TAKE THIS OPTION. Banning yield spread requires borrowers to take out high-cost loans if they use a mortgage broker.

Let me repeat the obvious. The editorial is arguing that borrowers be forced to take the bad option which is the expensive option even though the point of their policy is to reduce high-cost loans.

Because borrowers will not take the bad option, they will move their business to retail banks. Mortgage brokers will all go out of business.

***

Nobody who understands yield spread would argue for it to be banned. That is why it is so critical for the New York Times to retract its opinion, issue an apology to all mortgage brokers and provide full space for a complete rebuttal.

If any reader thinks that ignorance cannot rule this world, please take note that The Center for Responsible Lending, the  group which argued for a ban on yield spread, it released an issue brief on August 31, 2009, saying that the Fed has issued a final proposal saying that mortgage broker fees “would not increase based on changes in the interest rate.” Changes in interest rate is the way brokers charge yield spread.

The real world implications of this nonsensical editorial are real. A group of prominent senators has just written a letter calling for a ban on yield spread. Guess who is the source of intelligence on this strange public policy proposal (read the letter here)?

Look above at the example. The mortgage broker changed the interest rate from 4.875% to 5.4%. The Fed proposal would ban fees “based on changes in interest rate”. It’s true that the borrower added $33 to their monthly payment to reduce their loan balance by $6,000. They didn’t want to wait 15 YEARS for the monthly savings to pay off and they didn’t want to add $6,000 to their loan balance.

***

EVERY MORTGAGE CUSTOMER SHOULD INSIST THAT THEIR MORTGAGE BROKER PAY FOR THE ENTIRE TRANSACTION WITH YIELD SPREAD.

I call attention to my opinion with block letters because I am proud of all the mortgage transactions which I have originated which were paid for entirely with yield spread. That means the lender paid for the loan and the borrower received an acceptable rate and the borrower paid nothing for that privilege.

The writer of the editorial has no awareness that this is the smartest and the best way for a consumer to take out a mortgage. Who do you think is right? Is it me? Is it the editorial writer? Is it the creature from the black lagoon?

It’s not just my opinion based upon 17 years of real estate lending and a complete and full mastery of the subject matter discussed here. It is also the assertion of the academic research which has been written on the subject (but obviously not including the paper from The Center for Responsible Lending). The center will comfortably join Jayson Blair in New York Times history.

The editorial writer has used the work of a terrible reporter or a deceptive reporter.

***

“The first step must be to outlaw the kickbacks that lenders pay brokers for steering clients into costlier loans.” (sentence 13 of the New York Times editorial)

Do you wonder where the editorial writer got this thought? Listen to this. Yield spread is a “bonus a lender pays to reward a mortgage broker for placing, or steering, a borrower into a higher cost loan than the borrower qualifies for” and the payment is “essentially a kick-back” (“Bans on Yield-Spread Premiums and Steering: Protecting Homeowners and Strengthening the Mortgage Market”, Nov. 5, 2007, The Center for Responsible Lending).

Both statements are so factually erroneous that it merits special attention.

I will mention briefly again that in sentence 10 the writer said the “kick-backs” paid by lenders to mortgage brokers are “fully justified”, but he didn’t know he was talking about the kick-backs when he said that. Yet in sentence 13 he argues that the kickbacks paid by lenders should be outlawed. Sentence 13 also contains the erroneous assertion that yield spread is paid on “costlier” loans.

Yield spread is paid on costly loans, cheap loans, and all loans in between. Almost all of them anyway. I do not remember a single loan I have done which did not include yield spread. I can’t imagine any circumstance in which it would be smart to exclude yield spread.

Yield spread allows mortgage brokers to provide low-cost loans. Since it is the goal of the New York Times editorial policy to promote low-cost loans, it must then embrace yield spread. A low-cost loan requires the use of yield spread. The editorial is backwards on how to accomplish low-cost loans.

***

Yield spread is a payment by a lender to an originator. It is ethical for a lender to make a payment to an originator because the originator has worked for their payment.

