Barney Frank Set to Throw Gas on Mortgage Meltdown Fire
U.S. Representative Barney Frank (D-Mass) is proposing legislation that will decimate the mortgage industry. If he is successful, it will no doubt negatively impact millions of Americans who own homes and who plan on buying homes. The public will see their mortgage choices cut in half, if not more, and has the potential of exacerbating the current mortgage and real estate crisis. Consider the excerpt from an October 29th bizjournals article…
The bill, introduced by House Financial Services Chairman Barney Frank, would require all mortgage originators to be licensed. It also would require lenders to determine that borrowers have a reasonable chance to repay the loan and ban incentives for mortgage originators to make certain types of loans.
First let me address the obvious. Originators and mortgage companies are already required to be licensed. They are required by the states that they operate in. Requiring Federal licensing will only add another layer of red tape to an industry already plagued with it.
He then wants mortgage companies to ensure a borrowers ability to repay a given loan. Only God can do that. There is no way any money making entity would take the risk of originating loans if they can be called to the carpet for not foreseeing a borrower not being able to repay. Yet that is what Barney Frank is requiring of mortgage companies.
The incentives he wants to ban are an integral part of mortgage pricing. The incentives he speaks of is called Yield Spread Premium in the mortgage industry. Originators get paid for providing a mortgage through front end fees or points and yield spread premium. Sometimes it’s one or the other and sometimes compensation comes from a combination of both.
Yield spread premiums provide compensation to the originator in exchange for delivering a mortgage with a rate that is higher than the “par” rate on any given day. The par rate is the rate that the originator can offer without yield spread premium being paid or without cost to the originator and or borrower.
It is through yield spread premium that no point and no cost mortgages are offered. When a lending institution offers a no point loan, they aren’t doing it for free. Someone is paying and that someone is the secondary market. The consumer benefits because they are able to get a loan without having to pay points. Eliminating yield spread premium would eliminate no point and no cost mortgages. How can this benefit the consumer?
The American Bankers Association also is concerned the bill would increase the regulatory burden for banks and restrict their “ability to provide products and services — all of which would increase costs and decrease choices for consumers,” said Floyd Stoner, the association’s executive director of congressional relations and public policy.
The National Association of Mortgage Brokers contended consumers would be hurt by the legislation’s elimination of the yield spread premium, a rebate paid to brokers if borrowers accept a higher interest rate in return for lower fees on the loan.
It is interesting to note that none of the measures in Frank’s legislation would have headed off the current mortgage crisis. However it is plain for everyone to see that the current crisis sets a nice stage for his grand standing.
Not only would his legislation not prevent the crisis, it will make the current crisis more painful and has the potential of thrusting this country into a 1930’s style depression by drying up liquidity in the mortgage market. This will lead to fewer homes being sold and more homes going into foreclosure. All of which will continue the steep downward spiral of housing prices.
Let’s remember one thing about politicians. Their number one goal is not help anyone in particular, but to get re-elected. Many are re-elected on ideas that sound good but are harmful in reality. This is one of those instances.