World Wide Wealth Advisors

San Diego Mortgage Rates Report: July 31, 2007

We still maintain a cautiously float stance. 

The Fed's preferred benchmark of inflation signaled temperance, stronger earnings from General Motors suggest that the stock market isn't on its deathbed, and consumer confidence accelerated.

Of course, housing prices in San Diego suck but we all knew that.

I'll be speaking at the Inman RE Connect conference so I'll be out today and tomorrow.  If tomorrow's ISM index looks like it will change our cautiously float posture, I'll bang out a quick report; I figure that SOMEONE has to have internet access at a technology conference.

San Diego Mortgage Advice: Do ARMs Really Work?

This award-winning post about ARMs brought me a ton of questions today. 

Let's take a look at what Kelly Sibilsky, a RE/MAX Realtor in Lake Zurich, IL, said:

I got a 7 year ARM a few years ago because it was the lowest rate available (in the 4's). We selected an ARM based on how long we thought we might remain in the house. When the time is up, we will refi or sell. At any rate (no pun intended), we've saved oodles of money over the past few years with our low, low rate. Even if we refi to a higher rate, the money we will have saved over the 7 years is still money we have saved, that benefit doesn't go away!

I've had so many buyers say to me "I must have a fixed rate" when they only plan to be in the house for 4-5 years. I tell them to talk with their lender - fixed is not always better - look at the WHOLE PICTURE of your financial situation and then decide. Thanks for a great post.

No, thank YOU , Kelly for explaining in layman's terms what so many of us money geeks forget to explain simply.  For the engineers in the crowd, Here's what Kelly said:

IF... the 30 year fixed rate= F,  AND...the 7-Year Fixed Period ARM = A   AND...the "new future loan" = N

The probability of the negative impact of the delta between N and A is less than the sum of the delta between F and A.    I think.

Kelly hit the nail on the head with her comment.  It's no surprise that she's an Accredited Buyer's Representative (ABR), a designation featuring her expertise at counseling home buyers.

Intermediate-Term ARMs can really save people money.  Today, the difference between a three-year fixed ARM and a 30 year fixed rate loan is .75%.  Here's why you might consider this option:

1- An inverted yield curve generally foreshadows a recession, which leads to lower rates.
2- Interest rates  generally run in 3-5 year cycles; we are in the third year of an up cycle.
3- A three year ARM takes us out to the 6th year of a cycle.
4- Even if we need 7 years, the rate cap would only take you up 2% in rate; you've already saved 2.25% in the three years by opting for the 3-year fixed ARM.
5- The average homeowner refinances every three years, and moves every six years.

Nothing is guaranteed but sometimes you need to look at the economy and say, "What REALLY makes sense, here?"

Limiting the Negative In Negative Amortization

I wrote an article about ARMs with a broken link about "tempering negative amortization".

That encouraged this question from Jim Little, a Realtor in Sun City, AZ:

More importantly, after reading this article, I re-read the ARMs dealer post. You have a broken link regarding tempering reverse amortization. This sounds like an important concept, maybe you could adress it in a future post.

Great question, Jim.  Sorry about the broken link.  World Savings (now owned by Wachovia Bank) was the grand-daddy of negative amortization loans  They are a portfolio lender and underwrote these loans very well.  One of the "bells and whistles" they offered was their Equity Builder feature with the negative amortization loan.

The Equity Builder feature was combining a bi-weekly payment feature with the neg-am loan.  What that did was allow a full extra mortgage payment to be applied to the loan balance during the negative amortization phase.  It's actually pretty slick.  The borrower repays half of a mortgage payment 26 times each year which tempers the negative amortization.

It's kind of like going down the highway at 85 miles an hour with one foot on the brake but it allowed many hesitant borrowers to feel comfortable that their loan wouldn't "reset" early.  I found it useful to help clients budget and still invest the difference between the "two half payments"  and a 30 year fixed amortizing loan into a side fund.

