Donovan Backs Extension of 'Skin in the Game' Concept

Homeowners and mortgage investors would not be the only ones with "skin in the game" if U.S. Housing Secretary Shaun Donovan's plan for revising the nation's consumer protection laws comes to pass. The secretary of the Department of Housing and Urban Development told the NAREE conference that "fairness" would be a "fundamental principle" that the Consumer Financial Protection Agency proposed by the Obama Administration would follow. Under that heading, he said, mortgage brokers would "owe a duty of best execution" to avoid conflicts of interest between themselves and their borrower clients. In addition, yield spread premiums would be "banned outright" and prepayment penalties would be restricted. And to reward responsible lending, loan originators would be required to retain a vested interest in the mortgages they write. Brokers would be paid "over time" based on the continued performance of the loans they originate rather than at the closing table. At the same time, lenders and mortgage aggregators would be compelled to retain a 5% interest in the loans so they would be rewarded for making good loans and penalized for making bad ones. The HUD secretary said neither he nor President Obama had any desire to prescribe exactly how brokers should be paid. But they "have to have a duty" to provide affordable products. "Putting a borrower in a mortgage (the broker) knew from day one that the borrower could not afford cannot be allowed to continue," he told the conference. "There has to be a chain there to tie some responsibility to the mortgage to ensure that this kind of situation doesn't ever happen again." None of what secretary Donovan proposed is new, but it is the first time the proposals have been adopted by a key government official.