Yield spread premiums: misunderstood?

There's a spirited debate raging today over the latest column by "The Mortgage Professor" Jack Guttentag, which looks at whether a controversial bill that's making its way through Congress will accomplish its goal: eliminate the incentive for mortgage brokers to steer consumers into higher-cost loans in order to earn rebates from lenders (the infamous "yield spread premiums").   

The challenge, Guttentag says in Part 1 of the two-part series, is "to eliminate opportunistic pricing without eliminating rebates," because consumers CAN use them to their advantage. A cash-strapped buyer might want to agree to a higher interest rate in order to get a rebate, Guttentag says. The problem is, brokers often pocket the rebates without the borrower's knowledge, placing them in loans that carry higher interest rates than they could have qualified for.

The solution: require lenders to credit all rebates to borrowers, Guttentag says.

Unfortunately, many of those commenting on Part 2 of Guttentag's series don't seem to have read Part 1. In Part 2, having established that yield spread premiums are not necessarily a bad thing, Guttentag questions whether HR 3915, the Mortgage Reform and Anti-Predatory Lending Act of 2007, will prevent incentives for abuse.

His conclusion: the way one provision of the bill is worded now, it's unenforceable. The bill won't accomplish what it sets out to do.

When the House approved HR 3915 on Nov. 15 in a 291-127 vote, Rep. Barney Frank, D-Mass., acknowledged that the bill's language might need work to achieve its intent. He said as debate continues in the Senate, "it will be very clear to anybody by the time this bill becomes law, there is no possibility of anyone getting higher compensation in return for putting someone in a higher-cost loan."  (see Inman News story).

Although HR 3915 enjoyed some bipartisan support in the House, it riled many mortgage brokers, who objected to being made the scapegoats for all of the excesses in mortgage lending during the housing boom. An online petition against the bill garnered more than 100,000 signatures -- including many a mortgage broker (see blog post).

Part 2 of Guttentag's column has gotten a similar reception on Yahoo! Finance, where dozens have commented on it.

"The article implies the mortgage broker and the YSP are to blame for, if not all, a significant portion of the current mortgage mess," writes commenter Ross W. "However, nothing could be further from the truth. The mess was created by Wall Street, for Wall Street and is now being blamed by Wall Street on others. The basic truth is, originators originate what the bankers will underwrite, fund and sell. If the Bankers want loans from borrowers that meet a specific profile, the Originators will get them those loans."

Another commenter, germainandrew, writes that he's used YSP to his advantage, applying the rebate toward closing costs and refinancing with zero closing costs. "Eliminating YSP would prevent such a deal," he writes, apparently unaware that Guttentag proposes no such thing and outlined just such an advantageous scenario for borrowers in Part 1.

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