It wasn't "pure" in its financial planning approach but it worked by getting a lot of people to move "off the dime" and start increasing liquidity.

In your market, Jim, many retirees loved the concept of the negative amortization loan but hated the idea of eating into their heirs potential inheritance.  Thus, this "bell and whistle' worked very well for them.  World Savings was successful, they had (or may still have) a HUGE loan production branch right at 101st Ave and Bell Road, not too far from your office.

Thanks for bringing this point up, Jim!

Negative Amortization: Supercharged Firepower-Handle With Respect

Roberta Murphy, one of my favorite San Diego real estate webloggers, wrote an article   calling for stricter underwriting guidelines on negative amortization loans.  I essentially agree with her but want to explain a few finer points about this financial instrument. 

Let's start calling these products by their true names: deferred interest loans or negative amortization loans. Why am I being a stickler for that?  The "Option ARM" name was coined about 8-9 years ago by Washington Mutual in order to downplay the "negative connotations of the product's real description".  Countrywide called it the "PayOption ARM" and World Savings renamed it to the pick-a-payment loan.  Those sound nicer than "negative amortization" don't they?  Thank the marketing departments of those mega lenders for that twist.

Making the minimum payment makes perfect sense...for some people. The idea is that you "defer" the difference onto the balance of your loan and that the home appreciates more than the deferred amount. You "use the difference' to pay down higher interest debt or to invest it in a higher yielding investment than real estate. 

This strategy was designed in the late 80s/early 90s in response to a SLOWING real estate market.  The concept was, don't tie up your money in a slow appreciating asset (real estate) when you can invest in your "monthly cash flow difference" in the stock market....and it worked!

So, does the neg am loan make sense TODAY?  Probably now more than ever...IF...the vehicle is used correctly (pay down debt or beef up savings/investment).  Will Southern California real estate appreciate at a rate greater than 4-5% a year for the next ten years?  Probably not.

Does it make sense to refinance this loan every three years and "reset" the start rate?  Well, sure IF...you are "using" the difference for high-interest debt or investment. You can refinance these loans with no closing costs when a pre-payment penalty is applied.  The yield spread premium, paid to the originator, is generous enough for originators to apply it to the closing costs and still earn a respectable (and earned) commission.

Let me give you an example:

A client pays $700,000 for a home in Carlsbad, CA that should be worth $1,000,000 in 10 years.  I secure that client a  neg am loan for $630,000 and refinance that loan two times (at no closing costs) to keep his cash flow free to "invest".  The client will have deferred that monthly savings onto the balance of the loan;  the balance would have grown to $850,000.

The client would have DOUBLED his equity (he put $70,000 down) to $150,000.  He would have an investment account of about $400,000 at the end of 10 years.  Net result: profit of $550,000

Had he obtained a 30-year fixed rate loan at 6.5%, he would have paid the balance down to $530,000.  He would have a lot of equity but he would be cash-poor. Actually, he'd have no cash. Those cash reserves can come in handy if he loses his job. 

Should the client lose his jog, that 30 year fixed payment would be brutal;  the client would probably run to the first job offer he received.  With cash reserves, he can be patient to wait for the right job.  He would have risked foreclosure if he had to continue with the fixed rate loan.

The loan is a great loan...WHEN used correctly.  It's not treacherous, the originator who recommends it to an unsuspecting or financially unsuitable client is treacherous.

READ:  ARMs Don't Cause Foreclosures, Loan Hacks Cause Foreclosures

The neg am loan is a fully-automatic, supercharged cannon in the wrong hands.  Used properly, it's firepower can catapult you to financial security.

San Diego Mortgage Rates Report: July 30, 2007

Mortgage rates in San Diego are essentially unchanged from Friday as is our recommendation to Cautiously Float your rate.

