MCP Help Blog

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.