Why Stop With the Bath Water When You Can Throw Out the Baby At No Additional Charge?

by Mark Green

Database Marketing Expert

Author website

Full disclosure: I’m neither Democrat nor Republican. I’m neither Mortgage Broker nor Mortgage Banker. I am a consumer – just like you.

I haven’t been over here to play as often as I’d like because of some other projects I’ve been passionately pursuing.  My bad, because this is still the place to be for people with a take.  And I’ve got a take:

What the American public doesn’t know is what makes them the American public, alright?

– Dan Akroyd as Ray Zalinsky in the movie “Tommy Boy”

For the rest of this article to make sense, I’d ask that you take 2 minutes to read this letter authored by Sen. Jeff Merkley to Fed Chair Ben Bernanke dated Dec. 24, 2009.

Here’s the cliff’s notes version the way I read it:

1. Mortgage brokers are crooks.
2. The subprime debacle happened because consumers were “tricked” into loans they couldn’t afford to repay.
3. Eliminating the Yield Spread Premium (YSP) will fix our problems.

To support his argument to kill YSP, Merkley cites a NY Times editorial piece painting the mortgage broker as unethical and the root of the subprime debacle.  Here are a few questions I’d like to pose to the pound for thought and discussion:

1. YSP existed in its current form up until Jan 1, 2010 – when the new Good Faith Estimate and RESPA rules took effect .  By the way, is there still such a thing as a “subprime loan”?  What banks are writing “subprime loans” today?  Six months ago?  A year ago?
2. Did it EVER make any sense that a bank would knowingly extend a loan to a borrower who had demonstrated a propensity to default and thus would be more likely than normal to default on their mortgage?  Where is the mention of the “stated income” loans in Merkley’s letter.  Certainly THAT didn’t contribute to the subprime mess, right?
3. FACT:  today, the mortgage broker CANNOT earn YSP.  YSP belongs to the borrower and may only be rebated to the borrower.

I’m going to repeat that for effect.

1. Senator Merkley, less than one month ago
2. Authored a letter (co-signed by approximately 20 other Senators)
3. In the guise of consumer protection
4. Calling for the elimination of Yield Spread Premium
5. Which today belongs to nobody but the consumer
6. Because this will help us solve the subprime crisis
7. Which solved itself as soon as the banks realized that a borrower with a 480 credit score earning $34,000 annually might not be able to afford a $450,000 home (Stated income loan?  Are you kidding me?  Who was the Einstein who thought THAT was a good idea?).

The Merkley letter, both in content and in timing, shows a level of ineptitude I never thought possible – even for an elected official.  Today, mortgage brokers must disclose their compensation up front and in full on the new Good Faith Estimate.  Any yield spread premium earned MUST be rebated to the borrower.  This, folks – is extremely consumer friendly.  Elimination of YSP HURTS the consumer in several ways:

1. It further skews the competitive playing field in favor of depository banks.  Yes, the BIG banks like Wells Fargo and Bank of America.
2. It limits consumer choice.  Now, instead of hiring a trusted advisor (who has already disclosed what his fees are up front) to act as your fiduciary and find the right mortgage for your needs, you’ll be on your own to shop the banks.
3. It’s dangerous precedent.  Do you think the movement to eliminate YSP stops with the broker?  Immediate pressure will begin to fall on the regional mortgage banker – the lender who borrows its funds on a “warehouse line” and is eligible for back-end compensation in the form of SRP (service release premium).

Who’s next when the government’s finished telling mortgage professionals what they ought to make, and how?  You think the idea of limiting what a Real Estate Agent might sound juicy in a letter to Congress?  I’ll close with another movie quote:

And whatever your particular problem is, I promise you, Bob Rumson is not the least bit interested in solving it. He is interested in two things and two things only: making you afraid of it and telling you who’s to blame for it. That, ladies and gentlemen, is how you win elections.

– Michael Douglas as President Shepherd in the movie “The American President”