Mortgage Bill Needs Upgrade
Byline: Henry Savage, SPECIAL TO THE WASHINGTON TIMES
I have to chime in and express my views on the proposed "Mortgage Reform and Anti-Predatory Lending Act," introduced by U.S. Rep. Barney Frank, Massachusetts Democrat.
I've spent more than 20 years in the mortgage business as a consumer advocate, so I believe my opinions on the bill are qualified and justified.
The bill contains three sections.
The first addresses steering, which is the practice of directing business for personal gain to a particular entity that may not be in the consumers' best interest.
Specifically, the bill calls for the elimination of the so-called "yield spread premium" (YSP). Sometimes called "negative points," this is actually a fee, paid as a percentage of the loan amount, to the mortgage broker.
In exchange for a YSP, the lender receives a higher interest rate, hoping to recoup the YSP over time through the higher interest.
Mr. Frank considers a YSP to be a tool of steering. While there may be many unscrupulous and unethical people in the mortgage business that, indeed, may push borrowers into loans with higher rates in order to reap a YSP, the notion of eliminating YSPs altogether is absolutely akin to curing dandruff by decapitation.
I've been writing this column since 1996 and have written about the so-called zero-closing-cost refinancing program dozens of times. The concept is simple: In exchange for a slightly higher interest rate, usually about 0.25 percent, the borrower can refinance his mortgage and pay zero points and zero transactional costs.
The analysis is even simpler: If a borrower's current rate is higher than the rate offered with no closing costs, it makes sense to refinance. Any interest savings is immediate because there are no fees to recoup.
Since 1992, my company has refinanced thousands and thousands of area homeowners - the vast majority of these folks opting for the higher-rate zero-cost option. These folks choose the higher rate, no-fee program for a reason: It's a better deal than taking a lower rate that carries thousands in nonrefundable fees.
The elimination of the YSP would prevent independent mortgage companies from offering zero- and low-cost financing options. As far as I understand it, big banks would still be able to offer such of programs, but seeing as mortgage brokers account for 65 percent of all mortgage business, the availability of these programs would be curtailed and perhaps completely unavailable.
The reduction of supply will diminish competition and adversely affect consumers.
The first section also addresses licensing for all individual loan originators. I'm fine with this. We need to weed out the crooks and incompetents, but let's hope licensing applies also to originators who work for banks, not just brokers. In my experience, there are plenty of inept loan officers who work for banks and independent brokers.
The second section the bill addresses the ability of a borrower to repay. While I almost laugh at the notion, because I have never recommended any loan to a client whom I didn't think could repay, it's pretty obvious that a lot of homeowners took out loans that they can't afford. …