Scapegoats

Legitimate compensation or an illegal referral fee (kickback) - really two existentially different, and diametrically opposed concepts! - each claims reference to the yield spread premium (YSP). An entire class of financial institutions serving the consumer is being held up to public opprobrium over the legal practice of receiving YSPs from a lender for assisting in the negotiation and origination of residential mortgage loans.

The class of financial entities we refer to, of course, is mortgage brokers.

The level of scorn and malign commentary has gradually reached a fevered pitch, where certain consumer advocacy groups, politicians, heralded economics professors, and some professor-politicians alike now willfully call the YSP a kickback. For a very long time, however, they viewed the YSP as a vital, functional component within the broader context of mortgage loan originations.

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Incompatible Nomenclature

Linking the nomenclature of "yield spread premiums" with "kickbacks" is an attempt by various parties, including the main stream media, to sway public sentiment toward viewing YSPs as inherently, adversely affecting the borrower - and, by extension, implying that the mortgage broker's receipt of a YSP from a lender is somehow a kind of sneaky, underhanded act.

A New York Times editorial recently inveighed that the "first step must be to outlaw the kickbacks" and "the most clearly unethical form of payment is the so-called yield-spread premium."

These assertions amount to inferring that the YSP is a prime causative agent of the mortgage meltdown crisis, and specifically the subprime defaults, because brokers had allegedly "steered" borrowers to inappropriate loans that paid higher yield spread premiums.

This allegation is really part of the on-going "blame game" that has saturated the economic environment for the last two years. In this circular firing squad, the last one standing (rightly or wrongly) takes all.

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About the Author: Jonathan Foxx is the President and Managing Director of Lenders Compliance Group, a mortgage risk management firm specializing in all areas of mortgage and lending compliance.