Yield Spread Premiums -- FHA & Conventional Mortgages -- Why the uproar?

Politicians are wanting to step in and squash the yield spread premium (YSP) that is paid to brokers by offering higher rates. I am not here to debate politics and what is right and wrong, but to give the true understanding what YSP is used for and how it can help the borrower when purchasing or refinancing a home.

Yield Spread Premium known as YSP is defined by wikipedia as the cash rebate paid to a mortgage broker based on selling an interest rate above the wholesale par rate that the borrower qualifies for.

It becomes a balancing act when a loan officer has to defend the reasoning behind how they make money, when the consumer can assume that the loan officer makes more money if they see the YSP on the good faith estimate or on the HUD settlement sheet. It becomes worse when that consumer now shops for his or her mortgage by trying to compare YSP's. This method in my opinion is ludicrous and just plain retarded.  By disclosing the YSP just confuses the mortgage process.

Question : Would you select a doctor or a criminal lawyer by what they charge?  How does the disclosure of the loan officer's profits affect the price that the consumer would pay for that loan?  Very simple, by knowing the profit, the consumer is able to negotiate better.

What's been the hottest topic of lately? That it's unfair that the broker has to disclose the YSP. What gets me is that you just don't see it on the bankers side. Which could lead you to believe that mortgage bankers are cheaper. A lot of the hype is that many brokers don't disclose YSP on their inital good faith estimate, even though they have to by law. And then it's later seen on the closing settlement statement. This is where the client becomes angry and figures that the loan officer is trying to get over on them. What would solve the problem?  Just allow the broker not to disclose the YSP.  But congress wants to eliminate the YSP on the brokers side.  This could make it more expensive  for the borrower.

Let's take a peak, comparing 2 different lenders, not making a difference if it's a banker or a broker. Example : LENDER A :  If their rate was 5.75% and they were charging 1 pt with $500 in fees. The YSP was 1 pt on the back. LENDER B : Their rate is 5.625% and were charging 1 pt with $500 in fees.  But the YSP was 1 1/2 pts on the back.  Who has the better deal?  LENDER B has the best deal for the client. So what if they made more money.  Unless we put an exact fee per loan to be made there is no transparency.  I truly feel that if you get the loan officer to reduce their fees tremendously, that it would seriously affect your service that you would receive.

Conclusion : Katie Marchione said in a comment in another post, "When you buy a $50 shirt at Macy's, don't you think that there is profit built into that price?  You are paying for a product or for a service and the providers deserve to get paid for it."

I admit, that there are loan officers that take advantage of the consumer. But there are many borrowers out there that don't have the money for all of the closing costs. And the lender can use the YSP to also pay for certain fees. And if the yield spread premium is taken away from the broker, borrowers will end up paying for more in closing costs because the lender needs to make a profit.

 

Comments

[Melina Tomson]

Okay,
This was thought provoking.

There will always be people who take advantage of others. The issue that comes into play in the real estate market (agents and mortgage brokers alike) is that there is such a lack of trust on the part of consumers. Entry into these fields is so easy, that it makes it too easy to provide poor service to clients with little to no personal consequences. This is just a reaction to the market and I think more of a public perception proposal rather than a necessary change.

[Jeff Belonger]

Melina, Yes, there will always be those that take advantage of others. My biggest concern is that more loan officers will try to educate the avg. consumer to also shop by YSP. As I mentioned, this is ridiculous. Why add confusion to the whole process.

The consumer needs to look at the fees of the lender, not all fees (since they are 3rd party), but the lender fees which are in lines 800 to 813, the rate, and the term. Making sure that the program and term is the same. This is my opinion and I think many loan officers add the YSP element into the picture, to distract the consumer, so they miss what that lender is truly selling. Again, just my .02. thanks for you input. jeff

[Thesa Chambers]

Jeff - personally, I do not care what the lender makes - I want the best product and the best service my client can get... and if that means the lender makes more - then everyone is a happy camper :)

[Katie Marchione]

Jeff,
Great example with the Lender A and Lender B.
It's what's best for the client that counts. However, us loan officers deserve to get paid as well! Anyone who provides a product or service deserves to be compensated!

I am the first to admit that I love a great deal, but I also realize that I still have to pay something. I think that you are exactly right with this comment: "I truly feel that if you get the loan officer to reduce their fees tremendously, that it would seriously affect your service that you would receive".

