APR stupidity

I wrote in a previous blog about why I think that APR is of little use to the mortgage shopper. Unfortunately, I don't have the millions of followers necessary to effectively change the perception that APR is a useful tool. Therefore APR, and how it is calculated, remains an important discussion in various legislation.

In various legislative proposals, APR is frequently used as a means to determine if a certain loan is considered to meet 'high-cost' thresholds that would put the loan into categories that require everything from additional disclosure to non-fundable.

For instance, in the proposed law HR1728, any loan that is 1.5% higher in APR than the Average Prime Offered Rate (APOR) as reported weekly by Freddie Mac in it's survey of major lenders is considered to be a 'high cost' loan and is treated with severe restrictions.

I am not against the spirit of this law. I am, however, shocked at the lack of understanding of what goes into the calculation.

First off, the APOR is reported as the average rate and average fees. However, the calculation in HR1728 and bills like it will attempt to calculate the difference in APOR and APR. APR includes all the fees, PMI, UFMIP, etc...that will naturally cause us to not compare apples to apples.

Secondly, professionals in the industry cannot agree on what fees are APR fees vs. non-APR affecting fees.

Lastly, with the new Good Faith Estimate for 2010, mortgage brokers are at an APR disadvantage to direct lenders. This doesn't mean that the loans that a consumer can get from a Broker are worse...it means that the APR is frequently higher. Confused yet??

Here's how it works:

Let's say I am a broker and I am offering the following loan to a client:

5.25% 0 pts, $2,500 in other APR fees (title/escrow, appraisal, etc..)

Then the client goes into Wells Fargo and gets the following quote

5.25% 1/2 point fee, plus the same $2,500 in other fees


My loan is clearly better. It's not even close. On a $400k loan, it's $2,000 better. One would think that would be reflected in the APR, correct?? Wrong, of course....


You see, the way that a broker now offers a 0 point loan to a consumer has changed.

A broker has access to the wholesale rate sheets of it's investors. These wholesale rate sheets will have various points and/or rebates associated with various rates that it offers to the brokers.
It may look something like this:

4.75% 1 pt
4.875% 0 pts
5% (1 pt rebate)
etc...

In this case, pre-2010, if we delivered a 5% rate to the investor, then they would pay us a 1 pt rebate. This 1 pt rebate would allow us to be able to deliver this lower wholesale rate to our clients without having to charge for our services since we are paid by the lender in the form of a rebate.

Now, the rebate (also called Yield spread premium, or YSP) is required to be credited to the borrower. We are now required to charge a fee for our services and credit any fee paid from the lender directly to the borrower.

The net effect on the borrower hasn't changed. They still get the wholesale rate with 0 points (well, they get charged 1 point and credited 1 point, so it's new 0 points).

Here's where is gets silly....

The YSP that is being credited to the borrower is not factored into the APR calculation!

This means that in my offer, I will have to actually factor in a 1% origination fee plus the $2,500 into the APR calculation, making my APR 5.1422%

Wells Fargo, who doesn't have to play the charge/credit game, will factor in a .50% 'buydown' fee plus the $2,500 and their APR would be 5.0986%

That's right...a lower APR when the fees are $2,000 more to the borrower.

Is there any wonder that people are leaving this industry??