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Costly Home Charge Exposed

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By JOHN W. ALLMAN

jallman@tampatrib.com

Published: November 16, 2008

TAMPA - For years, the Housing and Education Alliance has helped prepare low-income residents to buy their first home, teaching a mandatory class for anyone seeking down-payment assistance.

The class covers everything from making a budget to choosing a mortgage broker to knowing what's expected at the closing. It is supposed to keep residents from being taken advantage of.

But many of these residents taught by the alliance are paying thousands more than expected because of a fee tacked on by their mortgage brokers. One of those brokers was American Liberty Funding, a company operated by the fiance of the woman whose agency taught the classes.

The alliance has since bought the company.

In August, Hillsborough County housing officials decided to ban the fee, called a yield spread premium, after determining it can keep low-income residents from getting the most affordable loans possible.

The fee, which increases the percentage rate of the buyer's loan, is supposed to save out-of-pocket closing costs. But officials said it can have a negative impact as well.

"It's basically making them pay a higher interest rate. In the long term, they're paying more interest," said affordable housing officer Howie Carroll. "It's better to pay a few thousand upfront at closing than take that over a 30-year loan. They're going to pay a lot more."

Carroll said the increase is felt monthly and annually.

"The burden would then be $25 to $30 more a month or $300 to $400 a year," he said. "That's a couple of energy bills or groceries on the table."

American Liberty, according to county housing records, received $169,584 from yield spread premiums on 66 loans between 2002 and 2007. All but six of the loans came from people who attended classes taught by Sylvia Alvarez's agency.

Yield spreads historically have sparked debate. Some counties in Florida banned the fee years ago on low-income home loans. Others still allow it, but monitor it closely.

The federal Department of Housing and Urban Development has long pushed for better disclosure to first-time buyers of what impact such fees have on their loans.

Last week, HUD announced it had created a standardized Good Faith Estimate that tells buyers all closing costs and terms associated with their loans. The form will make it easier for residents to compare estimated fees with what they actually pay at closing. That form will take effect in 2010.

"The way they're currently disclosed to people, if at all, is in a way that doesn't leave borrowers with any idea what these premiums actually are," said Brian Sullivan, a spokesman for HUD.

Alvarez, the executive director of the Housing and Education Alliance, said homebuyers are made aware of the fee when they attend her agency's class.

"Yield spread and all fees in a closing are explained in HEA's classes, both in English and Spanish," she said in a written response to The Tampa Tribune.

But some former clients, such as Felicia Colon, said they were never told by American Liberty about the fee or its impact. Her loan included a yield spread of more than $2,500 paid by her bank to American Liberty.

"I would know that it's going to raise my interest rate as well as my monthly payments," Colon said. "I'm not stupid."

No Accounting

Hillsborough County officials had previously never tracked the use of yield spreads by banks and brokers.

They do not know how many low-income housing clients have received loans with a yield spread premium attached. The county helps hundreds of people each year find housing.

For example, from 2002 to 2007, the affordable-housing program assisted 2,409 first-time homebuyers.

Housing officials also do not know how many mortgage brokers and banks have assessed the fee when working with residents.

The county has no master list of lenders that have participated in the program, interim affordable housing director Bill Armstrong said.

Other counties have been more successful in monitoring the fee.

In 1993, St. Lucie County and the cities of Port St. Lucie and Fort Pierce created a Lending Consortium with guidelines for handling low-income loans. One of the guidelines is not to allow yield spread premiums. The consortium has six members, all banks, that assist residents with loans.

"We did it just so we could keep our loans competitive for low-income clients," said Jessica Parrish, housing project coordinator, "and also it helps to weed out predatory lenders."

Orange County's Housing Development office allows any broker, bank or lender to participate in its program. It also allows yield spreads, but the office limits how much profit a lender can make.

Kerwin Mellott, program manager for down-payment assistance, said his office meets with all buyers to go over their loans.

"If there is a yield spread premium, we try to explain to them that in the long run they might be paying a little more than if they had shopped the loan to another lender," he said.

Mellott's office receives about 500 loan requests a year. He said less than 5 percent include the fee. The average fee, he said, is $1,200 to $1,800.

"When you start seeing them north of $2,000," Mellott said, "that would raise a question mark."

Hillsborough's decision to eliminate yield spreads was prompted by a review of a loan this year, Armstrong said.

The mortgage broker in question was American Liberty, but other lenders also factored into the decision.

The county looked at 50 loans handled by nine brokers, 14 banks and two nonprofit agencies. American Liberty had seven loans with yield spread premiums - the most of any lender next to GMAC Mortgage bank, which had 12.

"We're not saying it shouldn't have been charged. It doesn't violate any type of law," said Valmarie Turner, affordable housing manager, contracts unit. "We looked at it and said we don't want that to be a part of our program."

