The scary side of mortgages – Yield Spread Premium in Action
I’m not a mortgage broker or real estate agent. I’m a programmer and like most people not in the business, I have no idea what happens behind the scenes when buying a home, getting a mortgage, going into escrow, or any other real estate transaction process. So when I was hired to develop RateWindow.com I was told about how transparency will help the typical mortgage borrower, but still didn’t truly understand it. So, I went into my personal records and found a closing statement from a condo I bought a few years ago. What I found made everything clear!
I’m pretty sure you don’t know what Yield Spread Premium (YSP) is. It is hidden in most mortgage 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.
I didn’t even see it, until I re-read the statement 3 years later. It was probably mentioned during the 30 day escrow but at that time your head is spinning with all the docs you have to sign and things to do. Worse thing is, I was really good friends with the mortgage broker, and now that I understand YSP better, I will never look at them the same way.
Why is the YSP not even in a debit column?
because, it is not a direct payment. It is carried into the life of the loan, so not only is it a large amount, but it will be compounded by interest over the next 30 years. That alone will triple the amount.
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.
Back to RateWindow.com. Now that I understood YSP better, mind you I’m still a developer, and still don’t understand all the mortgage talk, I was ready to fully jump on board. I’m very proud to be part of the transparent movement now and know that I was the first to develop a web application that turned that $3,800 FEE into a rebate to the consumer.I can only hope for the future an in 5, 10, 15 years I smile when I think of all the rebates people will get with the services I helped make. I think the savings will be in the millions!
Click to check out RateWindow, even if you’re not in the market for a loan, I think you’ll see that it is a much needed service, especially with the current economic conditions of the nation.
In the eyes of a typical homebuyer, what is the lending process like? I'll talk about this in my next blog post.
Why is the YSP not in any column? Is it sort of a kick-back to the broker?
Now that I look at it, I asked the same questions. I think, and again, I’m not a broker, it is not in a column because it is not paid at closing. At closing you write a check for all the debits and since the YSP gets rolled into the loan, you pay for it at closing… but you do pay for it the long run.
Matt – I can appreciate your argument with regards to YSP, and this is a huge debate right now. I’ve been on both sides of the lending spectrum, retail and wholesale. I made the decision to go back to wholesale as a broker in order to increase my product offerings for clients. I’ve always been transparent and I even review the rate sheets with clients – ultimately it is their choice (such decisions as whether or not to pay an origination fee due to corresponding tax implications). However, YSP is to the broker what SRP (Service Release Premium) is to the bank. The only difference is that brokers are required to disclose this – which I believe is in the consumers best interest. Banks do not have to disclose, so there is no way of a consumer knowing what their loan originator is actually making on the transaction. Also, YSP is paid by the lender to the broker and does not affect the total cost of the loan other than the interest rate differential. From the settlement statement you posted above, it doesn’t look like there is an origination fee on there – which means that the loan officer was only compensated through the YSP. You probably could have gotten .25 to .375 off of your interest rate if you had chosen to pay and origination fee (and points are fully tax deductible – on a purchase transaction – the year of the purchase). At the end of the day, YSP is a tool that gives the consumer options. But like any tool, it can be misused. I personally fully explain what YSP is to my clients, how it plays into the transaction, what ultimately the choice that it gives them.
By the way…RateWindow.com is very cool.
You can keep your mortgage friend, a little over 1% for doing a loan is not a rip off. Another different thing is if he did not disclose to you how much and how he was getting paid. In 2005, most settlement statements showed 1% in the front AND 3% on the back for 100% financed, so consider yourself blessed!
@Kyle Williams
In all fairness, it probably was all explained to me, I just had other things on my mind… I remember this condo. It was a flip and I was really more excited about the remodel and potential profit, so the last thing on my mind was mortgage numbers, especially since I was only going to make 3-4 payments… I would assume most home buyers are the same way, thinking about everything but the numbers. So there needs to be a lot of trust between the broker and the consumer…
BTW… I bought the condo for $350K, sold it 2 1/2 months later for $405K… It was foreclosed on this year and sold for less then $200K… ouch!
@Julio Lopez
She let me sit with her and watch everything as she typed into the computer, So I knew that everything she passed on to me was passed to here through the loan origination software.
WOW…YIELD SPREAD PREMIUM. Hey genius that was not charged to you. What right is it of your that
you even know what a loan officer is paid. Please tell me how much do you make? It is none of my business. Right? Please, stop hyping up you web site? There is much more to the lending business than
rates and fees. Oh by the way…We are trying to earn a living and no I do not try and rip anyone off believe it or not.. Yes I am a Loan officer.
Incentives to sell sub-prime loans: the straw that broke America’s back
Banks created financial incentives associated with riskier loans. The riskier the loan the wider the YSP. Therefore, many unscrupulous Loan Officers – in conjunction with banks, investors and mortgage brokers – laid the ground work for the demise of our current economic system.
