HR 3915 Gets OK from House Panel - Be Afraid, Be Very Afraid

I had been mostly silent during the time period this bill was being prepared for vote.  I did post today on some of the issues within the bill and the real reason I am against it, which is that ultimately it will do more harm than good for the consumer.

Well, the bill is now set to go to the House for a vote and then move its way over to the Senate and finally to the President.  Chances are it will be amended along the way, which we hope will be the case to make the law more consumer friendly.

While there are some issues that I, as a mortgage broker, do not like, they are my issues alone and some of the requirements will actually be welcomed by many of us (hey, any way we can eliminate competition and drive prices up is a good thing for us).  There are issues that you, as a consumer, should be afraid of though.

The CMPS Institute (where Certified Mortgage Planning Specialist {CMPS} designation comes from) created their own proposal which you can view here.  I must admit this seems to be the best proposal yet, though even it could use some additions as it falls a little short.  At least it would be the best starting point for what is out there.

Here are some of the dangers you should be afraid of if HR3915, The Mortgage Reform and Predatory Lending Act of 2007, goes through as is...

1. Elimination of Yield Spread Premiums (YSPs) - Mortgage brokers make their living through commissions they earn from the wholesale lenders to whom they broker loans. These commissions are called yield spread premiums (YSPs) and are in most cases fully consistent with the commission schedules that are used by bank loan officers. However, brokers tend to have more latitude than bank loan officers in pricing their loans. This can be very beneficial to consumers as brokers can sometimes be more flexible than bankers in terms of pricing out various point and interest rate scenarios on many loan programs. One loan program that would be virtually outlawed under this proposal would be the no-cost refinance where the broker uses their YSP to pay the borrower’s closing costs. The very clause that is intended to protect consumers would result in harming them and increasing their refinancing costs.
2. Fiduciary Responsibility, Suitability Standards and/or “Net Tangible Benefit” Requirements - Proposals that call for requiring a federal fiduciary standard for mortgage originators or a “net tangible benefit” requirement for mortgage loans are impractical for the most part and will result in costly and unnecessary litigation within the mortgage industry. Secondary market investors would refuse to buy and securitize loans, bankers would refuse to issue loans, and brokers would refuse to originate loans – all out of fear that the consumer will come back and say, “You shouldn’t have sold me the loan in the first place.”  Furthermore, a federally-mandated standard would put the government firmly in the driver’s seat when determining which loans are suitable for consumers. It would be much better to allow consumers to make their own personal financial choices without government interference. Rather than imposing a federally-mandated “net tangible benefit” requirement with no practical way of enforcement, a better solution would be to implement the three guidelines proposed in this policy statement.
3. Legislating Underwriting Guidelines - Proposals that call for federally-mandated underwriting guidelines will greatly limit market-based innovation and snuff out many of the financial choices available to consumers. One of the greatest benefits of living in the US is the myriad choices we have when it comes to investments, homeownership, lifestyle, etc. Government-decreed lending guidelines are not consistent with the personal freedoms inherent in the American way of life. Rather than jumping into the mortgage business, governments should simply require the industry to act in a responsible manner by implementing the three guidelines proposed in this policy statement.

Additionally, more mortgage professionals will likely leave the profession, reducing competition and allowing those remaining to drive costs higher.  So, ultimately, the American homeowner loses.

Comments

[Christina Atheton]

You are wrong about YSP for loan officers employed by mortgage brokers vs banks. Bank l/o's are paid on volume (loan size volume) and Broker l/o's are paid on % of ysp - big difference. I made 4x as much money as working for a broker vs working for a bank, doing about the same amount of business.
Check your facts.

[Robert D. Ashby, CMPS CITRMS]

Christina...Thanks for the comment. First off, the comment about YSP being broker pay is in line with bank LOs is from the CMPS report (I did not do the research and make the statement, simply broguth it over for highlighting here). The full text is available in the link above so you can read it directly.

Now, as for the comparison, if you are not already aware, the banks make basically the same amount of money as the mortgage broker in terms of "commissionable income". The difference is how they pay their LOs versus YSP paid to brokers. Banks charge a Service Release Premium (SRP) that is never disclosed as it is not required to be. I have friends at Countrywide that do hundreds of applications, bringing in tons of revenue for CW and make a pittance per loan while the bank hoards the rest. The banks would love to eliminate YSP and mortgage brokers for the most part as it would reduce competition and allow increased profits, something that is obviously in need right now.

[Mike Volpe]

I know that sometimes tone is hard to decipher but you seem to be fairly blase about this. Elimination of YSP means the elimination of the broker as a whole. Keep in mind that banks are immune from this law giving them an advantage no one can overcome. Eliminating mortgage brokers means eliminating wholesale lenders, appraisers, title companies, software companies like Calyx, and credit reporting agencies.

This isn't merely a bad bill but a disaster waiting to happen. We all need to mobilize and most importantly get our clients involved. Once they understand how YSP helps them they will speak out against it as well as us.

I just did a loan where all of the borrower's closing costs were paid. I do this type of loan a lot and the borrower was made aware of the law and immediately not only signed the petition but also emailed their Congressman. That is the type of activity we need. here is how I saw it...

http://www.proprietornation.blogspot.com/2007/11/congress-vs-mortgage-brokers.html

[Robert D. Ashby, CMPS CITRMS]

Mike...Thanks for commenting as well. I am biased only in as much as it favors the consumer. I also disagree with the statement that it will eliminate the mortgage broker as a whole. So long as lenders allow wholesale lending, as most still do now, the broker will still likely be a better value for the consumer. The only real issue from elimination of YSP is that the broker may need to be paid in "cash at closing".

Also, HR3915 did have the section on anti-steering amended, which if I read correctly will actually allow YSP so long as the loan can be determined to be the best loan for the client and not for the mortgage broker's pocket.

I still think the loan as it sets today is, as you put it, a "disaster waiting to happen". It throws excessive "barriers to entry" and other issues into the equation that will likely drive most mortgage brokers to say it's not worth it to stay in business, reducing competition and driving up the cost to consumers.

I will try to read your post later today, but I edited the address to make it active so readers can visit your post and see what your take is.

[Marc]

Great points listed in the above comments.

No one has mentioned the impact on the real estate market. We already have a sluggish market. How will people qualify for loans that brokers can do. Different banks have different lending parameters and brokers know where to place loans. without brokers many deals that could happen won't happen.

As if the interest rate hikes and insane subprime loans didn't do enough damage, this bill will have even more horrific effects on the housing market and indeed the whole economy if it passes!!!