This week may be defining for the near-term future of San Diego mortgage rates.  The Core Personal Consumer Expenditures number will be out at 5:30AM, California time.   This report is the Fed's favorite gauge on inflation.   A stronger than expected number suggests that the American consumer has not slowed down his spending; this would cause the Fed to consider raising rates.

Wednesday, the ISM index reports.  This index is a market mover because it's a survey of purchasing executives' potential and actual spending on capital goods.  If these folks are spending money (big business) it is expected that they are optimistic about the economy.  It's considered the "KING" of all manufacturing indices by Wall Street.

Friday, we get bombarded with important data about employment.  More on that later this week.  I'll be speaking at Inman RE Connect in San Francisco so I'll be somewhat reactive in my reports.  Please check back daily for updates.

San Diego Mortgage Advice: Yield Spread Premium

This is a reprint from a highly-read article I wrote about yield spread premium.  I thought I'd bring it out of the bowels of my weblog and highlight it for the new readers we have here at America's Mortgage Broker:

There is a lot of good information about a pricing mechanism in the mortgage market called "rebate" or "yield spread premium".  Mortgage brokers will often refer to this term as YSP. 

A good source for understanding how to understanding the concept of yield spread premium is from Jack Guttentag, a retired professor from the Wharton School of Business at the University of Pennsylvania (in my hometown of Philadelphia) .  Jack has a website called The Mortgage Professor.

I'm going to use Jack's example of points and negative points with you. I have heard many people explain that they don't really understand the whole "YSP thingy" on their settlement statement.  I hope to make it easy to explain for you to understand how much your mortgage REALLY costs.

Discount Points are upfront interest to the borrower .  Along those lines, so are closing costs from third-party providers.  This means that we figure in those costs as the true COST of credit to the consumer and measure it as an annual percentage rate (APR). There are 2-3 good arguments about why APR is an antiquated measure but I'll leave them for another article.  Borrowers pay points to lower the rate.  A common term is to "buy down the rate".

Did you know that mortgage brokers get money at a wholesale cost?  It's how we make profit. Just like your local Nordstrom's, we buy at wholesale and sell at retail.  The only difference is that we, acting as a mortgage broker have to tell the customer three times what we expect to profit on their mortgage transaction:  First, within three days of an application on a good-faith estimate, at the bottom of the itemization (bottom of page 1 of the California MLDS), second, within three days of drawing loan documents (same disclosures), and finally, on the HUD-1 Settlement Statement as a paid outside of closing (POC) item. 

That profit, paid by the lender to the broker is called yield spread premium or YSP. You can understand it as "negative points".  if a consumer "pays points to lower the rate", why can't they "receive points to accept a higher rate".  Instead of paying upfront interest in the form of a discount point, they receive upfront interest in the form of a "YSP".  That receipt of upfront interest defers the mortgage broker's fee!

Let me give you a raw example.  If I wish to earn a mortgage brokerage fee of 1% of the loan amount plus $495 processing fee on a $400,000 loan, here are 3 ways I can do it for a customer who wants to take advantage of YSP (or negative points).  Let's assume that the third party (or HARD) costs of this loan are $4,000:

1-  The customer gets a rate of 5.875% with no YSP.  The customer-paid fees will be my $4,495 PLUS the $4,000 third party fees for a total of $8,495.

2- The customer gets a rate of 6.25% with 1% YSP.  The customer-paid fees will be my $495 PLUS the third party $4,000 for a total of $4,495.  The lender will pay me (the mortgage broker) the other $4,000 of my fee. the borrower really pays it in the form of a higher interest rate.

3- The customer gets a rate of 6.625% with a 2% YSP.  The customer-paid fees are only $495!  The lender pays me (the mortgage broker) my $4,495 and I credit the remaining $3505 from the YSP to the borrower for all of the third party fees.  That's enough to include the title premium, "lender junk fees", appraisal, etc .

