What is a yield spread premium? Yield Spread Premium or YSP are fees paid by the mortgage lender to a mortgage broker in return for the delivery of a loan that carries a higher interest rate. The higher interest rate is the interest rate above the par rate. A par rate is a rate at zero points. Points are expressed as a percent of the loan. Each point is typically one percent of the loan amount. One point for a $300,000 loan is $3,000.In other words, YSP is the money paid to the mortgage broker. This is one way mortgage brokers receive more money for each loan. The mortgage broker will quote a higher (than par) rate and in return receive money back from the mortgage lender. In this case, the lender will pay the broker points for booking the borrower into a higher interest rate.The Center for Responsible Lending says, “The effect of YSPs is to steal equity from struggling families. Not all loans with YPSs are abusive, but because they are permitted and easy to hide, unscrupulous brokers can make excessive profits without adding value to borrowers.” Ain’t that nice?Conversely, lenders charge the points to the borrower for rates below the par rate. For example, borrowers will pay points when they buy down the rate. The excess points charged by the mortgage broker go to the lender so that they can receive a lower rate.Yield spread premium is a major issue in the mortgage industry. Some interest groups call them “illegal kickbacks” stating yield spread premium is a referral fee from the mortgage lenders to the mortgage brokers. Other critics charge that mortgage brokers steer their clients to lenders who pay yield spread premium so the broker can reap bigger fees. There are some brokers who “price gouge” unsuspecting borrowers. However, mortgage brokers don’t need YSP to price gouge borrowers. The mortgage broker can simply charge more points to the borrower.According to the Department of Housing and Urban Development, yield spread premiums serve a purpose by helping to reduce closing costs. In return for a higher interest rate, yield spread premium allow borrowers to pay lower fees at closing. This option helps low-income borrowers to be able to buy a house without having to worry about the huge closing costs. The majority of loans with yield spread premium, the fees are used to offset the borrower’s closing costs. The mortgage broker pays the borrower’s closing costs with the YSP. The difference is what the mortgage broker earns.Borrowers are not aware about the yield spread premium until they sign the loan documents. The broker is not required to disclose the amount until the HUD-1 Settlement Sheet is prepared which is a day or so before closing. To avoid a surprise closing, ask for a good faith estimate. The good faith estimate should include all transaction fees – direct and indirect – and the specific services earning those fees. Don’t be afraid to ask questions if you are unsure of anything on the good faith estimate. You should be able to shop from broker to broker and compare total fees and rates.
And remember, when you’re refinancing – you can walk away. Just because you’re at the closing table doesn’t mean you owe anyone anything. Don’t put pride or loyalty in the way of your family’s financial freedom. Have the broker or the closing agent explain everything clearly to you before you sign. If they can’t, tell them you’ll have to wait until they can before you sign anything else. Even if you have second thoughts later, make the call – you’ve got three business days (Saturday IS a business day in some states) to exercise your rights of recission. Thirty seconds of clear thinking can save you 30 years of buyers remorse and higher expense charges.