Professor, Harvard Law School

Jennifer Landree

As published in Scotsman Guide's Residential Edition, February 2009.

As yield-spread premiums (YSPs) face greater government scrutiny, some groups have proposed more regulation. Others want to abolish them entirely. We talked with Harvard professor Howell E. Jackson, who studies financial regulation and consumer protection, about compensation practices and the future of regulation and the housing market.

You've been critical of brokers receiving YSPs. What is the biggest problem with them, in your view? Nondisclosure. I don't think anybody defends the use of compensation that's not disclosed. Certainly, there have been cases of firms that have not been straightforward in their disclosure of YSP compensation. Also, [the U.S. Department of Housing and Urban Development (HUD)] has permitted for many years a very confusing form of disclosure described as "paid outside of closing," which most borrowers don't understand comes from them.

Part of the more general problem is consumers just have a difficult time understanding the economic significance of payments that are made on a monthly basis.

How can brokers, legislators and consumers come to a compromise on YSPs and compensation for mortgage brokers? The trend that both the Federal Reserve Board and HUD are looking at is clear disclosures upfront of the amount of compensation that the originator will receive, with the dollar signs in current terms that are clear and agreed to before the borrower is locked into an arrangement.

What problems would you say still exist with how compensation is regulated? The chief problem is how you treat equally different distribution channels: direct lenders as opposed to originators.

It's important that the solution be comprehensive and covers both channels. There are ways of developing shadow-pricing of the wholesale value of a loan that would yield an implicit YSP for direct lenders that could be used to get similar disclosure for all distribution venues. That's the trick, imposing equal disclosures and ethics for brokers and direct lenders, and that's the regulatory challenge that still hasn't been worked out.

The truth of the matter is that [mortgages] are a valuable distribution mechanism. There should be a way to have relatively low-cost origination agencies and broker vehicles, like the industry provides. It just has to be done in a way that consumers understand and that is not rife with conflicts.

What should the Obama administration do to reform and invigorate the housing market? The new administration has to deal with some conflicting impulses. It needs to get home financing going again, and [Fannie Mae and Freddie Mac] are going to continue to play a big role. But we also need to get the private side working again. Whether [the vehicle is] going to be traditional mortgage-backed securities, securitization processes, something more like the covered bond schemes of Europe or something new entirely remains to be seen.

What's your outlook for this year, overall? I hope that we can begin to stabilize the housing markets. It's reasonable to expect that the government is going to have a very large role in that process. But hopefully 2009 will be a year of substantial modifications, with the restoration of more traditional private financing. The backlog of distressed loans has got to be the top priority, and the new financings will come after that.

Jennifer Landree is a Seattle-area freelance writer. For questions or comments, e-mail articles@scotsmanguide.com.