Today’s “Know Your Mortgage” article is going to cover Yield Spread Premium or YSP. This is becoming a hot topic in the news right now because the Federal Reserve has purposed a new rule that would make it illegal for banks to pay yield spread to any loan originator. This rule, if passed will have a very detrimental impact on your ability to get a new mortgage. So in that light, I thought it would be good to explain what YSP is and how it facilitates mortgage lending.

Yield Spread Premium is money that is paid to a mortgage broker, by the bank, for originating the mortgage. The dollar amount (of the Yield Spread Premium) paid by the bank is determined by the rate of the new loan. The third and forth component of the pricing of a new mortgage is the origination and discount points. Both of these are costs paid by the consumer. It is the relationship between all four components that make up the majority of costs of a new mortgage. If you are paying discount points, the broker is not receiving any yield spread. If you are not paying any origination points, the broker is getting paid in Yield Spread Premium. Some of the benefits of Yield Spread Premium are:

 YSP allows the consumer to use other sources besides banks to get a mortgage done.
 YSP allows for lower closing costs because that lender is paying a portion of the closing costs.
 YSP allows for better flexibility on rates.
 YSP paid to mortgage brokers allows you the consumer to see how much money is being paid on your mortgage.

Yield Spread Premium allows for more consumer options by allowing non-bank companies to originate mortgages for the consumer. The largest collections of these companies are mortgage bankers and brokers. In fact, it’s very likely that many of you reading this today got your mortgage through one of these sources. Some of the ways that mortgage brokers and bankers help facilitate the mortgage process is by offering more programs, better rates and fees, and probably a shorter time frame. In addition, because most mortgage brokers are paid strictly commission, they will work harder for that business because they don’t get paid unless they get you into a loan that works for you.

Yield Spread Premium has also allowed for consumers to have lower closing costs and more flexibility on rates. When a loan originator works for a bank, they have very stringent pricing guidelines to follow. A mortgage broker on the other hand has the option of looking around with multiple lenders to see which one has the best pricing.

The other benefit that Yield Spread Premium brings to the table is that the consumer gets to know what is being made on their new mortgage. When you are working with a mortgage broker, Yield Spread Premium must be disclosed from the beginning of the loan process now in addition to on the final settlement statement. What that means is that you the consumer see from start to finish, what a mortgage broker is making on a new mortgage. Banks also have a yield spread premium but they are not required to ever disclose. This does not mean that money isn’t there. It just doesn’t have to be disclosed.

The Fed’s argument against YSP is that it gives incentive for brokers to give their clients worse loan programs because of their own personal gain. And even though, law requires full disclosure about the Yield Spread Premium, the Fed believes that the American consumer is not smart enough to protect itself so YSP must be eliminated. The reality is that many consumers “shop” around when looking for a new mortgage or they work with someone they know and trust. If you have had a bad experience in the past with a mortgage broker, odds are you either didn’t “shop” around or were not working with someone you trusted. If you don’t know any good mortgage brokers, ask a friend. If you don’t have any friends, check out your local real estate association. Any of these sources should be able to provide you with a list of reputable mortgage brokers.

To read more about the new Federal Reserve Board Ruling Regulation Z – Truth in Lending – Closed-end Mortgages [R-1366] check out http://www.federalreserve.gov/newsevents/press/bcreg/20090723a.htm. The purposed rule is currently in its public comment period, so please leave comments!

We hope that you found this information useful and as always, if you would like to see what it feels like to work with a mortgage team that can bring a little sanity to an insane world, give The Kunselman Team a call.