Yield Spread Premium (YSP)
What is the Yield Spread Premium (YSP)?
The Yield Spread Premium is a payment by the lender to your mortgage
broker for having the consumer agree to a higher interest rate then what
is known as par. Par is the interest rate provided by the lender
to the mortgage broker for zero cost. Meaning the broker will
receive no additional (hidden) payment from the lender for the interest
rate being offered to you.
Only mortgage brokers disclose the YSP (and usually only because it's
the law). Both mortgage bankers and banks/lenders do not usually
disclose this fee voluntarily to consumers. Be assured it's still
there. The law just doesn't make them disclose it.
Example of a typical YSP - par for the broker is 6% and the upfront
fees for the 6.0% and 6.5% loan are equal-
- 5.50% - YSP for the mortgage broker is -2% - To receive this
rate it would cost you an additional $6000 on a $300k loan above and
beyond all other fees and is usually charged as a discount or point
fee.
- 6.00% - YSP for the mortgage broker is 0% - This would be what
is called par in the industry: the broker will receive nothing on
the back-end and you would pay no discount points to receive this
rate.
- 6.5% - YSP for the mortgage broker is 2% or more - This rate
would make the broker an additional $6000 on a $300k dollar loan,
payable when the loan closes from the lender to the mortgage
company.
These are some of the more prevalent ways a broker can use YSP,
either to help or hurt you.
- Unfortunately, what seems to be the easiest way to charge this
YSP is for the loan officer to wait until you're deep into the loan
process. Then the loan officer comes up with reasons why he has to
raise the interest rate in order to complete the loan. This can be
one of the dirtiest tricks a broker can pull to try and raise
his/her profit on the loan. The loan officer knows most borrowers
have a fear of not closing the loan on time and the borrower
believes they either don't or think they don't have enough time to
change brokers.
There "are" legitimate reasons as to why your rate
can be raised in the middle of the loan process. Actual and
unforeseen problems with debt ratios, income or cash on hand
verification, credit issues, problems with the appraisal, changing
from one loan program to another. Anyone of these can contribute to
a sudden change to the interest rate you were initially provided
whether or not the interest rate was locked. And, the biggest
reason this occurs is because the borrower over estimates any of the
above or the problem did not show up in the initial paperwork.
- If you're short on closing cost the loan officer can charge a
higher interest rate and use the YSP he receives from the lender to
cover all or most of your closing cost.
- Adding a pre-payment penalty to a loan will always earn a loan
officer a higher YSP.
If you are currently or have dealt in the past with a mortgage
broker, look for the YSP on the second page of your HUD1 Settlement
statement (final breakdown of fees given to you at your signing for the
loan (or closing). Usually, but not always done by a Title Company
or equivalent). On that second page look for Yield Spread Premium
(YSP). This is what you paid the loan officer/mortgage company in
addition to an origination fee and/or discount fee.
Many mortgage
professionals will tell you something like "your not paying this fee,
this is what we receive from the lender for doing your loan".
Don't believe it for a second! The "only" reason they are
receiving this payment from the lender is because they charged you a
higher interest rate than they could have.
The loan officer has a choice when giving you the rate for say a
$300k loan for your particular situation. If he chooses 6% he
makes zero percent on the YSP, but if he can convince you one way or
another, to take 6.5%. You would then be paying an additional 2.0%
of the total loan paid to him by the lender.
That would come out to be an additional $6000 for the mortgage
company, and the loan officer would normally take $2400 - $5400 of that
in commission for himself. It's the loan officers job to make as
much money as he can for both himself and his mortgage company.
If you appear to be oblivious about the process you can bet you're
paying the loan officer top dollar one way or another.