Here’s the question…

“My wife and I are in the process of finding a mortgage broker, we’re going to check out the one her brother used. This mortgage broker said that they don’t charge points, so I assume they will make their money from Yield Spread, which is the lender giving her a rebate for boosting up our interest rate. I don’t want to be in the position of paying an extra $30,000 over the life of the loan because the interest rate was inflated by 0.5%

Add On Defined

An add on is a cost to the borrower for risk-based conditions on their mortgage like cash out, investment, FICO scores, minimal down payment or equity, and waiving escrows. The add on is charged as a percentage of the loan amount as a discount point, at the time of rate lock, if you are made aware of it…which is unlikely.

Yield Spread Premium - YSP - Defined

Yield spread premium is easy to understand if you think of it as “the income made by unnecessarily raising your interest rate”.

A loan officer earns is income by arbitrarily raise the rate of your loan over the “par rate” and the income derived is called the yield spread premium. The larger the rate bump the greater the profit.

Bernanke’s new mortgage rules are devoid of any real protection from bad mortgage originators since they conveniently skipped regulating yield spread premiums. The new rules apply to all mortgage lenders and therein lies the rub. If the Fed wanted to reign in mortgage broker yield spread premiums they’d also have to address bank service release premiums.

Great question!

What the average consumer doesn’t know is just how wide-spread of an activity and how profitable the practice of rate bumping to insure YSP or SRP income really is.

If Joe Sixpack actually knew these things one might have a shot at pressuring State legislatures or even Congress to pass laws making it illegal.

Here’s the whole story:

“The mortgage broker that we used to buy our home did not disclose a 2.5% YSP before the day of signing and we have since lost the home to foreclosure. We have all the docs that say what the interest rates were supposed to be, and then the jacked up rates that they presented to us at closing. (I signed the loan docs because I had two days to move out of the residence that I was already living in and was pregnant with a high risk pregnancy and didn’t want the last minute stress of finding living quarters until things worked out.) Do we have any recourse here?”

Mortgage originators tell you your mortgage lock is in force when it is NOT. Lying about your mortgage lock status is a common practice to increase loan revenue or cover loan officer mistakes.

Loan officers are always trying to make the most yield spread revenue on every mortgage. Telling you the mortgage lock is placed but then not actually locking the rate with the wholesale mortgage company allows them to “play the market” with your money.

A Florida mortgage broker found a way to rip-off people he never even met: the home seller! Mortgage broker greed reaches an all time high with this unconscionable scam.

So I was over checking my blog on ActiveRain and ran upon a Florida real estate agent who sparked this post. His comment said a buyer client was told to ask the seller for 6% in closing costs!

Not disclosing yield spread premium is a violation of the Real Estate Settlement and Procedures Act, so it’s a crime for sure. If the crime is considered “fraud” per se, I am not sure.

I’ve compiled a few resources on average mortgage rate data and yield spread premium starting with Congressional testimony from experts and ending with average mortgage rate resources online.

Be sure to read the Harvard Professor Jackson’s testimony if nothing else….

Mr. Olson’s Senate Testimony

HUD’s RESPA FAQ Site

Harvard Professor’s Conclusions on YSP