Government loan programs known as FHA, VA and USDA Rural mortgages are insured, guaranteed or offered through the United States Government. They were created by the government to provide home loans after the Depression and the two world wars when the greater population of Americans wanted homeownership but the banks were not lending to the masses. It then became a mortgage for those that could not obtain one through more conventional bank means and evolved into the “new subprime” loan today.

Around for decades, FHA and other government programs go in and out of the mainstream of mortgage products. Government loans have held a stigma as the mortgage of the lower class or lower income- for those that cannot obtain financing thorough convention means. If you need help from your government, you cannot stand on your own- not true.

Over the past twenty years, government loans have been heavily abused as a loan product, with mortgage loan officers often targeting lower income, minorities and the unsuspecting as the only loan choice available to them. Why is this? The government loan is a big money maker to banks and loan officers, in addition to having a broader approval guideline. In the past two years, the qualifying guidelines have been tightened to be more in-line with FNMA.

Government loans pay higher commissions to loan officers than conventional bank loans. The loan officer could also charge several points (fee based on percentage of loan amount) to the borrower, telling them it is a part of the cost of the government program and enticing them to roll the fees into the base loan amount. In a way, the loan officer would make even more commission.

There is now a crackdown on the fees that can be earned on government loans. Beginning with new mortgage submissions on October 25^th, the loan officer may earn a maximum of 4 percent of the loan amount payable from the lender in yield spread premium, origination fee and closing fees.  The yield spread premium (fee earned by wholesale lending) is maxed at 3 percent of the loan amount and the broker can still charge a 1 percent origination fee. Additional points are no longer allowed to be charged unless the borrower benefits with a lower interest rate (except in the state of New Jersey).

However, if a broker is making 3 percent from the lender, they can very well lower their lender paid fee to lower the borrower’s interest rate. Thus, no points should ever be charged to lower rates. Origination fees of 1 percent are still allowed, but isn’t this still excessive? This means that all money earned by the loan officer is maxed at 4%. On a $200,000 loan amount, the mortgage broker can rake in $8,000. Where is the crackdown?

Not here-