An ARM That Goes One Way: Down


An Adjustable-Rate Mortgage that only goes down? Sounds too good to be true. But that's what a Virginia startup is promising.

But first, the background. If you've refinanced your mortgage without paying closing costs, there's a good chance that you're still paying for the privilege, in the form of a "yield spread premium" (YSP) that ended up in the pocket of your mortgage broker.
During the boom, YSPs became the lifeblood of brokers' incomes, and provided a powerful incentive for them to refinance customers into new mortgages again and again in order to generate fees.

Borrowers often ended up paying higher interest rates than they otherwise qualified for, and landed in unsuitable mortgages. YSPs became so notorious for sabotaging borrowers that the Department of the Treasury has effectively recommended the proposed Consumer Financial Protection Agency ban them. And consumers aren't the only ones who lose out: mortgage-backed securities investors had to pay for the risk posed by stampedes of borrowers refinancing their mortgages every time interest rates dropped, which wiped out expected future interest payments.

Now a Tysons Corner, Va. company is betting that a bit of financial engineering can reincarnate the hazardous yield spread premium as a win-win for consumers, mortgage brokers and investors alike.