Why would a customer want to pay a higher rate if he qualifies for a lower one? The answer is in paragraph six; they actually receive negative points! Hey!  What about their payment?  Isn't it going to be higher?  Of course it is!  In the difference between option one and three , it is $250/month in extra interest or $3,000 year.  They receive $8,000 upfront in negative points for that $250/month.  Then, it's a matter of simple math.  I ask the customer if they intend to keep this mortgage for more than 32 months (the breakeven point).  If they say, "No, we'll probably refinance to remodel", then they should take the negative points and higher rate.  If they say. "Yep.  We expect to be in this loan until we pay it off", then I advise them to pay the third party fees and my mortgage brokerage fee upfront and take the lower rate!

If you are used to dealing with a direct lender, correspondent lender or bank, they do not have to disclose yield spread premium to the customer because they are making the credit decision, funding the loan, and reselling it on the secondary market (Wall Street).  if you want to be certain that your customer is getting a fair deal from a direct or correspondent lender (or bank) , ask a mortgage broker to furnish you with a good-faith estimate at identical rates and fees from the direct lender so you can see the "profit" the lender is making.

I hope this article better explains the whole "YSP thingy" and helps you make the right loan decision!

There is a lot of good information about a pricing mechanism in the mortgage market called "rebate" or "yield spread premium".  Mortgage brokers will often refer to this term as YSP. 

A good source for understanding how to understanding the concept of yield spread premium is from Jack Guttentag, a retired professor from the Wharton School of Business at the University of Pennsylvania (in my hometown of Philadelphia) .  Jack has a website called The Mortgage Professor.

I'm going to use Jack's example of points and negative points with you. I have heard many people explain that they don't really understand the whole "YSP thingy" on their settlement statement.  I hope to make it easy to explain for you to understand how much your mortgage REALLY costs.

Discount Points are upfront interest to the borrower .  Along those lines, so are closing costs from third-party providers.  This means that we figure in those costs as the true COST of credit to the consumer and measure it as an annual percentage rate (APR). There are 2-3 good arguments about why APR is an antiquated measure but I'll leave them for another article.  Borrowers pay points to lower the rate.  A common term is to "buy down the rate".

Did you know that mortgage brokers get money at a wholesale cost?  It's how we make profit. Just like your local Nordstrom's, we buy at wholesale and sell at retail.  The only difference is that we, acting as a mortgage broker have to tell the customer three times what we expect to profit on their mortgage transaction:  First, within three days of an application on a good-faith estimate, at the bottom of the itemization (bottom of page 1 of the California MLDS), second, within three days of drawing loan documents (same disclosures), and finally, on the HUD-1 Settlement Statement as a paid outside of closing (POC) item. 

That profit, paid by the lender to the broker is called yield spread premium or YSP. You can understand it as "negative points".  if a consumer "pays points to lower the rate", why can't they "receive points to accept a higher rate".  Instead of paying upfront interest in the form of a discount point, they receive upfront interest in the form of a "YSP".  That receipt of upfront interest defers the mortgage broker's fee!

Let me give you a raw example.  If I wish to earn a mortgage brokerage fee of 1% of the loan amount plus $495 processing fee on a $400,000 loan, here are 3 ways I can do it for a customer who wants to take advantage of YSP (or negative points).  Let's assume that the third party (or HARD) costs of this loan are $4,000:

1-  The customer gets a rate of 5.875% with no YSP.  The customer-paid fees will be my $4,495 PLUS the $4,000 third party fees for a total of $8,495.

2- The customer gets a rate of 6.25% with 1% YSP.  The customer-paid fees will be my $495 PLUS the third party $4,000 for a total of $4,495.  The lender will pay me (the mortgage broker) the other $4,000 of my fee. the borrower really pays it in the form of a higher interest rate.

3- The customer gets a rate of 6.625% with a 2% YSP.  The customer-paid fees are only $495!  The lender pays me (the mortgage broker) my $4,495 and I credit the remaining $3505 from the YSP to the borrower for all of the third party fees.  That's enough to include the title premium, "lender junk fees", appraisal, etc .

