The new mortgage rules touted by Fed Chairman Bernanke are devoid of any real protection from bad mortgage originators since they conveniently skipped regulating yield spread premiums. The new rules apply to all mortgage lenders and therein lies the rub. If the Fed wanted to reign in mortgage broker yield spread premiums they’d also have to address bank service release premiums.

Bernanke was smart enough to walk away from that fight.

As I’ve discussed before the the banks make a ton of money from offering you mortgage rates higher than you qualify in the form of a “service release premium” which is paid to them once the sell the loan into the secondary market. The mortgage brokers do the same thing, however when they do it the income derived is called “yield spread premium”.

Why the two different names for the same thing you ask?
So one can be hidden and the other one disclosed.

Which one is hidden you ask?
Well the bank earned service release premium is hidden of course. This has created what most industry folks call “an unlevel playing field” obviously favoring the banks.

Who does Bernanke work for you ask?
He works for the banks and couldn’t care less about mortgage brokers.

So why didn’t he just outlaw yield spread premiums in the new rules you ask?

According to the press release announcing the changes:

“One element of the original proposal has been withdrawn. The Federal Reserve Board had proposed for public comment certain requirements pertaining to so-called “yield-spread premiums.” During the intervening period, the Board engaged in consumer testing that cast significant doubt on the effectiveness of the proposed rule. As part of its ongoing review of closed-end loan rules under Regulation Z, however, the Board will consider alternative approaches.”

In other words, and I’m paraphrasing, “the consumers don’t know the difference, so let’s just keep things the way they are.”

Yield spread premium and service release premiums are here to stay and any mortgage shopper wanting to get the best rate and cost will have to fend for themselves against profit-making practices they don’t even know exist.

What did make it into the changes are mortgage rules that apply only to “high risk” loans..the subprime loans that are not even available anymore. Once again government regulates against false threats and leaves the real threats unchallenged.

Good Luck!


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