Ethical Homes

As part of our commitment to transparency, Ethical Homes’ Borrower-Managed Lending policy are designed to remove any possible conflict of interest between us and our clients, while giving our borrowers the ability to strike the balance that they want between risk, upfront costs, and long-term interest rates.

To explain how our Borrwer-Managed Lending policy works, we first need to to explain how a mortgage broker gets paid.

When a mortgage broker is considering placing a borrower’s loan with a specific lender, they will determine the rate that the borrower will get by consulting the most recent “rate/lock/price table” for the relevant loan program for that lender. A Rate/Lock/Price table shows how much a particular lender will pay a mortgage broker for originating a loan for a borrower with a given rate locked in for a given period of time. Those payments are known as a “Yield Spread Premium” (YSP), because they increase based on how much yield (i.e. profit) the mortgage broker can secure for the lender. When a mortgage broker convinces a borrower to accept a higher rate, for example, the lender obviously will make more money off of that borrower, so they reward the mortgage broker with a higher YSP payment. Similarly, when a lender agrees to lock in a rate for a borrower before the loan actually closes, the lender views it as losing “potential” money—since there is a chance that during the lock period, interest rates in general will rise, and the lender will be committed to lending money to the borrower at a lower-than-market rate; thus, the shorter the lock period that the mortgage broker secures for the borrower, the higher the YSP payment.

A sample excerpt from a rate/lock/price table for a lender on a given day might look like this (with some color-coding to make it easier to explain):

The exact format of a rate/lock/price table varies from lender to lender; in this sample, negative prices are YSP payments to the mortgage broker, given as a percentage of the loan amount—the green cell on the table, for example, has a -1.000 value, meaning the YSP payment to a mortgage broker who originated a loan with that lender at a 5.875% rate with a 15-day rate lock would get paid 1% of the amount of that loan. The purple cell, similarly, shows that if the mortgage broker originates a loan at a 6.250% rate with a 30-day lock, they would get paid 2.25% of the amount of the loan.

What about the positive prices on the table? Those reflect the amount that the lender will charge the mortgage broker (who will usually pass that charge on to the borrower in the form of discount points)—the orange cell on the table has a value of 0.750, meaning the broker would have to pay the lender 0.75% of the loan amount in order to get a 45-day lock on a rate of 5.500%. To recap:

A mortgage broker can also charge a borrower an “origination fee”, which is in addition to any YSP they might receive. Many brokers might collect up to 4% from the lender as YSP, and also charge origination fees of 1-4%, for a total payment of up to 8%; some unscrupulous brokers have even been known to collect a total payment of 10-20%! At the Ethical Homes team at HomeFirst Mortgage, on the other hand, our Borrower-Managed Lending policy says that we will collect a fixed commission of just 1%, whether it comes from YSP or origination fees; if the YSP is less than 1%, you will pay the difference as an origination fee, and if the YSP is over 1%, then we charge no origination fees and rebate any YSP over 1% back to you to cover your closing costs. For example:

The end result? Our Borrower-Managed Lending policy means that we will always earn the same commission, so we will have no incentive to put you into a higher-rate loan than you might qualify for. And we will always show you all of the relevant rate/lock/price combinations for your situation, so that you get to choose which one to use for your loan—which means that you are in control of whether your rate is locked for a shorter or longer period, as well as giving you the freedom to choose between having lower closing costs now or lower interest rates in the long run, depending on which option makes more sense for you.

Full Disclosure: there are a few circumstances where we might accept a total commission that is not exactly 1%; for example, as part of our Green Mortgage offerings, we will lower our commission to 0.75% or 0.5% for borrowers who are purchasing properties that meet certain environmental standards. There are also some circumstances where we are not legally allowed to rebate excess YSP back to a borrower. We will always inform any borrower before they commit to any loan program if the our total commission for that program will not be 1% or if they will not be able to accept a rebate of excess YSP.

If you’ve still got questions about our Borrower-Managed Lending policy works, feel free to ask us for more details.