There was a systematic reward system for lender to “sell” larger YSP loan products even to families with excellent credit scores. Think about it – you would have to be a great “sales” person in order to get a buyer with a 780 credit score to buy a home with a sub-prime loan. Well, the loan officer had a great incentive from the bank to get this sale job done. It was like selling an ice cube to an Eskimo.
Therefore as a consumer, and real estate professional – YSP – was rarely spoken about in any mortgage application process – that I have ever been part of in the last 30 years. But to force one sector of the industry (mortgage brokers) and not the other (banks) is not fair. This goes to show the power of banks’ lobbyist.
I understand need for transparency but as you said in the beginning you don’t know much about the industry and mortgage talk which became very evident in this example. To say 3800 gross commission is a hefty fee is based on what yardstick of measurment? Realtors are being paid 3% of price with little to no risk of the loan or the expense or underwriting a loan. LO’s typically only get half of the commission as there is signifcant cost and overhead to running the lending operations. There is significant compliance work also done on every loan by state and federal gov’t which costs. The BIG risk is that this loan is secured and not defaulted on or the bank could buy back the loan costing ten’s of thousands. Realtors have none of this risk exposure. So again I ask why do you say this is a hefty price. Its the greed of people that are causing this debate. You want the LO to be available 7 days a week, write an approval on a Sat. night and bend over backwards to make sure you get your home but then you want to destroy them so only the buyer wins and LO makes nothing for the work. How does this seem fair or make even logical sense. this is what is driving banks to not lend and get tighter and tighter requirements to make sure no one will default on a loan or bank takes no risk. If they can’t get compensation then guess what you better expect much less service and 20% down because the risk isn’t worth it.
Be careful what you wish for as you just may get it!
@Heywood
A perfect example of what happens when a Realtor gets a little bit of knowledge with out knowing the whole story. Do you know that every financial institution makes money on the back end? If it is a bank it is called a servicing release premium or SRP. However, since it’s a bank they do not have to disclose it! Mortgage Brokers have always had to disclose YSP, but that does not mean that they are earning that money! How do you think they office expenses are paid for? Things like rent, employee salaries, pension benefit’s etc.
You were not ripped off my friend, and I am sure you compared the rate you got with every other lenders. So the lender got paid YSP, big deal! Quit trying to hype your product which by the way is incomplete and misleading. I sincerely doubt you understand the intricate relationship between MBS (mortgage backed securities) and the yield on the ten year treasury. I doubt you further understand how these all relate to what is going on in the market as a whole like a knowledgeable Loan Officer does who subscribes to rate watch like myself. I can lock in my core Realtor’s clients at a moments notice saving them up to .250 on rate verses anyone else and guess what. I will make YSP or SRP depending upon whether I use an in house bank or have brokered the loan out.
This compensation does not belong to the consumer, period end of story. If you would like to be educated on how the financial markets work, I suggest you start doing some research about how mortgages are bought and sold in tranches. Then rated by the rating agencies and sold as mortgage backed securities to pension fund managers around the world.
@Steve Harkness
You make some interesting points in your comment, but perhaps there is a more subtle message, beyond the relationship between MBS and the yield or the ten year treasury, the author was trying to emphasize as he described his journey through a personal loan transaction.
One of the best things about RateWindow is that it insures income for the loan professional who is taking care of the lending transaction. The over reaching effort pushing loan transaction transparency has nothing to do with limiting or preventing loan officers from getting paid. In fact, compensation for the loan officer is prominently displayed on the RateWindow results page for everyone to see. In a complimentary way, the results page makes borrowers privy to all rate and payment choices available, and provides the opportunity for a personal choice regarding the rate and payment eventually assigned to the loan. Best of all, borrowers choice of interest rate and loan officer compensation are no longer a function of each other. Regardless of what choices the borrower makes, the loan officer still receives a reasonable and ethical payment for their services.
The author of the original post feels ripped off not because the loan officer got paid, but instead, because he had no input into the interest rate and payment that would govern his loan. If the mortgage professional gets paid 1 1/2 points to do the loan (an average of what they may make on all closed loans), and the borrower gets to choose their interest rate and payment, what’s the problem? Every fair minded person understands that people should get fair and reasonable compensation for their work. Even further, some are paid much more because of what market influences will allow (actors, athletes, etc). Transparency is the issue, not compensation.
The 2010 GFE and RESPA requirements require the YSP* to be shown as a credit on the new form (a debit if buying down the rate) so by definition under the new requirements the YSP does belong to the consumer. This is not open for dispute because of the new rule. The misunderstanding occurs when we assume that just because the amount of the YSP is going to the consumer as a credit toward closing costs, the loan officer is not going to get paid. Of course they will get paid. Line 1 of page 2 of the new GFE nicely allows for the value of the YSP (or more or less) to be included as compensation to the loan officer. The law was never intended to take compensation from the mortgage professional, and transparent lending through RateWindow follows the same path.
* http://en.wikipedia.org/wiki/Yield_spread_premium