If you’ve been following the news about mortgage reform, you might have come across the term YSP, or Yield Spread Premium. YSP is simply a rebate paid by a wholesale lender to a mortgage broker for originating a loan. While some (usually well-meaning but ignorant) folks rant about how lenders use the Yield Spread Premium to steal from poor dumb consumers, the truth is that consumers are pretty sharp when it comes to shopping, YSPs save many people money, and most people who get loans from brokers (85% in fact) choose to make use of them.
Here is how YSP works: When a mortgage broker brings in a loan, he or she saves the wholesale lender time and money. The lender doesn’t have to market or advertise, network in the community, maintain a local office, meet with the borrower, analyze the income, assets, and debts as well as future financial and lifestyle changes, help the borrower choose the best loan, complete the paperwork, and document the financial package. The broker who does all this doesn’t work for free but is not an employee of the lender either. So brokers get paid one of two ways: they either collect fees from the borrower (that’s you and me!), for example origination and application fees, or they get them from the lender in the form of a rebate. Borrowers can choose to pay the fees to the broker out-of-pocket or they can opt for a slightly higher rate and the lender will cover the broker fees for them. And 85% of borrowers opt to have the lender pay the broker fees. It’s their choice.
But this is hard to visualize. So here’s an example:
Bob Borrower wants a $200,000 loan with a 30 year fixed rate. His broker shops around and offers him the chance to get a 5.75% rate while paying 1 point ($2,000) plus about $1700 in other fees. Or, Bob can choose a 6% rate and pay NO fees. Bob finds an online mortgage calculator and puts these figures in. The 5.75% loan carries an APR of 5.92%. The payment is $1,167. The 6% loan, costing $0, has an APR of 6% and a payment of $1,199, a $32 per month difference. So Bob can choose between paying $3700 upfront or paying $32 a month more. While the 5.75% loan has the lower APR, it takes almost ten years before Bob makes up the $3700 by saving $32 a month. So you can see why most people choose the so-called “no-cost” loan.
How can Bob KNOW that he’s not being taken advantage of? Simple, when it’s easy to compare rates and programs online. Bob checks online and finds another lender who wants 6.125% for a no-cost loan — he knows he’s getting a fair deal. It doesn’t matter what the wholesale price is; by comparing offers and taking the best one you get a good deal — no different than shopping for clothes or tires (aka threads and treads).
There are plenty of things to watch for when shopping for a loan — the APR, the fees, terms like prepayment penalties, teaser rates, amortization — but YSP doesn’t mean “You’re Swindling People” and yield spread premium isn’t anything to worry about.
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(10 votes, average: 5 out of 5)
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Is the yield spread premium (YSP) cash rebate to the mortgage broker based on an interest rate above what the borrower qualifies for? In looking around it seems many borrowers will have loans with a certain interest rate and they never understand that the interest rate is higher than it needs to be. I guess if you shop around like you said you get a fair shake or at least in comparison you do.
Well, the broker has to get paid and it’s either they get paid by you upfront or over time, Right?
Good question, June. Most consumers are under the impression (due to fast and loose journalism mostly)that borrowers “qualify” for rates. Rates are driven by financial markets. The “going rate” is also referred to as “par” pricing in the industry. That is the rate you could get if the loan originator did your loan for free. So you can see that asking lenders to work for free is kind of unrealistic, and characterizing charging for their services as some kind of “scheme” is misleading. The choice is yours. You can opt to take a “par” rate and pay your fees out of pocket, you can choose a higher rate and pay less or no fees, or you can choose to pay more and get a “discount” rate.
The easiest way to shop for a loan is to ask several lenders for their rates at no cost, 1, and 2 points. Each point is one percent of the loan amount. Remember if the lender also charges other fees for underwriting, documentation, or processing to add that in when comparing costs. A loan comparison calculator can show you what your payments would be at various rates, and you can decide if the monthly savings are worth bringing in the upfront costs or not.
Personally, if it’s going to take more than 3 years or so to make up the difference I opt to go no-or-low cost. You never know what the future holds, and if you sell or refinance then you just wasted money buying down your rate. In addition I can usually find better uses for that money like investing or paying off higher interest debt.
Hope that helps!
“Anonymous” is correct. Unless lenders all decide to work for free, loan originators have to be paid for their work. What makes pricing different from one lender to another is:
1. How efficient the lender is — office space, Internet presence, marketing, in-office or centralized operations, and data processing capability can affect the lender’s profit margin.
2. Temporary market conditions — sometimes a lender needs to get in loans to keep employees busy, or increase market share in a particular area, even if it doesn’t profit from them. In this case it might offer funds at below market rates for a very short period of time. Conversely, a lender may be overburdened with business and may raise rates above the market to scale back on the number of loans in its pipeline.
3. Economies of scale — large lenders may be able to take advantage of centralized systems, which is useful in very busy times. Also, bigger banks or brokerages may be able to earn less per loan while maintaining profitability. On the other hand smaller shops may be able to cut back and run “lean and mean” when times are tougher.
Whatever goes into the pricing of your mortgage loan, shopping and research (I know, sorry!) are still the best ways to ensure getting the best of the “going rates” quoted.