H.R. 3915 Mortgage Reform Legislation

I’m writing this post out of the recent disgust that I have for recent policy maker decisions. These decisions are being made for “the benefit” of everyone, when more realistically they are knee jerk reactions by poorly informed politicians looking to make a name for themselves. As an owner of a Florida Correspondent Lender that has employed mortgage brokers for the last 4 years, and having been in the industry for over 5 years you can call my interests bias. However, no matter what changes are made to the industry, I won’t be leaving it anytime soon. In the end the persons that these proposed bills hurt are the consumer.

The bill that is going around now is H.R. 3915, and Senator Christopher Dodd’s mortgage reform legislation. There are several things that have been mentioned in these bills that will greatly hurt many borrowers, and others that are irrelevant as they are already preformed in our industry. One of the main changes that will hurt borrower’s the most would be prohibiting the financing of points, fees, and prepayment penalties. I understand the purpose of this is to prevent dishonest lenders and borrowers from flipping properties around. What cost does this come at though? One of the main problems that we have with the housing industry is from borrowers that will be unable to refinance their adjustable rate mortgages when their expiration period comes up. The Federal Deposit Insurance Corp estimates that approximately 1.1 million borrowers will be unable to afford their loans when they adjust to higher interest rates. How is it assumed that these borrowers will be able to afford closing costs out of pocket? Now what about borrowers what want to do a rate and term refinance just to lower their interest rate? This person would have to save up 5,000 to 10,000 to do something that could start benefiting them today, when interest rates could be much higher by the time they do.

Another misinformed decision by the H.R. 3915 and Senator Dodd’s legislation is the prohibiting of Yield Spread Premiums. For some reason it is believed that mortgage brokers were placing borrowers into subprime mortgages to make more Yield Spread. The outline of Dodd’s legislation states “Mortgage brokers, who have originated about 70 percent of subprime mortgages, received higher compensation through YSPs for steering borrowers to these higher cost loans.” These statements are completely incorrect. The truth is that as a mortgage broker we can make more Yield Spread from a Fannie Mae or Freddie Mac loan than we do with a subprime mortgage. According to my most recent rate sheet with a good credit score borrower I could make close to 3 points Yield Spread and give the borrower an interest rate of 6.75% on a 30 year Fannie Mae fixed rate mortgage with no prepayment penalty (assuming 10% down). If I took that exact same borrower to a subprime lender the most I could make would be 2 points Yield Spread and the borrower’s interest rate would be 9.25% on a 30 year fixed rate mortgage with a 3 year prepayment penalty. To compare apples to apples it would cost .875 percent to buy out that prepayment penalty bring the rate to 10.125%. Where is this huge incentive that I have to give my clients horrible rates? The most we’ve ever been able to make in Yield Spread on a subprime mortgage was 3 percent (which was very rarely offered by lenders) and came at the cost a 2.25% addition to someone’s rate. We have always (even today) been able to make up to 3.5% Yield Spread on a Fannie Mae loan at a fraction of a cost (to be exact according to my rate sheet it would cost 1.125%.)

Paying Yield Spread also helps lower a borrowers over time fees. For example if I had a client that planned on only staying in their home for 5 years (which according to a recent survey is the time an average American stays in a home) I could get them a 30 year fixed rate mortgage at 6.125% with me getting 1 point Yield Spread or 5.875% with me getting no Yield Spread but now I charge 1 point up front. On a 300,000 mortgage the difference in payment between these two mortgages would be $48.22 a month, so to make up the 3,000 the borrower with the lower interest rate paid at closing it would take just over 5 years and two months. Now what if my borrower plans on moving sooner?

The things I listed above are the changes that will harm the market the most. I do however believe that there needs to be some new legislation regulating the mortgage industry. More research needs to be done to figure out the benefits and potential harm to the average american not just the politicians that are establishing these laws. The good changes these bills have in them are prohibiting prepayment penalties, requiring escrows for taxes and insurance (which should be just on primary residences), net tangible benefit for the borrower (this is something that all of my lenders already do, but if there are lenders that do not this has to be done), limiting low- and no-documentation loans (If you receive a W-2 you should not be able to go Stated Income), & foreclosure prevention counseling. My only hope is that these bills are either amended or replaced with something that actually helps people keep their homes, not loose them.