What incentive does a person have to give you great customer service if they aren't being paid for their work & time? Take, for example, the kids that are getting paid $6 an hour at your local hamburger joint. Compare them to the waiters/waitresses who work in fine dining. Where will you get better service? Of course at the fine dining estabolishment! It's not a perfect example, but it really isn't all that different.

"You get what you pay for".

[Jeff Belonger]

Thesa..... well, we should care to a certain extent, what some make. I know some that make as much as they can, which can hurt the client.

But the best product and very good service should always be what we strive for, making sure the client gets the best. thanks , jeff

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Katie..... I agree that we deserve to get paid. And as I explained to Thesa, service, making sure that the client gets the best product/advice...assuring that predatory lending is not part of the formula, is crucial.

But we do seem to agree that those deals that are negotiated to the bare bone, will usually not receive the best of service. Especially when it could be a demanding deal. I have seen these fall apart often. Thanks for the compliment and for your input. jeff

[Damian]

The whole issue of YSP is a joke. YSP has value, it can lower the costs associated with a loan when funds are tight and borrowers will be hurt if it is taken away. The playing field isn't level as banks have ysp but typically call it overage or SRP. Transparency isn't bad as long as it is equal to all parties in the profession.

[John]

Jeff, Good post. I have been on both sides of the fence. Broker and Banker. You are very correct in that we should all be treated equally with respect to YSP/SRP. I have real estate agents leave there current mortgage brokers because they felt that the YSP was too high. Even though the rate and fees were the same as a competing bank. Most real estate agents do not understand how YSP works and because they see a large amount on the HUD going to the broker they perceive this as "being greedy" I personally do not believe YSP should be disclosed. If the Consumer is provided with good service and a fair rate it should not matter what is made on the back. I believe that the industry as a whole will have a weeding out process of both mortgage originators and real estate agents coming very soon. Let's make it a little tougher to get a license. Let's start requiring more continuing education. Let's act like professionals and maybe just maybe we can turn this industry around. I'm almost embarrassed these days to tell people what I do and I have been in the industry for 16 years.

[Jeff Belonger]

Damian.....

We agree... sure, do I like to have the upper hand when trying to compete for business, yes. Do I think YSP is a joke? Yes... because so many loan officers can explain it correctly and they try to tell the consumer that banks are hiding it. Again, all I need to compare is rate and lender costs. If mine are lower, then YSP doesn't count in my opinion.

Thanks, jeff

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John.....

Thanks for the compliment. I agree.... just get ride of the fact that YSP needs to be disclosed. I am beating out the broker because my rate is the same, but my fees are less. Most of all, I just took two deals and my rate was an 1/8% higher. But it was how I explained the whole process and how quickly I got back to the client that made the difference here. That should be the true value. As you mentioned, professionalism. Thanks for your input...

jeff

[Rogan McGillis]

Although I don't like being haggled to much, I understand. When I go to buy a car I know what the invoice price is, or atleast I should, so it's not that different.

Granted, there is already a bit of a profit to the car dealer already in their invoice price but it's basically the same thing. You know how much they paid for the car and you don't want to pay much more.

YSP/SRP is basically the same.

The thing is, if you really do a good job and you know where to go for the best deals on each specific scenario then you should be able to beat most brokers who just use 3-4 lenders and don't really care. And if you are really good at what you do then you should hopefully have enough business to turn down those deals that aren't going to make you what you think your worth.

that's my thoughts anyways...

[Jeff Belonger]

Rogan.....

I am going to have to disagree on your statement that YSP/SRP is basically the same as knowing the invoice at a car dealership.

At the car dealership, all they are selling is a car. In regards to mortgages, especially if I am a banker, I am taking a huge risk than a broker. We don't sell the loan until the investor buys it off of our warehouse line. Besides, I have more control than a broker. We underwrite the loan in-house, close it in our name, and then sell it after the client has signed on the dotted line.

In regards to beating out brokers... bankers and brokers pricing is almost the same, depending on the investor or on how greedy your company is before you give pricing to the consumer. The bottom line is that we get the money from the same place when all said and done.

So, in my honest opinion, there is no need to compare YSP. If that lender gives an honest good faith estimate, that is all you need. As I have mentioned, if my GFE is cheaper than someone else's, but my YSP is better, that client is still getting the better deal from me. Sure, could they even get a better deal if I gave some of my YSP back? Yes... but people fail to realize... in many cases, I am using that YSP to pay for some of that borrowers costs.

And those that try to compare APR can also hurt them, which I wrote about. I still think the true and best comparison is the good faith estimate. As long as the loan officer is giving you one true to form and accurate... no bait and switch on the rate.