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Monday, November 5, 2007

Saved from ourselves, again...

I'm not sure which is the dumber of the solutions to the sub-prime home loan mess being considered in Congress right now - proposals to bail out of companies that got themselves in trouble with sub-prime loans or the "save us from ourselves" proposal to eliminate the Yield Spread Premiums (YSPs) on home loans. Congressman Barney Frank (pictured on the left) is leading the effort to save us from ourselves. About the only thing that is certain is that whatever solutions our geniuses in Congress come up with, it will cost us taxpayers money.

In the case of the proposed elimination of the YSPs, it will also severely impact the real estate market; by taking away one tool that the mortgage industry has at it's disposal to keep mortgage rates affordable. Maybe Congress will next get into dictating mortgage rates (or capping them), so that people can afford houses. Stranger things have occurred in my lifetime.

Mortgage companies use the difference ("Spread") between the wholesale cost of money to them and what they charge to consumers (often 1/4 to 1/2 %) as the way to generate most of their profits; or, in some cases, to cover the discount points needed to make the loan viable for the borrower. If the YSP is eliminated, then mortgage brokers will have to charge higher rates (called points most of the time) and fees (often called origination fees) to make the loans. After all, the mortgage brokers can't be expected to work for nothing.

If the YSPs are eliminated, then the fees that brokers will have to charge will be payable at the time of the loan and would have to come directly out of the pockets of the borrower; since, they can no longer be "baked in" to the loan itself (the YSP). The bottom line for many borrowers will be that they will not be able to afford to get the loans that they need, since they will not have sufficient funds to pay a down payment and the loan origination fees. So, the net effect of this noble effort by Congress to save us from ourselves may well be that fewer Americans will be able to afford to buy a house. Yea Congress! Keep up the good work.

You've got to admire this legislative body. It's the same group who brought you the 1-gallon per flush toilet and who dictated the sign on your lawn mower that read "Do not put your hand under the mower while the blade is turning." Maybe we should have a warning sign on our wallets that reads, "Do not open while Congress is in session."

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