The jobs which the originator is paid for include finding the borrower, finding the best loan for the borrower by checking with different lenders, explaining different options to the borrower, organizing the paper work for the borrower, submitting the loan application, and arguing on behalf of the borrower when the lender does not want to approve the loan.

All of these jobs performed by an ethical originator are an ethical source of the ethical payment they earn from the ethical lender who makes ethical payments to ethical originators based upon the ethical use of yield spread.

***

The writer of the editorial does not define a kickback in sentence 13, but I define it as an undisclosed payment. If an undisclosed payment is the definition of a kickback, and that is a primary definition of “kickback” under RESPA, the key body of law which defines the work of mortgage brokers, then yield spread is by definition not a kickback. Yield spread is by definition not a kickback because it must be disclosed and it would be illegal if it is not disclosed.

Why does the editorial writer believe that yield spread is “the most clearly unethical form of payment” and a “kickback” even though the payment is fully disclosed?

It’s simple. He copied somebody else’s work. Yield spread, according to the Center for Responsible Lending, is “a bonus a lender pays to reward a mortgage broker for placing, or steering, a borrower into a higher cost loan than the borrower qualifies for” and “Many lenders pay this premium—essentially a kick-back to brokers“ (“Bans on Yield-Spread Premiums & Steering: Protecting Homeowners and Strengthening the Mortgage Market” Nov. 5, 2007, Center for Responsible Lending).

Do you believe the editorial writer who says yield spread is “fully justified”? Or do you believe the same editorial writer in the same editorial saying that yield spread is “the most clearly unethical form of payment” and the “reward” for “bleeding unsuspecting borrowers” and that pending legislation “would rightly make yield-spread premiums illegal”?

Does anybody think the New York Times editorial makes sense?

***

The special irony of the editorial writer’s mistake is that there is an entire segment of players in mortgage origination who do receive kickbacks – if we use the definition from RESPA. All retail banks sell their loans in return for payments called “release spread premium”.

To a borrower there is no difference between a broker who earns yield spread and a bank which earns release spread. Except for one thing. MORTGAGE BROKERS ARE REQUIRED TO DISLCOSE THIS INCOME. RETAIL BANKS NEVER DISCLOSE THIS INCOME. The institutions which earn kickbacks are retail banks. Retail banks don’t disclose their income.

Which practice is more ethical? The practice of those who disclose or the practice of those who do not disclose? Which practice is more like a kickback? The practice of those who disclose or the practice of those who do not disclose?

If we define a kickback as an undisclosed payment, then retail banks are earning “unethical” kickbacks because they do not disclose their release spread premium. Yet the Times policy would shift all mortgage business to the “unethical” retail banks who hide their “kickbacks” legally (Please see the example below.).

If the editorial writer understood this basic failure in our regulation of the industry, and if he actually knew what a kickback is and how to define it, then he would have been aware that mortgage brokers are required by law to disclose more fee information than retail banks. Anybody with a basic knowledge of mortgage origination is aware of this fact. The editorial writer should apologize for getting this key industry fact backwards. And The New York Times should conduct an investigation of The Center for Responsible Lending.

Is their work paid for by major banks – the lenders that don’t disclose their fees? How could any serious academic institution butcher the facts so badly?

They must know that retail banks get kickbacks and not mortgage brokers, but if you say mortgage brokers get kickbacks enough, then the New York Times and 20 senators who don’t know what they are talking about will call for a ban on yield spread because it is “a kickback.”

***

“Brokers can claim this premium (yield spread) by steering a borrower whose credit history qualifies him or her for say, a 7 percent loan, into a more expensive loan at a higher rate” (sentence 18 of the editorial).

This statement misleads the reader because it implies that yield spread is only paid if a borrower takes out a “more expensive loan”.

The obvious intention of the editorial writer was to say that mortgage brokers should provide the best loan available to their client. Mortgage brokers should not be given a greater financial reward for giving their clients a less favorable loan. The classic example of this malpractice is putting a borrower into an ARM loan with an adjustable rate when they could qualify for a fixed rate.

All good mortgage brokers agree that mortgage brokers should be required to give their customers the best loan available. Good mortgage brokers are not only willing to live by this rule, they want that rule. Mortgage brokers should provide their clients with the best loan available. We should banish brokers who do not follow this rule.