Why would a customer want to pay a higher rate if he qualifies for a lower one? The answer is in paragraph six; they actually receive negative points! Hey!  What about their payment?  Isn't it going to be higher?  Of course it is!  In the difference between option one and three , it is $250/month in extra interest or $3,000 year.  They receive $8,000 upfront in negative points for that $250/month.  Then, it's a matter of simple math.  I ask the customer if they intend to keep this mortgage for more than 32 months (the breakeven point).  If they say, "No, we'll probably refinance to remodel", then they should take the negative points and higher rate.  If they say. "Yep.  We expect to be in this loan until we pay it off", then I advise them to pay the third party fees and my mortgage brokerage fee upfront and take the lower rate!

If you are used to dealing with a direct lender, correspondent lender or bank, they do not have to disclose yield spread premium to the customer because they are making the credit decision, funding the loan, and reselling it on the secondary market (Wall Street).  if you want to be certain that your customer is getting a fair deal from a direct or correspondent lender (or bank) , ask a mortgage broker to furnish you with a good-faith estimate at identical rates and fees from the direct lender so you can see the "profit" the lender is making.

I hope this article better explains the whole "YSP thingy" and helps you make the right loan decision!

San Diego Mortgage Advice: Call to ARMs

Adjustable rate mortgages, ARMs for short, are the most misunderstood, misused, and maligned financial instrument.  The have been abused by consumers, Realtors and loan originators alike these past 3-4 years and are now the subject of national scourge.  Much like our Second Constitutional Amendment critics, the ARM critics are usually misinformed and preying upon the fear of catastrophe. 

These inexperienced mortgage sales people or "loan hacks" as I like to call them, are banking upon your fear of catastrophe.  Loan hacks sold you ARMs in 2003 and negative amortization ARMs in 2005.  After they ride the fixed rate mortgage trend, they'll move on to reverse mortgages. They lack original thought and critical analysis.  They'll sell you any loan that is on the front page of USA Today.

ARMs don't cause foreclosures, loan hacks cause foreclosures.

READ:   I am an American ARMs dealer.

Fixed rate mortgages, for the lion's share of the population, are an inappropriate recommendation.  Mortgage advertisers, unschooled in financial planning , are aggressively advertising fixed rate mortgages as a cure to the rising ARM rates.   They're encouraging you to sell low and buy high.

SAY WHAT?   DID THEY FORGET THAT RATES GO DOWN, TOO?

You should lock in a fixed rate mortgage at the low end of an interest rate cycle, not the high end of it.  It is easier to sell fear than to properly counsel you so these loan hacks will try to baffle you with slick sounding "Myths". 

 

Three Myths Fixed Rate Loan Hacks Love to "Quote":

1- Fixed rate mortgages are the safest loan out there-  Categorically incorrect.  Annual ARMs outperform fixed rate loans over any given five year period and have since World War Two.

2- The inverted yield curve rewards fixed rate mortgages today- An inverted yield curve is when short-term interest rates are higher than long-term interest rates.  Indeed, ARM rates and fixed rates will appear identical.  It would appear rational, to the unknowing eye, to "lock-in" to a fixed rate mortgage.  Here is what the loan hacks omit; an inverted yield curve has preceded an economic recession, over 85% of the time, since the Civil War.  Recessions lead to lower short-term rates which would save you thousands of dollars in the near future.  It is better to lock-in a fixed rate at the low end of an interest rate cycle.

3- We are still experiencing historically low interest rates- Again, another myth. Mortgage rates, historically, fluctuate between 5.5% and 6.5%.  The average homeowner, however, doesn't realize that because of the aberration of the 1975-1989 period.  We all remember the high mortgage rates of twenty years ago and make financial decisions while looking in the NEAR TERM rear view mirror.  That's our perspective.  We need  a longer-term perspective to understand that rates of 5-6% were the norm, not the exception. Ask your parents or grandparents about their mortgage rates.

