Mortgage Reform, U.S. House Bill 3915, & YSP

This morning, the U.S. House of Representatives Financial Services Committee voted on H.R.3915, The Mortgage Reform and Anti-Predatory Lending Act of 2007.

While legislators attempt to erect a defense shield against mortgage lending abuse, this current law strikes wide of the target and is sure to inflict collateral damage upon the very group it seeks to protect.

YSP

One of the primary thrusts of the Act is to outlaw Yield Spread Premium (YSP). This is the mechanism by which consumers are able to obtain zero point and no cost loans. Borrowers elect a slightly higher interest rate in exchange for eliminating points and other closing costs. YSP is a rebate (the Premiumpaid by the lender to the broker for the higher interest rate (the Yield )on the loan. The amount of that premium is determined by difference or theSpread between current interest rates and the rate elected by the consumer. Mortgage brokers must disclose YSP.

It’s a simple trade-off and a valuable tool for consumers. Without YSP, buyers with limited cash may have to postpone purchasing a home. Existing homeowners might be unable to refinance to a better loan if they had to pay all their fees and points out of pocket.

I do a lot of loans for retiring folks relocating from the San Francisco Bay Area to Sacramento. Frequently, their plan is to sell the old homes once they are settled in and pay off the mortgage completely. It makes infinitely more sense to accept a higher interest rate over the short term to save thousands in costs. The math ain’t that hard.

What Happens if Congress Makes YSP Illegal?

Well in that case, consumers will have to pay points and fees on all loans. Those who can’t afford it won’t be able to buy. Sales will slow, and fewer people will dream the dream. Some may find themselves stuck bad loans, unable to refinance, losing their homes, and adding to the foreclosure problem we’re trying to fix.

A Rigged Game

If this legislation passes, consumers will be forced to work directly with a bank like a Countrywide, BofA, or Wells Fargo in order to obtain a no points/no fees loan. However the banks are exempt from the disclosure requirements placed upon mortgage brokers. That’s right, the banks don’t have to tell you how much they are making at the expense of your higher interest rate.

That is a long standing inequity, born of bribery and the lobbying efforts of the big banks. They claim that until they actually sell the loans, they don’t know exactly how much that premium is worth. Therefore they can’t disclose. Last time I checked, that hadn’t kept them from paying my mortgage banker friends a very specific commission at the close of the loan.
Check Mate

Here’s how the game plays out if YSP is outlawed. Mortgage brokers won’t go away, nor will lending abuse. In fact, it will get worse. Mortgage brokers will morph into banks or go to work for banks. Competition will shrink (not good for the consumer), and we’ll all be free under the banking exemption from disclosing to the consumer how much they are really paying for their loans. We will miss the terrorists and kill the women and children.

Other Issues

There are certainly other issues to consider within this Bill. In his post HR 3915 is Dangerous, Brian Brady over at Bloodhound Blog does his usual great job of illuminating some of those.

Press Release, Kurt Pfotenhauer, Senior VP of Government Affairs and Public Policy for the Mortgage Bankers Association underscored the risks of HR 3915 when he stated that:

some people will be locked out of the mortgage market, many of whom would have been successful homeowners.”

He went on to say that,

85% of sub-prime borrowers are paying their mortgages on time. It’s an open question, how many would even qualify for a loan under the proposed regulatory construct.”

Lending abuse is certainly a problem and the consumer needs protection. Stronger licensing and supervision are required. But outlawing YSP and reducing competition takes us down the wrong path.

Got a comment or question? Join the discussion and leave your thoughts below.

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