In the editorial, the writer falsely claimed that yield spread is the reason mortgage brokers move clients to more expensive loans. If he had understood yield spread and the mortgage business, he would have stated that brokers should not be paid a greater amount of yield spread for putting their clients in to a lesser loan – a loan that costs more.

I restate my opinion again on the matter: There is nothing wrong with being paid with yield spread. I always advise clients to pay for their mortgage with yield spread. Always. I am proud of that record.

The editorial writer wanted to say that there is something wrong with being paid more yield spread for a lesser loan. Any law or regulation which enforced that sentiment is a rule which good mortgage brokers embrace. If the New York Times editorial writer had understood yield spread, he could have reasonably made such an argument, and it would have made sense. In this case he is senseless and so is his newspaper. And that’s just the beginning.

***

“A House bill introduced by Representative Barney Frank, a Democrat of Massachusetts, would rightly make yield-spread premiums illegal.” (Sentence 22 of the editorial).

Obviously, at this point of my story, any person in my industry is both outraged at Rep. Frank’s House bill and they are on the floor laughing hysterically at the comedic intersection of errors shown here in the Barney Frank, Center for Responsible Lending, New York Times ménage-a-trois.

While mortgage brokers have taken a very heavy beating from the press, there are millions and millions of mortgage broker customers who both like their mortgage broker and know their broker got them a great deal – a much better deal than they would have gotten from a retail bank. When a friend needs a loan, they refer that friend to their mortgage broker.

I encourage all mortgage brokers and all happy customers of mortgage brokers to contact Barney Frank, The Center for Housing Studies, and The York Times public editor:

public@nytimes.com,nytnews@nytimes.com,letters@nytimes.com,kathleen.day@responsiblelending.org,ginna.green@responsiblelending.org,charlene.crowell@responsiblelending.org, info@barneyfrank.net

Please use the following message in the subject box: Ban Yield Spread and Die Yuppie Scum Eater.

If you want to include a short body in the email, please write:

“My mortgage broker paid for my loan with yield spread and it totally turns me on.”

If you want to include a long-winded body in the email, please write: “My mortgage broker gave me a great deal on a cheap mortgage paid for with yield spread. I love yield spread. It’s the bank’s money. It’s not my money. Like my broker said: Let the bank pay for the loan. I don’t want to pay for it. And did I hear somebody wants to ban yield spread? Where in the hell did that come from? Mike says if you ban yield spread you will bankrupt the mortgage-broker industry. That isn’t good for consumers. You will force every mortgage borrower into the hands of a dumb, slow and expensive retail bank. And did you know retail banks jack up their interest rates and charge hidden fees and get huge kicks backs? Yep, that’s right. They jack up the customer’s interest rate and secretly earn kickbacks and that’s the biggest part of their income. Predatory? Yes. And perfectly acceptable under existing lending laws. And they don’t whisper a word to boo about it. They never tell anybody. Did The New York Times mean to encourage kickbacks when they called for a ban on yield spread? Cause I don’t get it.”

***

The editorial writer and The New York Times and the Center for Responsible Lending will want to reconsider their opinion about Rep. Frank’s bill in light of the new information provided here. If there is still in fact such a bill, it would only have been written by a person who does not understand what yield spread is. It might have been written by a person who read the New York Times editorial and took it seriously.

As it so happens, a group of important senators have written Fed Chairman Ben Bernanke. And do you know what they asked for? They asked for a ban on yield spread.

Here is the heart of the senators’ December 24^th 2009 letter – which makes extensive use of the Times editorial:

“The Times concluded that ‘The first step must be to outlaw the kickbacks that lenders pay brokers for steering clients into costlier loans.’ The editorial went on to say that ‘the most clearly unethical form of payment is the so-called yield spread premium.” … it is difficult to overstate the damage that has been done by these hidden steering payments … yield-spread premiums … were the enablers for the propagation of destructive sub-prime mortgage-backed securities and collateralized debt obligations that brought Wall Street to its knees and devastated our economy. … the Federal Reserve must end this dangerous practice.”

