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| When a California mortgage broker decided to share his yield spread premiums with borrowers, his business boomed and customers lined up to repeatedly refinance their home loans. But when Freddie Mac found out about the practice, the party was over.Now, Mark Gallagher has sued Freddie for putting him on its exclusionary list, and industry pundits are shaking their heads over whether it was a good or bad idea.
It’s an illegal kickback, declared one mortgage broker, who asked not to be identified. Explaining that Gallagher should lower his fees, the broker said that in many areas, for example insurance, commissions can not be shared with people who are not licensed. But Marjorie Corwin, an attorney with Gordon, Feinblatt, in Baltimore, Md., said sharing the YSP is not illegal in Maryland but wondered whether Gallagher’s borrowers know what they are getting into. Gallagher’s plan reportedly is not illegal under California law. To provide borrowers with cash at closing and with no-cost loans, the borrowers agree to pay a higher interest rate than they could otherwise obtain. Corwin suggested, however, that the tax deduction for the higher interest rate and cash at closing combined could mean that the loans made sense for consumers. Reports indicate and Gallagher did not dispute that some homeowners refinanced their mortgages as often as three times a year. Gallagher stressed that the borrowers had to have good credit and meet other criteria each time they refinanced. At its peak, Gallagher’s company, Park Place Funding, was making 200 such mortgages a month and raking in about $200,000 a month from the loans. Joe Falk, chairman of National Association of Mortgage Brokers’ Government Affairs Committee, sounded the same cautionary note on behalf of consumers. “Refinancing alone to get a cash flow rebate from the mortgage originator is problematic,” he said. Larry Pendleton, a mortgage broker with Legend Mortgage Corporation, said sharing the premium with the customer is a great idea but expressed misgivings about repeated refinancing at higher and higher interest rates. “There is no such thing as a free lunch,” he said, suggesting that a cash out refinance involving a lower interest rate might better serve the client. But while industry professionals offer differing opinions, the practice definitely landed Gallagher in hot water with Freddie. The secondary lender put Park Place on its exclusionary list after an investor received an investment pool made up of a large number of Park Place loans and the hefty interest payments to the investor dried up in a matter of months after the homeowners refinanced. In response to Freddie’s blacklisting, Gallagher filed a lawsuit in federal court in California, asking for an injunction and accusing the McLean, Va.-based company of defamation and restraint of trade, among other things. Trial is set for November. Gallagher was bewildered by Freddie’s move. He said that, as far as he knows, there is at least one large subprime lender not on Freddie’s list whose mortgage brokers were charging clients and not disclosing the rebate. Gallagher said he discloses the rebate on the HUD-1 settlement form. He also claimed that the lender through which he made the loans, National City, knew of his business methods. Gallagher sued National City but dropped that lawsuit because, as he said, the harm to his business was created by Freddie. A spokesman for Freddie said putting Park Place on its exclusionary list is consistent with the law, that the company will “vigorously pursue” its interest and will do what it has to do to defend its shareholders. He declined to offer any further comment on the matter because it is in litigation. But industry attorneys say that increasing interest rates to increase the yield spread has been harshly criticized and was an issue raised in the Ameriquest settlement. And, both Corwin and Falk pointed out that loans that pay off in a matter of months aren’t worth much to the secondary market. When loans pay off faster than expected, then investors aren’t getting their return on investment, Corwin explained. Gallagher said he has owned Park Place since 1995 and has not had any previous complaints lodged against him. The California Department of Real Estate, which lists Park Place as a broker in good standing, isn’t looking into the matter. Gallagher said he is still doing deals but structures them differently. He said his company still makes no-cost loans and still uses the yield spread premium to pay loan expenses. He said he is also doing more subprime and option arm loans. “When it’s done properly, everybody wins, that’s what I love about it. It’s a win-win-win situation,” Gallagher said. |
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Lisa D. Burden is a legal analyst for MortgageDaily.com and holds a law degree from the University of Maryland. She is currently a freelance journalist who previously wrote for Institutional Investor publications and the Baltimore Daily Record. e-mail Lisa at: burdenlisa@yahoo.com |
