These guys are nuts. HR 3915, called the Mortgage Reform and Anti-Predatory Lending Act of 2007 is set to completely wipe out all the bad people in the mortgage business. Thank goodness we have a Congress in the first place, right? I mean, anytime there's a problem then some lobbyists start making sales calls to get things right.

A specific part of the resolution is aimed at Yield Spread Premiums, or YSPs. More specifically HR 3915 would make a YSP illegal.

"Hooray!" yells all the goofy consumer groups and "Hooray!" yells all the people who don't understand the function of a YSP.

What will happen if indeed Reps., Frank, Miller and Watt get their bill through Congress is it will keep otherwise good, honest people out of home ownership by making buying a house even more expensive than it already is.

How's that? What's the connection between homeownership and a YSP? Making a YSP illegal will make mortgages cost more.

A YSP is a function of an interest rate and is an amount wholesale mortgage lenders give to a mortgage broker. If a 30 year fixed rate is available at 6.00 percent with one point and no origination fee then a consumer could expect an interest rate of 6.25 percent with zero points and no origination fees. Conversely, for a lower rate the consumer could elect to pay more out of their pocket and get 5.75 percent with two points instead of one.

The consumer gets to choose. Not the federal government. At least not yet. For the record, I am not a mortgage broker and this bill won't affect me like it will affect a broker. But it's still an idiotic bill that will hurt.

How do people think mortgage brokers can offer a no-point, no closing cost loan without the YSP? Do you think brokers work for free? A no-point, no origination fee loan pays the mortgage broker with the YSP so the borrower doesn't have to pay the broker's commission. There's a tradeoff to be sure but nobody's hurt.

On a $300,000 30-year loan at 6.00 percent the monthly payment is $1,796. But that 6.00 percent rate also costs you one point, or $3,000. But what's that you say? You'd rather keep that $3,000 and put it into your kids' college fund?

No problem, take the slightly higher rate of 6.25 percent and pay no points. You keep the $3,000. Yes, you got a higher rate but your payment only went up to $1,847 for an increase of just fifty-one bucks.

Your monthly payment went up but you'll long make up for it by investing it somewhere else, like in that college fund.

That's what a YSP is folks, it's a function of the rate. The rate is indeed higher but you as the consumer get to spend your $3,000 as you see fit. The YSP has been beaten up so much by reporters who don't k now any better and consumer groups that darned sure don't know any better. But just say, "Y-S-P" out loud and you can hear the shrieks.

You could run over grandma in her wheelchair with your gas-guzzling SUV and get less reaction.

Guess what else? If YSPs are eliminated, it will affect the poorest the most.

If someone is trying to qualify for an FHA loan and is having a hard time coming up with down payment money and for closing costs, the mortgage broker could give them a higher rate instead of coming up with more money.

Instead of a 1 percent origination fee on a $200,000 FHA loan at 6.00 percent the mortgage broker could quote 6.25 percent with no origination fees and save the borrower $2,000. If the borrower didn't have $2,000 then there's no deal.

No new home, no Realtor commission, no attorney fee, no appraisal, no title insurance, no homeowners insurance, no trips to Home Depot, no nothing.

The homeowner couldn't buy the house but hey we sure nailed that YSP thing, didn't we?

YSPs have been twisted in their definition and yes, consumers pay a higher rate for a YSP but that should be a consumer choice. Pay $3,000 for 6.00 percent or pay 6.25 percent and save $3,000? By getting rid of YSPs your government has made that choice for you. Again.

Technically, YSPs are additional compensation the lender pays in exchange for someone taking a higher rate loan. There's no denying that but YSPs by themselves are not this evil "closing cost who must not be named" thing.

HR 3915 will without argument make housing less affordable and will raise the bar yet again on homeowners by making buying a house more expensive. HR 3915 is a bad, bad idea.

Who thinks up this stuff, anyway?

Published: November 5, 2007

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, a veteran Mortgage Banker, successful Real Estate Consultant and author of Your Guide to VA Loans, Mortgages 101: Quick Answers to Over 250 Critical Questions About Your Home Loan, Who Says You Can't Buy a Home!, and Mortgage Confidential: What You Need to Know That Your Lender Won't Tell You, is a former columnist and Contributing Editor with San Diego-based Mortgage Originator Magazine. Reed is President of CD Reed Mortgage Bankers, Austin, TX and is a Past President of the Austin Mortgage Bankers Association.