***

Yield spread is a payment made by a lender to an originator. The payment of yield spread is both ethical and borrower-friendly and smart and the choice that all borrows should choose when paying for their new mortgage.

The existence of yield spread does not create an unfair advantage for a mortgage broker. Dishonesty creates an unfair advantage. Any borrower can easily defeat a dishonest broker: He calls somebody else and asks for a second opinion.

“What will you do this loan for and how much will it cost?” That’s all we need to do to stop bad brokers, although I have zero qualms about more serious regulation. Banning yield spread would destroy mortgage brokers and their ability to provide good loans.

Legislation should not outlaw yield spread payments from a lender to an originator. Those concerned about predatory mortgage brokers should use some other method to police the industry. I have some thoughts about how it can be done correctly.

If legislation outlaws yield spread, it will bankrupt all mortgage brokers and force all mortgage business to retail banks. The retail banks will continue to charge their version of yield spread, and they will continue to keep knowledge of the charge to themselves – meaning the people who earn kickbacks will be aided by the Times policy.

It is also true that borrowers will lose their best mortgage resource. Brokers beat the pricing of retail banks all the time. Why do they provide better mortgage terms? Mortgage brokers are smarter, faster, better, cheaper. The Times policy is against mortgage lending which is smarter, faster, better, cheaper.

***

Do you want to see some academic research on yield spread? Please see the paper titled “Do Borrowers Make Rational Choices on Points and Refinancing?” by Yan Chang and Abdullah Yavas.

A press report on this paper says that 1.5 percent of borrowers who used yield spread to pay for their loan would have been better off using points. If you told the New York Times editorial writer that his ban on yield spread would force 98.5% of borrowers to choose a more expensive and less affordable loan paid for with points, he would have looked at you as if you had said a unicorn is green with a white horn. Why?

He didn’t have the slightest idea that there are only two choices for the borrower: pay with points or pay with yield spread. There is nothing else.

In other words, in almost all cases, the use of yield spread is not only ethical, the use of yield spread is smart and cheap and the best choice for consumers.

In my personal practice of mortgage brokering, I always instruct borrowers to pay my fees and all close costs with yield spread when possible. I am proud of making a point of always providing that intelligent advice to all of my customers.

***

The New York Times has committed grave errors in its April 10 2009 editorial titled “Predatory Brokers”. Please retract the entire editorial. Please issue an apology to mortgage brokers. And please provide an op-ed space to explain how our work works.

If borrowers and lawmakers depend upon your editorial, they will be mislead, confused, deceived. We can already see that 20 senators have called for a change in regulation based upon your errors.

***

My opinion is that your massive errors in this editorial prove your prejudice against free markets. Any sensible commentator would have asked themselves: How should brokers get paid? You wouldn’t ask that question if you think it is immoral for people to be paid for their work. I admit the charge is broad, but I back up the charge with the factual falsehoods of your editorial against yield spread and the work of mortgage brokers.

You have destroyed your credibility on this subject.

Sincerely,

Michael David White

A Mortgage Broker Who Proudly Charges Lenders Yield Spread To Pay for His Clients’ Mortgages

CEO: The New Mortgage Company, Blogger: Implode and NewObservations.net, Chicago Illinois

The popularity of US Rep. Ron Paul’s bill to audit the Fed taps into a great pent-up frustration about the unaccountability of the very powerful institution. Independent socialist Bernie Sanders of Vermont is the senate sponsor. While Dr. Paul, my former boss, wants to go as far as getting rid of the Fed, he wisely offered an opportunity for us to learn more and make a more informed decision.

We have just learned that the Fed will return $46 billion dollars from 2009 earnings to the US Treasury. Explains the Washington Post, “The Fed, unlike most government agencies, funds itself from its own operations and returns its profits to the Treasury.” The article continues, “By the end of 2009, the Fed owned $1.8 trillion in U.S. government debt and mortgage-related securities, up from $497 billion a year earlier. The interest income on those investments was a major source of Fed profits — though that income comes with risks, as the central bank could lose money if it later sells those securities to reduce the money supply.”

