Just for laughs, ask your mortgage broker what the yield spread premium (YSP) is on the loan he is doing for you and watch him squirm. Or better yet, go over some of your old settlement statements and see exactly how much money your broker may have made on your last loan without your knowing it.
What you find might either surprise you or sicken you, depending on the integrity of your loan officer. That’s because while YSP is a term that is completely unfamiliar to most people, it is one part of your loan that you really need to know about.
Simply put, the yield spread premium, or overage, is the cash amount the lender is willing to pay a broker for any loan that he delivers that was locked above par.
Par is the rate that the lender offers for free and is the lowest rate available without discount points. A loan officer receives a YSP payment simply by closing a deal that was above par for that day. This is what is known as getting paid on the back end, and frequently it is not disclosed to you. But to your loan officer it is nothing but gravy.
This may be great for your loan officer, but it’s bad for you because you receive the higher rate that makes the YSP possible in the first place.
In practice it works like this:
When a customer calls a mortgage broker looking for a loan, the interest rate that is quoted is entirely up to the loan officer. That’s because in truth there is no such thing as a single rate for that day. In reality, a loan officer has maybe seven or eight different rates he can quote, depending on the program.
One of these rates is the free rate. That is par. It does not have to be paid for and the broker receives no YSP. The other rates available to him, then, are either below par or above par.
Below par rates are those that are under the current market and must be bought by the borrower with discount points.
Above par rates, on the other hand, are those that are higher than the market. And because these higher rates are more valuable to the lender (higher rates = more interest paid), the broker receives a cash payment or yield spread to bring them in.
For instance, on a given day the par rate may be 6%. But on that same day a broker may quote the rate to a prospective customer as being 6.25%, thus earning himself a one-point bonus from the lender. (Some jokers will push this even further, sometimes earning as much as 4% on the back end!)
To the borrower, of course, it means a higher rate than what was really available. And over the course of the loan that extra interest can be costly. A rate that is 0.25 % higher on a $400,000 loan will cost the borrower an extra $732 per year or some $7,320 over ten years.
But the reality is that your loan officer couldn’t care less, because that extra 0.25% earns him a $4,000 legal kickback from the lender at settlement.
These kickbacks, of course, provide loan officers with strong incentives to charge borrowers a much higher interest rate, if they can get away with it.
In fact, many loan officers will actually quote the par rate in hopes that the market will eventually go lower. They simply wait to lock your loan above par when rates drop, picking up a YSP payment in the process.
The flip side of this is that sometimes they are wrong. Instead of falling, rates actually rise. When this happens they simply lock your loan at the new higher rate, offer you some lame excuse, and hope that you won’t walk out on your settlement.
But it’s not just the brokers that play this game. Lenders do it, too, and are just as likely to abuse it. The difference is that brokers must disclose these premium payments at settlement, while lenders for some reason do not have to make this disclosure.
Even then, the practice is not all bad news. Honest lenders will make such payments known to their borrowers and in some cases use some of these funds to cover closing costs.
Regardless of how those premium payments are ultimately used, they are the one aspect of your settlement that your loan officer usually doesn’t want you to know about. It the reason why you didn’t get the rate that you were promised, and it’s one of the reasons why your once charming loan officer suddenly gets so tense at your settlement.
But if you are brave enough to look at the seamy details, it is all there. You just need a magnifying glass and a dictionary to find it. So much for full disclosure.
By the way…..According to Foreclosures.com., California foreclosures increased 94 percent last year to 157,417 homes, as homeowners struggle with fast-rising home payments and a slow-selling market.
Nationwide, almost 971,000 foreclosure filings were reported last year, 51 percent more than the 641,000 in 2005, according to the annual report.
Mortgage Matters will return next week.
Wishing you happiness, health and wealth,
The housing bubble has popped, but the banking debacle has just begun. Email me your mortgage questions at firstname.lastname@example.org.