How should a potential homeowner select an ARM?

1- Qualify for the mortgage at 2% above the adjustable rate.  If you are selecting an ARM to "get into" the home, you should be renting.

2- Invest the difference between the starting mortgage rate and the 2% higher mortgage rate into a short-term, liquid side fund.  Liquidity solves problems with a change in financial status.  If you are applying for a $300,000 loan, get a 5.5% ARM and invest $500 month into a liquid investment.  If your rate rises 1%, next year, lower your investment to $250/month.  If your rate rises 2%, discontinue the investment fund, temporarily, until the rate lowers again.  If, for some strange reason, your rate rises a full 3%, subsidize your payment with the funds from your earlier savings.

3- Understand that interest rates move in 3-5 year cycles. We are currently in the third year of this cycle.  It is possible that we have reached the peak in mortgage rates.  If rates start subsiding, and a fixed rate mortgage can be had for 5.5% or better, refinance and lock-in a fixed rate mortgage if you plan on owning the property for more than 3-5 years.

4- Explore and make use of hybrid ARMs if you are undisciplined.  If you feel that you'll fritter away your cash flow savings rather than invest it, lock in a rate for 3-7 years. It's not as good as an annual ARM but it will still save you a bit of money.  If you are undisciplined at saving money, you ought to consider renting as an alternative.

Homeownership requires liquidity.  If you intend to sink every bit of extra cash into a home, stay healthy, don't get divorced, and don't die.  Disability, Divorce, and Death are the three leading causes of foreclosure.  Combine one of those catastrophic events with no liquidity and you are a foreclosure waiting to happen.

5- Finally, never, never, NEVER, take out an ARM with a margin of more than 3%. A margin is the "markup" to the index that determines your interest rate.  It's the lender's profit.  They borrow the money at the index and lend it to you at index plus margin.  You'll have a difficult time finding a margin below 2.5%.  Some do exist at 1% margins for large loan amounts.  Call me for details.  If you have to get a loan with a higher margin to "get into the property", don't buy the property.  You simply can't afford it.

CONCLUSION:

ARMs don't kill people, loan hacks do.  Find an experienced, educated mortgage adviser, with financial planning training, to assist you with your loan.  If you think that dealing with a professional is expensive, wait until you see how much an amateur can cost you.

This article was selected as the best post of all the carnival contests

This article was selected as a winner in the 52nd edition of The Carnival of Real Estate

San Diego Mortgage Rates Report: July 27, 2007

July 27, 2007:  San Diego Mortgage Rates Report suggests that inflation isn't a problem but that the housing market is weak. 

The Gross Domestic Product figure was stronger than expected at 3.4%.  Core inflation, the Gross Domestic Product Deflator, was weaker than expected.    Conflicting data suggest that action needs to be taken if you haven't locked-in a mortgage rate.

 

What's it all mean?  If you have a loan closing less than 15 days away, go ahead and lock-in your interest rate.  If your closing date is still more than 15 days away, you can still cautiously float your rate in hopes that next week's mortgage rates improve.  Cautiously float means staying alert. 

Rates I'm offering today:

Mortgage Interest Rates*

Rates as of 07/27/2007:

Conforming APR Payment per $1,000 Jumbo APR Payment per $1,000 5-Yr. Interest Only 6.125% 6.195% $5.10 6.375% 6.470% $5.31 10 Yr Interest Only 6.5% 6.618% $5.42 6.75% 6.909% $5.63 7/! ARM 6.25% 6.321% $5.21 6.625% 6.722% $5.52 30 Year Fixed 6.5% 6.572% $6.32 6.75% 6.847% $6.49 Annual ARM 5.375% 5.442% $5.60 5.875% 5.967% $5.92 HELOC 8.25% 8.330% $6.88 8.25% 8.357% $6.88 5 Yr ARM- Amo 6.0% 6.070% $6.00 6.25% 6.344% $6.16

*Rates are subject to change due to market fluctuations and borrower's eligibility.

