HR 3915
Congressman Miller, Congressman Watt, and Chairman Frank introduced the "Mortgage Reform and Anti-Predatory Lending Act of 2007" on October 22, 2007. This act among other things is proposing to prohibit yield spread premiums. Yield spread premium (YSP), service release premiums, back-end points are monies paid from the lender to the broker for delivering a higher rate then what is required by the lender to cover the risk.
A simple example on an Agency (Fannie Mae/Freddie Mac) loan where the market rate on a 30 year fixed mortgage is 6.25%. In order for a mortgage broker/loan officer to make money closing a mortgage at 6.25% would be to charge the customer money (i.e. origination fee, discount fees, broker fees, processing fees, administration fees, etc.) If the loan is closed at 6.75% an increase in rate by .5% over the life of the loan, the lender will pay a fee for that increased revenue. Let's say the fee in this case is 1% of the loan amount or $1,000 per $100,000 loan.
The ability to negotiate a loan and compete with other mortgage brokers, lenders, loan officer and especially banks is paramount to the flexibility of the pricing. Prohibiting YSP completely diminishes the competitive edge of the mortgage broker. Granted all mortgage brokers will be on the same playing field together but not on the same field and Banks. Mortgage Brokers won't be able to pay for appraisals or close loans with no fees all together.
One of the areas of lending this wont effect is mortgage banking. Mortgage banking is where the mortgage company loans their own money, usually by means of warehouse line, to fund the loan. The loan is then sold individually or in a group to banks or lenders. The YSP paid in these transactions aren't regulated because it's considered a secondary market transaction. So the simple answer is most mortgage brokers will get warehouse lines and turn into mortgage bankers. I'm sure if YSP is outlawed many will become bankers.
The market has taken care of many of the large to mid size non-bank mortgage lenders. Who is left? Citi, Chase, Bank of America, Wells Fargo, Countrywide, Barclays, US Bank, Suntrust, National City. Is it a coincidence that this bill hit the House floor on one week after Citi, Chase and Bank of America agreed to create a $100 billion fund that would buy these structured investment vehicles (SIV). Cut out the middle men, now cut out the broker leaving only banks to compete for your mortgages.
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