I've said this many times before: The mortgage meltdown and subsequent credit crunch should have surprised no one. Years of escalating home prices created the demand for more affordable mortgage products and the industry responded with various products such as interest only loans, option ARMs and loans with negative amortization.

The subprime market was fueled by insatiable appetite for high yielding mortgage paper on Wall Street, creating a scenario of easy mortgage money for everyone. It was a train wreck waiting to happen.

My last column discusses the blame game. I won't repeat myself. Congress is now considering the "Mortgage Reform and Anti-Predatory Lending Act" (HR3915), introduced by Massachusetts Representative Barney Frank. If passed in its present state, the mortgage industry will completely change. Unfortunately, it appears to me that Rep. Frank doesn't have a fundamental understanding of the mortgage business.

The bill contains three sections. The first addresses steering, which is the practice of directing business to a particular entity that may not be in the consumers' best interest for personal gain. Specifically, the bill calls for the elimination of the so-called "yield spread premium" (YSP). Sometimes called "negative points," this is actually a fee, paid as a percentage of the loan amount, to the mortgage broker. In exchange for a YSP, the lender receives a higher interest rate, hoping to recoup the YSP over time through a higher interest rate.

Rep. Frank considers a YSP to be a tool of steering. While there may be some unscrupulous and unethical people in the mortgage business that push borrowers into loans with higher rates in order to reap a YSP, the notion of eliminating YSP's all together is absolutely akin to curing dandruff by decapitation.

I've been writing this column since 2001 and have written about the so-called zero closing cost refinance program many times. The concept is simple: in exchange for a slightly higher interest rate, usually about a quarter percent, the borrower can refinance his mortgage and pay zero points and zero transactional costs. The analysis is even simpler: if a borrower's current rate is higher than the rate offered with no closing costs, it makes sense to refinance. Any monthly interest savings is immediate because there are no fees to recoup.

Since 1992, my company has refinanced thousands and thousands homeowners, with the vast majority of these folks opting for the higher rate zero cost option. These folks aren't stupid. They choose the higher rate, no fee program for a reason: it's a better deal than taking a lower rate that carries thousands in nonrefundable fees. The elimination of the YSP would prevent independent mortgage companies to offer zero and low cost financing options.

As far as I understand it, big banks would still be able to offer such of programs, but seeing as mortgage brokers account for 65 percent of all mortgage business, according to various internet sites, the availability of these programs would be hugely curtailed and perhaps completely unavailable. The reduction of supply will curtail competition and adversely affect the consumer.

If taken literally, the elimination of the YSP would limit any homeowner to low rate/high fee loan programs. The going rate on a zero closing cost 30 year fixed rate is about 6.25 percent on a loan amount of $300,000, for example. Without a YSP, the highest rate available would be closer to 5.75 percent. The problem is that the borrower would have to pay the outdated "origination fee," usually one percent of the loan amount, plus all the closing costs.

On a $300,000 loan, the total costs would total close to $6,000 in most areas. Simple math will illustrate that it takes between eight and twelve years to recoup these costs in the form of a lower interest rate. The fact is that most folks don't hold loans that long -- they either move or refinance.

Eliminating the YSP would effectively prevent homeowners from being able to take advantage of cyclical drops in mortgage rates.

The first section also addresses licensing for all individual loan originators. I'm fine with this. We need to weed out the crooks and incompetents in this business. But let's hope licensing applies to originators who work for banks, not just brokers. In my experience, there are plenty of inept loan officers that work both for banks and independent brokers.

The second section the bill addresses the ability of a borrower to repay the loan. I almost laugh at the notion, because I have never recommended any loan to a client whom I didn't think could repay it. But unfortunately it's pretty obvious that a lot of homeowners took out loans that they can't intrinsically afford.

This is a tough situation. Rep. Frank said the following: "People should not be lent money beyond what they can be expected to pay back." I agree wholeheartedly. I have found myself in hundreds of situations where I needed to break the news to my clients that they simply cannot afford the house they want. Before the credit crunch and during the easy mortgage money years, I would say this to my disappointed clients: "I'm sure you can find a lender that will lend you any amount of money you want, but that doesn't mean you should borrow it".

Surely personal responsibility and common sense must come into play.

The bill calls for hardwiring underwriting guidelines and ensuring affordability through income documentation and credit checks. Credit checks are essential and are always utilized. But to determine loan qualification through income verification in every situation is short-sighted.

Consider a very common scenario: A retired couple in their 70's have perfect credit, own a property worth a million dollars, have $500,000 in investments and want to refinance their $200,000 mortgage. The problem is that all their income is generated by tax free bonds so their tax returns don't show enough income that would support a $200,000 mortgage.

Come on now, are these folks a bad credit risk? Would this bill prevent these folks from refinancing?

It's important to remember that it's not just borrowers who don't want to default on their mortgage. It's pretty important to the entity who lent the money, too.

You can't standardize mortgage underwriting and require the same rules for each person for one very simple reason: everyone's situation is different.

For refinances, the bill requires that the transaction would need to demonstrate a "net tangible benefit." I'm not sure what this means but some have interpreted it as preventing some cash out refinances that are deemed not to benefit the borrower. How do you gauge such a thing?

I don't know about you, but if I need to take out $10,000 or $20,000 to pay funeral expenses of a loved one, I don't want the government telling me I can't do it.

The last section of the bill deals with expanding the rules of the so-called Section 32 loans, which are loans defined as high rate and high fee. While I'm general advocate of free markets, it's been my experience that loans with high fees and rates are given to folks who have a troubled credit history. I've never understood the concept of lending expensive money to folks who have a history of not paying their bills, so perhaps this section of the bill has some merit. We don't want a repeat of the sub-prime meltdown.

The bottom line is this: Restricting YSP's and requiring universal underwriting guidelines will kill mortgage lending and put a lot of folks out of business. I really don't believe this bill has a chance of passing in its present state, but if it does, mark my words, the national economy will be in much bigger trouble than it already is, and that's no joke.