Selling and Financing California Homes: Charging Like Nordstrom For Wal-Mart Service

What is so wrong about Realtors who originate loans (or vice-versa)?

Here is a summary of what you told me:

1- It is a conflict of interest:  Realtors lose their objectivity if they perform both functions. 

2- Specialization:  Realtors need to specialize in selling homes, loan officers in financing them.

3- Some of you thought it violated RESPA (it hasn't since 1983 by an order of Congress)

4- The mortgage people didn't seem to care.

So why does your broker have an "in-house" mortgage company?

In short, your broker has an in-house mortgage company because they just can't make any money on real estate brokerage?  Commission splits have been rising exponentially for the past 15 years.  The introduction of the 100% model combined with discounting pressures has had broker/owners scrambling for ways to increase the bottom line by offering a "one stop shop" for customers.

How much can the broker really make off of an ABA with a  loan company?

Well, that depends.  If it's the Coldwell Banker/Century 21 model, not a lot.  The originating broker makes about $300/transaction.  Now if your office is a 30 agent office with 8-10 loan a month, that may pay the salary of a receptionist.

I had an ABA with 3 Keller Williams' offices in Phoenix.  I paid "rent" to the office, had a separate entrance, and operated as my own business.  I still had to hustle and my rent was "all-inclusive" (phones, fax, copies, internet at $2,000/month).  When I operated by myself, it was a great deal.  When I hired loan officers, I didn't make any money.

I was proposed a "partnership" with the real estate brokerage because they were convinced that they were missing out on thousands of dollars in profit.  This was the greatest thing that ever happened to me.  We split "profits' after the loan originators, rent, and all of the incidentals were paid.  I made more and the brokerage made about what I was paying in rent.  The broker had more of an incentive to encourage the agents to utilize our services.

California's largest brokerage, Prudential California Realty (owned by Warren Buffet-controlled HomeServices of America) owns a mortgage brokerage firm called First Capital.  Medium margin, high risk.  I see how the real estate brokers in California might want a little "taste" of the mortgage business but the consumer usually loses out.  Realtors just can't effectively originate loans and provide relevant financial advice without that conflict of interest staring them in the face.

How about title or escrow services?

In California, many brokerages have in-house "escrow" companies.  In fact, the term "virtual escrow" has popped from title companies to capture the title policies.  This platform transfers some basic escrow functions to the broker and allows them to be compensated for it.   Low margin, high risk.  I have no idea why real estate brokers would perform this function.

Does this violate RESPA?

Absolutely not if it is done correctly.  Section 8 (c)(4) of RESPA provides for these ABAs if they meet a safe harbor test.  It is required to use the HUD disclosure for each customer disclosing compensation or ownership.

Summary:

Real estate brokerage is a low margin business today.  Experienced, consistent producers are demanding (and getting) splits of 80-90% as well as increased services.  Big shops that have over 100 agents can afford to operate on brokerage alone.  Small shops where the broker produces are able to operate on brokerage alone.  It's the 10-60 agent shop that needs to find alternative revenue streams to make a profit. ABAs are here to stay, regardless of the poor advice they dispense to the consumer.

Sell the Steak, Not the Sizzle When Writing Your MLS Listing Profile

Words that sell homes.  The book Freakonomics discovered something very interesting about the MLS ads that sold for the highest percentage of listing price.  It's clear that consumers want the steak and not the sizzle when they look for a new home.

Words (or phrases) associated with Higher Selling Prices:

1- State of the art
2- Granite
3- Maple
4- Gourmet
5- Corian

Words (or phrases) associated with Lower Selling Prices:

1- Fantastic
2- Charming
3- Spacious
4- Great Neighborhood
5- Any term followed by an exclamation point!

MORAL:  Stop Selling and Start Telling