So the Fed makes most of its profit from taxpayers paying interest on the national debt. All thanks to irresponsible Congressional spending (terrible under Pres. Bush and continuing under Pres. Obama). Under this Congressional shell game, politicians claim “income” from the Fed on the interest on the national debt. As they say on TV, don’t try this at home! According to the Federal Reserve Board press release, the Fed’s net income in 2009 was $52.1 billion and they returned $46.1 billion to the US Treasury for operating expenses of $8 billion (these numbers are “unaudited” and subject to change). In 2008, the Fed returned $31.7 billion on $35.5 billion of net income–with operating expenses of only $3.8 billion. The Fed was twice as bloated, wasteful and inefficient last year as the previous year.

Even worse, only with a more complete audit of the Fed (such as under Dr. Paul’s proposal) could we find out the devil in the details. We already know that the Fed is returning approximately $46.1 billion dollars to the Treasury of the $46.1 billion it got from interest on the debt last year. How nice of them.

Given the gross profits by some money center banks from bond dealing, there are rampant rumors that Bernanke was active buying and selling bonds at a net loss in order to boost the bottom line of financial special interests. If true–and only Dr. Paul’s audit could give us the answer, there is more back door special interest corruption for Wall Street fat cats at taxpayer expense than know of from TARP, Fed Section 13.3 and other bailouts. Taxpayers have a right to know.

***

I read a mysterious statement the other day.

“My data show that between 1890 and 1990 real home prices actually didn’t increase,” said Robert Shiller, in Newsweek (Dec 30, 2009), Why We’ll Always Have More Money Than Sense.

We have all been in a long state of delusion. Our psychosis is simple. We are married to real estate which increases in value. I can get rich. You can too.

The belief in increasing values of real estate is the president of our financial crisis. Now we know he didn’t deserve the office. The price will be paid. We can all confirm the high stupidity of the crowd which we are in. Of course I’m a member, but I’ve decided I’m done, and you have too.

Now we are cured. Or some are. Or a few maybe.

If real estate is a “flat” asset, with price changes created only by inflation, and not true increases in value, than you know we still have quite a big fall to go ahead of us. And if we don’t fall, that’s almost certainly worse. The graph above shows Case Shiller through the third quarter of 2009. The numbers are adjusted for inflation.

***

Take a minute and pick out the most striking feature of the graph. Study it a minute. What do you think it is? Do we agree?

The striking feature is that the current breaking bubble is a bubble which was a King Kong bubble. Any predecessor bubble in the last 120 years was a hiccup. Now we have gangrene. At least one limb must go.

The best numbers, which are Case Shiller, predict a fall of 22% from current levels. And that’s if we don’t overshoot.

Over the last three or four months I have been looking closely at the data on pricing from Case Shiller, Freddie Mac, The Federal Housing Finance Agency, and First American Core Logic. I have been surprised by how negative the forecast is based upon long-term price trends.

While there are variations, all of the different data sets point to patterns very much like what you see above from Case Shiller. If history has a pattern, and the most educated voice on the matter says it does, then a fall is written in stone. The critical question: Should we respect what the stone says? Or should we try to break the tablet?

Who can imagine the perverse effects of a policy which successfully circumvents something as towering as the pricing of all of our 129 million residential housing units?

If successful, the most obvious perversion of our current policies on housing is that we will continue to pay too much for the most expensive cost which each of us shell out for every day and every month and every lifetime. We are fighting an ocean’s tide retreating. How will we hold the water on the shore? We are forcing a more expensive lifestyle across our entire economy. Rich and poor. Young and old. All are scheduled to pay more if the bubble doesn’t pop completely.

***

We live in a world of radical price competition. The obvious competition we are losing is the competition based upon the price of labor. Expensive housing exacerbates our competitive disadvantage.

Our focus should be on providing our services for a lower cost. Does anybody think it makes sense for us to increase the cost of housing when the price of labor is too high? If housing costs are high, will that help our competitiveness?

Those new to this argument about the price of housing should consider that the government effort to artificially inflate prices includes radical intervention. Fannie Mae, Freddie Mac, and the FHA, all government banks, are the entire mortgage market today. Private investment in mortgages is gone. No sane banker is going to make a loan on an asset that has fallen 30% in value.

