The XBroker: May 2007

OK, I went to college, took algebra, geometry, trigonometry, calculus, statistics, and passed them all.  Math wasn’t a problem for me (history and literature were), alas, I’m pretty baffled at how broker/bankers, and lenders come up with a mortgages Annual Percentage Rate (APR).

This is a problem because APR is commonly referred to as the  ‘value comparison barometer’ when shopping for a mortgage. 

I feel like my 5th grade teacher telling his students to ’show me the math that goes along with your answer’ when a mortgage professional simply says ‘well it seems about right’.  WTF?  It seems about right? 

During a common mortgage qualification process, you’ll typically find 3 different APR’s:

1. Generated by the ‘in house’ broker/banker found on the Truth In Lending doc

2. Mailed from the funding lender

3. At the time of closing. 

What’s more frustrating, is asking them to tell you how they came up with that APR, and you get a bunch of ‘uhhh’s’, calculator button punching, or baffle ‘em with bullsh*^ talk. 

Determining APR is more creative art than science.  Depending on the individual broker/banker, with so many independent variables that can be adjusted in the APR formula, it’s worthless at best and misleading at worst.  It’s very common to give two lenders the exact same data for the exact same loan and come up with two different APR’s.  Some lenders count certain closing costs as part of the APR, some don’t- There is NO prescribed method, only ’suggested’ formats. 

Nobody can seem to, "Show Me The Math!"  Why?

Mortgage pro’s, please don’t reply with a tutorial in how APR’s should be or are determined, you’re limited to the software program you’ve been provided with. 

The actual equation looks like this:

LA - F = P1/(1 + i) + P2/(1 + i)2 +… (Pn + Bn)/(1 + i)n

    i = IRR

    LA = Loan Amount

    F = All other fees (Points, lender, attorney, appraisal, etc)

    P = Monthly payment

    n = Month when the balance is paid in full

    Bn = Balance in month n

Don’t bother getting out a pen and paper to solve your APR, it must be done by a computer or proper calculator, unless you’ve got a few days to spare and/or are a graduate level mathematician.  In other words, any mortgage pro who says the APR is THE number to consider when comparing like mortgages without disclosing how they determine it, is blowing smoke. 

Citing Wikipedia for those who think I’m just being sensational):

• Despite repeated attempts by regulators to establish usable and consistent standards, APR does not represent the total cost of borrowing nor does it really create a comparable standard.

• Regulators have been unable to completely define which one-time fees must be included and which excluded from the calculation. This leaves the lender with some discretion to determine which fees will be included (or not) in the calculation. 

 Leaving discretion to the lenders opens the doors to misinformation and manipulation towards the consumer.

Because it can.

The number one statement that I get via comments and emails from others in the mortgage industry (paraphrased):

What a telling statement, as it confirms the general broker/bankers desire to keep valuable information hidden or buried deep in documents.  It also tells me that they don’t understand the laws surrounding the mortgage industry.  A financial services provider, especially one providing and selling mortgage advice and programs, are bound by far different rules than your local Wal-Mart or McDonald’s.  Some of these laws were referenced a recent post, so I’ll spare repeating them.

YSP’s always get drug into these discussions, mainly because they are almost always the tool used to create personal enrichment for the brokers/bankers that could be deemed as illegal kickbacks.  When wielded in such fashion, YSP’s are in direct conflict with the potential borrowers interest.  Although Ive stated YSP’s black letter law definition before:

 
Yield Spread Premiums are to be offered as an option to the borrower as a tool to finance some or all of their closing costs.

So fellow mortgage peeps, it really is the consumers business what you are making on their transaction, sorry.  Charge what you want, but receiving undisclosed monies from a 3rd party to the transaction is called a ‘kickback’ and illegal according to H.U.D.

Well, if this is so, why and how does business still go on like this? 

• There is alot of ambiguity revolving around YSP’s (good or bad) due to their ‘case by case’ nature.  Determining if they were used properly or as an illegal kickback is a highly subjective process.  This is the #1 reason a bell ringing class-action suit (although tried) hasn’t been successful thus far.  To achieve ‘class’ status requires a common level of generally consistent malpractice.

• By nature YSP abuse can’t be easily demonstrated under these terms .  It’s also very expensive to sue the bank these days, the economic practicality of engaging a bank in a court of law to get your mortgage rescinded or damages re-paid just isn’t there for most people.  A long discovery process, time draining continuations, depositions, etc equals alot of cash to attorney’s.

• I’ll say this with confidence because I’ve witnessed it first hand:  When a consumer does push the lender to the point they realize they’re not going away, the lender will almost unequivocally settle before the case reaches the courtroom.  There are many cases on record where lenders settle by forgiving the entire debt plus damages.

Why don’t the lenders go to court and vindicate themselves once and for all?  They know the chances of being found guilty are high, and most importantly, a precedent setting ruling would create a powder-keg scenario for the lending industry.  No one is willing to roll those dice, the potential repercussions are way too high.

So in the end, the mortgage industry continues to play in the Grey simply because it can.  It’s gotten so crazy that brokers/bankers openly believe they’re not governed by special rules and regulations, that their business practices are nobody’s business but their own.   For the most part they’re right, because consumers don’t know enough to keep the cowboys in check.     

This leads me to a question for whoever cares to answer it:

Why would a wholesale lender not want their rate sheets or pricing schedules shown directly to a consumer?  

Many brokers and bankers are quick to reference statements like ‘its illegal’ for them to show consumers a wholesale rate sheet….Where did this come from?