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Last May I wrote a blog item called The Yield Spread Premium: A Dirty Not-So-Secret in Real Estate. Now, presidential candidate Christopher Dodd is proposing legislation that would severely restrict lenders from paying yield spread premiums. Sounds like a good idea to me.
A yield spread premium is a payment by a lender to a mortgage broker. It’s not necessarily wrong, but unscrupulous brokers will sometimes steer a customer into an expensive loan in order to receive a yield spread premium from the lender. Dodd’s bill would crack down on such abuses. Two key provisions:
*If a lender paid a yield spread premium to a broker, it would become responsible for the broker’s actions (so it couldn’t claim afterward that it didn’t know the broker was steering customers into high-cost loans).
*Yield spread premiums would be banned entirely for high-cost, subprime loans.
The bill also would ban prepayment penalties, which trap borrowers into high-interest loans even when it would be cheaper to refinance.
Dodd, of course, is a Democratic senator from Connecticut. Democrats in the House of Representatives are working up similar legislation.
BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.