The federal government is also literally giving money to buyers through a tax credit. And the federal government is buying a huge percentage of mortgages to artificially keep interest rates low (see above). And the federal government has issued an unlimited credit line to Fannie and Freddie so they can write as many mortgages as they want.

If you don’t understand all of these names and programs, trust me when I say that nuclear bombs have been used on the housing market.

Think about that for a minute, and look at the pathetic unit sales above. The government is dropping nuclear bombs on the mortgage market and nobody is dying. They can’t move the product.

What has been taking off are foreclosures. They are soaring. The general feeling is that foreclosures are terrible and should be stopped because of the distress they bring both to a family and a neighborhood. The more important truth, widely ignored, is that foreclosures promise to bring back cheap prices. We know from the first chart in this story that lower prices are natural.

In our post-bubble world, foreclosures are the surest mechanism for creating affordable housing. Consumer advocates should now welcome this method of price correction. Those true to their mission will embrace a mass-foreclosure remedy.

In a credit bubble, the smart economist makes the highest goal a true reckoning with phony debt. The common man now has a chance to play the smart economist.

Let the house go back to the lenders. The bank will throw the mortgage in the garbage. Reality will return. Prices will fall – perhaps dramatically. Systemic mortgage debt in the United States will be reduced.

Default is now a patriotic duty. It is a courageous intelligent act. Take the right steps so we can beat the Chinese. We need the jobs. We need to get back to work. We don’t need the phony debt issued to buy a bubble.

The government has screwed up management of the financial crisis by granting debt assets special status. What the owners of debt assets deserve are losses. It’s time for the people to fix the financial crisis.

Michael David White is a mortgage broker in Chicago.

The housing market remains oversupplied by 860,000 units when compared to a 10-year average inventory and the overhang represents a direct contradiction to the spirit of Tuesday’s headlines describing new data from the National Association of Realtors.

Major media said that “Home Sales Exceed Forecasts” (Bloomberg) and “Sales Rise 7.4%” (Wall Street Journal) and “Sales of Existing Homes Surge” (MarketWatch) and the data providers described “Another Big Gain in Existing Home Sales” (National Association of Realtors) .

If you view the chart above you see supply exceeds long-term inventory averages by 32% — a significant hurdle despite a count of months-of-supply inventory which is just 12% above average and is practically normal (see below). The disconnect in the measure of excess between units for sale and months of supply suggests a logical problem with the data.

If you were to depend upon the months-of-supply figure, you would estimate the market is very close to a long-term equilibrium. Look next at the unadjusted unit-sales figures — which are the only figures which I look at.

The numbers look less promising when you see that unadjusted sales figures show the last 12 months of activity is very similar to a bad year last year (see above). We are headed in to the doldrums this year with a special un-trainable child locked in the attic: A mammoth set of delinquent mortgages (see chart below where X = the set of inventory plus delinquent mortgages.

And 3.5 million units for sale is not nothing when it should be 2.7 million.

With the most knowledgeable sources saying that the cure rate for delinquent mortgages has fallen in to the abyss of “rarely or never” (see below), you would be right to conclude that the federal government can only stop this hellfire by actually paying  the monthly bill for homeowners who are behind. Since they are funding every new mortgage, maybe it’s possible they can pay the mortgage too? Think of it as citizen-friendly quantitative easing.

You can’t fight the Fed, but even Superman cannot win in the presence of kryptonite. Foreclosures are kryptonite. It’s possible the United States government can be beaten. The trend in mortgage payments says they will lose.

The inventory of existing homes for sale is not a source of intelligent confidence. Overall, I see a year of weak sales when the actual number of units sold is compared to the trend in the last 10 years.

This is especially true in light of radical and draconian intervention via Fannie, Freddie, FHA, the home-buyer tax credit, the purchase of mortgage-backed securities, and the equity credit line Fannie and Freddie depend upon for solvency. And a third of unit sales are distressed sales.

If the Fed and Treasury fail in their desperate mission in the housing market, every recent purchaser will be a victim of fraud. Even if the Fed and Treasury are successful, the hardball risk has not been disclosed to new buyers. These consumers don’t have slightest idea what it means when Fed and Treasury are pulling a dozen rabbits out of their hat to fund every new mortgage in the United States.

