Mortgage brokers may be flustered by new rules limiting how much they can make on loans, but the restrictions might be a positive for all residential lenders overall.
A new report from Moody's Investors Service said the Federal Reserve's rules on loan officer compensation are likely to reduce mortgage defaults.
The rules, which take effect April 1, essentially ban yield-spread premiums, which are paid to brokers or LOs who make loans with higher interest rates, often in exchange for lower up-front costs.
"We expect rates to be lower as a result of the elimination of commercially motivated overcharges," Moody's analyst Gregory Bessermann wrote in a recent report. "Lower rates should result in lower payments, which would translate, all else being equal, into lower defaults, a credit positive."
Defaults also could fall as a result of borrowers being placed in loans they are more likely to afford. "We believe the prohibition of steering will enhance customers' ability to pick products that are more suited to them," the report said. "Previously, loan originators could encourage a borrower to take a mortgage with unfavorable terms or unnecessarily risky features in order to bolster their own compensation."
Additionally, Bessermann said he expects lenders to pay origination fees in the form of commissions rather than having borrowers pay them in points and fees, as the new rules no longer permit both the borrower and the lender to be charged an origination fee for the same loan.
One thing that remains unclear is what happens when securitized loans originated after the rules go into effect fail to comply with the regulations. Moody's said it is looking into whether potential penalties could lead to losses to holders of mortgage-backed securities.