Real World Example of the Yield Spread Premium in Action
June 6th, 2008 | Posted in Mortgage Industry, Ratewindow |Yield Spread Premium (YSP) is hidden in most transactions until the closing statement is presented and home buyers are ready to close escrow and complete the home buying process. Below is an actual scan of a closing statement is which you can see the YSP among all the other fees that are associated with a home purchase.
In this case the YSP was over $3,800, a hefty chunk of change. When talking to the owner this closing statement, they said:
I didn’t even see it, until you brought it to my attention. Since it was never a direct payment, I must have just glossed over it. Worse thing is, I was really good friends with the mortgage broker, and now that you brought this to my attention, I will never look at them the same way. I thought they got all their fees, but now that I know they got this too… Also, why is the YSP not even in a debit column?
If you are unfamiliar with YSP, you can do some research on it at the YSP wiki
An inherent problem with the Yield spread premium is that it’s anti-capitalistic. Typically, the borrower has no idea or does not completely understand how the broker is potentially compensated on the back end and therefore can’t truly price out the service being provided to the borrower. The definition of capitalism is a willing buyer, knowing all the facts and circumstances surrounding a service the buyer is considering purchasing (including how much the service provider is being compensated) makes a choice to use the service provider. Since the borrower typically has no idea or does not understand that the broker could potentially get paid on the back end, they can’t compare terms between brokers.
With RateWindow.com, that $3,800 would have been a rebate to the consumer. RateWindow adds transparency to the mortgage process and still allows the mortgage broker to make a living by providing their services at a flat rate, honest fee. RateWindow provides the consumer with the ability to see what their YSP is, and choose to obtain a higher rate, and therefore a higher YSP (which is rebated to the consumer), or a lower rate and possibly have to bring money to the table in order to get that rate.
Especially where it is not in the debit column I can see how a buyer could easily gloss over it figuring it is not coming out of is pocket.
I wonder if they show it on Good Faith Estimate.
This is simply an irresponsible post. If you understand how YSP works, you understand that the YSP is determined by the rate…. the lower the rate, the lower the YSP. The bottom line is that if the broker isn’t paid by YSP, lowering the rate so that there is no YSP means the broker is going to have to charge points…. they have to get paid one way or another. Saying the consumer could have been saved the YSP is not only incorrect, it assumes incorrectly that the broker is going to work for free. YSP is not a bad thing folks… YSP is a useful tool that enables consumers to pay fewer closing costs / points when the numbers make sense….
Please read up on how RateWindow works before making irresponsible comments. The Broker charges a flat fee which is disclosed up front to the consumer. RateWindow allows the consumer to see YSP and shop rates accordingly.
The brokers that use RateWindow do not work for free.
The consumer can shop rates much better because they see everything including how YSP effects their rates and payments.
As far as this post goes, You would be surprised how many consumers do not know about YSP. We are educating the consumer