The Fed and Treasury are now perpetrators of a fraudulent scheme probably greater than any market manipulation previously known to the history of the world.

The first time homeowners dancing to their positive tune may very well be remembered as dead persons buying. Honestly I think even Angelo Mozilo, the legendary leader of the greatest originator of garbage mortgages in the bubble boom, would find this game too unfair and corrupt.

Look who is running the systemic criminal enterprise now.

Michael David White is a mortgage broker in Chicago.

The exhaustive Freddie Mac price index fell 2% nationwide in the 3^rd quarter and analysis of its data predicts prices will continue to fall for the next four years.

While Freddie announced Tuesday that its purchase-only index has gained for the past two quarters, the “Classic Series” of the Conventional Mortgage Home Price Index, which includes refinance appraisals as well as purchase values, has fallen 9% from the high in June 2007 and 3.8% for this year.

The projections say homeowners have lost only $1 for every $3 they can expect to lose by the end of the cycle.

The trends show values will fall for four years through September 2013 based on current rates. Readers should take this estimate as an educated guess. The estimate may have greater relevance than forecasts described in mainstream-media headlines which typically fail to place new data within a long-term trend.

Widespread bullishness has lifted hopes for property values based largely on the definitive Standard & Poor’s/Case-Shiller home price index. The 10-city index has risen 5% from its April low.

A composite of projections derived from four major indexes — Freddie Mac, Case-Shiller, First American, and the Federal Housing Finance Agency – predicts a total fall from peak to trend of 35%. That same average of averages shows values falling nearly 20% further from their current level.

Real estate bears counter the bulls by arguing that record mortgage delinquencies will overpower inventories and that widespread credit-bubble debt will either stunt growth or ruin lenders and homeowners. The federal government is throwing everything including all of its kitchen sinks in to the fight over residential property values.

“The lowest average fixed-rate mortgage rates in a half-century, lower house prices, incentives to encourage first-time buyers, and loan modification efforts to stem foreclosures have worked together to support sales and reduce the inventory of unsold homes,” said Frank Nothaft, Freddie Mac Vice President and chief economist.

For more charts on the four major residential property indexes visit “Residential Property Price Index”.

***

Michael David White is a mortgage broker in Chicago.

Case Shiller was out with more late data last week. I say late because the data includes sales only through September. Call it the curve behind the curve. Not only is it late, the index is an average of the 3 months of data preceding the end of September, which causes another lag of 1.5 months. The data they report now actually represents the condition of the market as of August 15 on average, which may or may not represent where things are today, nearly 4 months later.

The Case Shiller showed another increase, reflecting the weight of  rising prices in June while camouflaging what occurred in July and August. Prices actually topped out in July, and tanked in August, September, and October according to the NAR’s more timely, unsmoothed data.

The Case Shiller indexes  add nothing to our understanding of the market, yet the media cites them as having enhanced credibility due to “academic rigor”.  Nonsense! Nothing could be further from the truth.

Click to enlarge

Just to make sure, I checked the cities in Case Shiller’s 10 city index on Housingtracker.net, which tracks real time listing prices. Since we have the NAR data through October, I wanted to see how the market did  since then. This data was as of November 23.

It’s a pretty picture. Pretty bleak. It supports my contention that the first time home suckers credit not only inflated pricing data but also pulled so much demand from the future that the result was a demand vacuum in the present. My experience in watching the listings data for several years is that it closely tracks the sales data and therefore is a reliable leading indicator of the current state of the market.

The coverage of the housing market in the media and the action of the stock prices in that sector is farcical. Unfortunately, in the end no one will be laughing.

By now you have probably heard that the ConCon Con,  the Conference Board’s Consumer Confidence Index, rose to 49.5 from an upwardly revised 48.7. The index is still buried at historically low levels. The uptick was due to a rise in expectations, and as the fine folks at Barfing.com pointed out, even that rise is an anomaly. Here’s how they explained it.