Armstrong and other housing officials met with two mortgage brokers, including Floyd Pierson of Freedom First Financial.

Pierson said he understands the county's position and will continue to work with the affordable-housing program. He said he and other brokers receive the yield spread fee from the bank financing a buyer's loan.

"Yes, they may pay a higher interest rate," he said, "but they're paying less at closing."

Housing staff spent about two months evaluating what was best for residents.

"The objective is to get them into a home. We want to get them the best deal. We want to make sure it's done right," Armstrong said. "You can't expect a first-time homebuyer to be an expert. We need to do a better job holding their hands through this process."

Policy Change

The policy change was announced Aug. 15. Almost immediately, Armstrong said, Alvarez called his office to complain. In all, she placed about five calls arguing against the decision.

On Aug. 20, five days later, American Liberty sent an e-mail to Realtors, lenders and former clients saying the firm would no longer work with the county's affordable-housing program.

The e-mail was sent by Luis Torres, mortgage operations manager for American Liberty. Torres did not return repeated calls for comment for this story.

Philip Tagliarini, Alvarez's fiance, who was listed on state documents in April as American Liberty's registered agent and president, did not respond to repeated attempts for comment.

Alvarez responded, but only in writing.

"Hillsborough County's new policy is unfair in that not only do they not allow a yield spread premium for mortgage brokers, but also limit the total amount a mortgage broker can charge, which is 2 percent," she said. "Sometimes a mortgage broker can work up to a year, working against many obstacles, to close a first-time homebuyer loan."

'I Figured Everything Was OK'

According to county records, from 2002 to 2007, American Liberty worked with 87 first-time homebuyers.

The Tribune reviewed 66 of the loans. The remaining files were not available because the county cannot find them. Armstrong said he does not know what happened to the files.

Allison Spencer, 46, a single mother who bought a house in Valrico, said her American Liberty broker never mentioned that a yield spread premium would be attached to her loan. A review of her mortgage documents does not show the fee being disclosed on her Good Faith Estimate before closing.

American Liberty, according to her closing documents, was paid a yield spread of $4,025. That was in addition to $2,036 in other fees that Spencer paid American Liberty out-of-pocket.

"At the closing, everything was going so fast. I was just signing," she said. "I figured everything was OK as long as I knew what my payment would be."

More Changes Expected

Since August, the city of Tampa's affordable-housing program also has eliminated yield spread premiums.

"We did it right after the county," housing director Sharon West said. "We got a lot of e-mails from brokers who felt we were picking on them."

American Liberty did not contact the city, she said, despite the company having worked with city housing clients and having received a yield spread on at least 16 loans since 2004.

More changes are likely for the county's program, Armstrong said.

One such change is that housing officials now randomly attend low-income loan closings. They have stopped at least five closings since August due to questions.

"By actively going to some closings," Armstrong said, "we have been able to end up with a lower interest rate with no additional fees charged to the homebuyer."

WHAT IS A YIELD SPREAD PREMIUM?

A yield spread premium is a fee paid to mortgage brokers for their services. The broker receives the money outside of closing from the bank funding the loan. It essentially increases the interest rate of the loan, for the life of the loan, in exchange for a reduced out-of-pocket cost to the buyer at closing. Yield spreads must be disclosed — a federal law and state statute — by brokers before closing.

IN PERSPECTIVE

The Housing and Education Alliance's relationship with Hillsborough County has been contentious.

Sylvia Alvarez's agency has taught homebuyer education classes since 2002.

In 2004, Alvarez entered into a county contract to build a new affordable-housing neighborhood, Amber Place. That subdivision, now completed, has been embroiled in a fight between residents and Alvarez's agency over control of the homeowners association and resident dues.

In 2005, she signed a county contract to exclusively teach education classes for two years.

In early 2007, Alvarez abruptly canceled that contract after the county asked to include a conflict of interest clause. The clause would have blocked the alliance and American Liberty Funding from mutually benefiting from affordable housing clients.

In spring 2007, Alvarez prompted an internal investigation of the affordable housing office, alleging improper conduct by three employees. That investigation sparked a federal probe that is ongoing.

NEED HELP?

If you participated in Hillsborough County's affordable-housing program and think your loan was affected by a yield spread premium without your knowledge, check your mortgage documents and then contact the mortgage broker and the bank that assisted with your loan. If the fee was not properly disclosed, as required by law, you can contact:

The Florida Office of Financial Regulations complaint hot line at 1-800-848-3792. To file a complaint online, go to www.flofr.com/Finance/Comp
FormDownload.htm.

U.S. Department of Housing and Urban Development Office of Inspector General at 1-800-347-3735. You can send an e-mail inquiry to hotline@hudoig.gov.

Reporter John W. Allman can be reached at (813) 259-7915. Keyword: Housing Investigation, to read previous coverage of the Housing and Education Alliance.

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