House Bill Looks to Kill Yield Spread Premiums

(Update 1: adds in industry confusion over YSP terms) Mortgage brokers should be very, very worried — a proposal unveiled in Congress Friday morning would ban all yield spread premiums, a move that brokers say would essentially kill the market for all third-party mortgage originations. There is clearly some confusion among those in the industry as to the bill’s approach towards yield spread, however, with the National Association of Mortgage Brokers suggesting the bill does not eliminate YSP, and other industry media reporting that the bill only eliminates some — but not all — forms of yield spread. We’ll let readers divine the meaning of the legislation themselves, based on the actual language used in the bill and its official summary, provided below. From a summary of the proposed bill: “Yield spread premiums and other compensation that could cause mortgage originators (i.e., mortgage brokers and bank loan officers) to “steer” applicants toward more costly mortgages are banned for all mortgage loans – the total direct and indirect compensation from all sources permitted to the mortgage originator may not vary with the terms of the mortgage loan (except for size of the loan and number of loans).” [emphasis in original] From the the proposed bill itself: “For any mortgage loan, the total amount of direct and indirect compensation from all sources permitted to a mortgage originator may not vary based on the terms of the loan (other than the amount of the principal).” As explained in the RESPA Policy Statement, yield spread premiums permit “home buyers to pay some or all of the up front settlement costs over the life of the mortgage through a higher interest rate.” Perhaps it’s true that legislators don’t intend to eliminate YSP with this legislation, but the language they’ve chosen sure seems as if it will have just that effect. The proposed legislation, H.R. 1728, was introduced Friday by Rep. Brad Miller (D-NC), along with Rep. Mel Watt (D-NC) and House Financial Services Committee Chairman Barney Frank (D-MA). Called the Mortgage Reform and Anti-Predatory Lending Act of 2009, the proposal is a tougher version of a measure that Rep. Miller sponsored in the previous Congress; that measure passed the House in 2007, but was never considered in the Senate. Frank said the House Financial Services Committee will mark up the proposal on March 31. Read a summary of the bill, or read the entire proposal. “The political climate has changed,” said Rep. Miller. “The foreclosure crisis has wreaked havoc on middle-class families and our economy as a whole. The industry’s arguments for watering the bill down are not at all convincing.” Congressional Democrats have long charged that YSPs are the functional equivalent of steering borrowers into higher-cost loans, a claim that industry representatives have vehemently contested. The House proposal also looks to set a Federal minimum standard for mortgages, including a so-called ‘ability to repay’ standard for purchases and a ‘net tangible benefit’ standard for refinances. Federal banking regulators would have the authority to change the definition of what mortgages meet these standards at will, under the proposed legislation; lenders whose loans violate the minimum standards would be required to modify or refinance affected borrowers at no cost to the borrower within 90 days, in order to avoid seeing the debt voided. The 2009 measure also includes stronger language on so-called assignee liability. That language would make mortgage securitizers, who package home loans into securities, more liable for fraudulent loans — under the bill, consumers would have cause to sue any issuing entity for including a loan in a securitization offering that violates the so-called ‘minimum standards’ tests, in addition to a cause of action against the lender that made the loan. It also requires any private-party securitizations to set aside 5 percent of the credit risk on any securitization with the original creditor; that creditor is also not permitted to hedge its exposure to that particular risk, under the bill’s proposed language. “As if the secondary market didn’t have enough problems,” said one trader that spoke to HousingWire on condition of anonymity. The bill also changes foreclosure law for tenants, too, establishing a blanket 90 day notice period for tenants — longer, if state law permits — and establishes a ‘right to remain’ for existing tenants with a prior lease, for the duration of the original lease term. The bill does not, however, spell out what it expects to constitute a valid lease contract. “Americans who lose their home to foreclosure fall out of the middle class and into poverty, probably forever,” said Rep. Miller. “And, middle-class homeowners are seeing their life’s savings disappear with the collapse of home values.” Write to Paul Jackson at Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments.

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