“In general, consumer expectations of things getting better have fallen in November. Instead of people believing conditions will get worse, consumers responded that conditions will remain the same. The confidence index takes conditions holding the same as a positive reading. So even though conditions today are outright bad, staying at this level is looked at as a good end result.”

http://briefing.com/Investor/Public/Calendars/EconomicReleases/conf.htm

The Present Situation index is at the lowest level since 1983. That means that the Christmas present situation is pretty poor.  Unlike the economic establishment, the general public, Joe Sixpack et. al., gets it.

The chart does not include the latest data point but you get the idea.

http://briefing.com/Investor/Public/Calendars/EconomicCalendar.htm

To help clarify, we asked our friend, IamFacingForeclosure.com contributor, and one of the nation’s top forensic loan auditors, Patrick Pulatie, what he thought of all this.  He responded with the following email, and just for good measure, a new post at IamFacingForeclosure.com entitled  What’s Really Up With Wells’ Option ARMs?.

Below is the content of his email to us (emphasis ours):

Most of the World Option ARMS had higher start rates than the Countrywide and other Option ARMS. This tended to hold down the speed of Negative Amortization. However, they tended to have Margins in the 3.5% range, which was yielding about a 3 point rebate, which was the upper range for most Option ARMS.

World did use their own indexes, Cost of Savings and Cost of Deposit. These indexes were less volatile, and lower than the MTA, so that is how they got away with the higher margins.

I have seen a couple of hundred of World TILDs. They show recast periods from 5-10 years, depending upon when they were written, so this has no real basis for drawing a conclusion.

What the [iStockAnalyst] article does not mention is that the World Savings underwriting conditions were a joke. They did “make sense” loans. This meant that they were doing Stated Income most of the time. Credit scores could be in the upper 500’s, with any attempt at explanations.

World loaned on the foreclosure value of the property. They would accept outside appraisals, but then the World appraiser would “review” the appraisal. The appraisal would then be cut by 10% minimum to show a lower value. This was their “protection” factor. Brokers knew that if the loan was pushing the Loan to Value limits, then they would not send it to World because it would be declined.

Currently, the World client tends to be going into default at the same level as the CW client, based upon what I am seeing. That is because the borrowers were all stated income, and after 4-5 adjustments, they can’t make the payment. Many are now doing strategic defaults.

Wells is blowing smoke like always. To give you an idea, Wells has said that they never did a Sub-Prime loan. That is “funny” because I have one of their Sub-Prime rate sheets.

After reviewing all of the above, our  take-away executive-summary is:

• There is no such thing as a “recast date at X years”.  Recasts occur whenever the negative-amortization limits are hit.  That in turn is based on how often the borrower made the minimum payment (usually always), and what the underlying financing index is doing (low now, but likely high later).   While current interest rates stretch this time out to the max, that certainly won’t be the same if the Fed has to start raising rates for whatever reason (economic recovery or inflation problem/dollar collapse.  At any rate, those predicting a recovery should take heed.)
• Someone who has examined hundreds of World Savings loans says they are a mix of “5 and 10 year” recast schedules.   So we aren’t sure where this blanket “10 year” number is even coming from or how representative it really is.
• Golden West/World Savings’ underwriting became a joke, like everyone else.  While they attempted some underwriting adjustments to be “conservative”, most of the time, they were doing stated “NINJA” loans, just like most of the toxic waste out there.  So World Savings was clearly gamed and gameable (see Pat’s full article for more details).
• Golden West/World Savings loans are subject to the same awful negative equity problem as all the other bubble-zone Option ARM loans out there.  This implies “strategic defaults” (walk-aways).
• Many borrowers have been defaulting after a mere 4-5 adjustments, well before the recasts, on these loans.
• Golden West/World Savings loans are “defaulting at CountryWide rates”.  ‘Nuff said.

In conclusion, we still expect Wells to be in some serious hot water due to the World Savings legacy portfolio, within the next few years.  We simply don’t see substantial grounds to categorize Golden West loans significantly better than most Pay Option ARMs out there.

So, the stagecoach can run, but it can’t hide.   We hope Warren Buffett saved some pennies to put into this particular piggy bank.

Disclosure: Some of our staff is short WFC.