State Bans Yield Spread Premiums for Reverse Mortgages, Banks Win

Competing for business in New Hampshire has become increasingly difficult for brokers after a state law banned yield spread premiums (YSP) for anyone originating reverse mortgages earlier this year.  Meant to prohibit compensation that rewards lenders for selling loans at higher interest rates, the law became effective July 31st and provides an un-even playing field for mortgage companies that favors banks.

Driven by a growing secondary market for HECM loans, lenders have been able to lower the costs of reverse mortgages using additional income from the YSP.  However, seniors in New Hampshire can only find these type of deals from banks because they’re not required to disclose YSP to borrowers.

Meanwhile, since brokers are required to disclose YSP, they’re limited in what they can offer seniors according to Nicholas DeMasse, an originator with Reverse Mortgage of New England.  “I can’t compete because of the prohibited yield spread premium for a reverse mortgage originated by a broker,” he said in an email to RMD. “My only option is to charge the borrower an origination fee.”

When banks offer a no origination fee reverse mortgage at the same rate, brokers are finding it incredibly challenging to do business in the state.

Now, companies like Direct Finance Corp – who was the 4th largest reverse mortgage lender in the state during 2009 – that broker loans have seen volume slide dramatically.  Alain Valles, President of DFC tells RMD that while the law to eliminate yield spread premiums was well intended, it did not reduce the costs of reverse mortgages.

“The law actually reduced competition in the marketplace and resulted in an un-even playing field,” said Valles.  “New reverse mortgage programs that have significantly reduced the upfront costs and fees are not available from mortgage brokers because the costs are lowered through yield spread.”

As business once originated from companies like DFC has dropped over the last year, banks like Wells Fargo, Bank of America, and MetLife have seen their volume increase.  As a result of the law, “there are fewer mortgage brokers serving the marketplace and fewer loan originators that can go to seniors homes to explain the pros and cons about reverse mortgages,” Valles said.

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