Yield Spread Premium-The Mortgage Industry’s Dirtiest Secret
Author: Rob K. Blake | Date: November 15, 2007 | Filed In: Yield Spread Premium
Yield Spread Premium (YSP) is without a doubt the most misunderstood and highly profitable secret the mortgage industry has kept from the American mortgage consumer.
The government’s own number pegs the consumer cost of the yield spread premium deception at $16,000,000,000 a year
…yes that’s billion, with a “b”! My own figures put it into the hundreds of billions of dollars since the government’s numbers were woefully short-sighted.
The yield spread premium consumer rip-off is so enormous, ubiquitous, and costly, I decided to dedicate an entire Category of our website to yield spread premium articles so I can constantly write on this topic as new figures come out, new legislation effecting it occurs, or any other relevant data appears.
Remember: Yield Spread Premium over-charging is real and almost every lie you ever get told in this industry stems from banks and mortgage brokers seeking to maximize this profit center in your loan.
I’m not going to sugar-coat this…
Understanding Yield Spread Premium is a little difficult. So don’t feel bad if it doesn’t sink in right away. Keep at it until it does.
Read the all yield spread premium articles in the Yield Spread Premium category, do a Google search…anything and everything until the light bulb shines above your head.
Re-read all the yield spread premium articles in this category and on our site until you get it.
Use the Comments Section to ask questions…I’ll answer them all.
The savings for understanding yield spread premium could buy you another house or put a kid through college.
So, it’s worth it!
Let’s just start with a tutorial and answer the basic question:
What is Yield Spread Premium?
Yield spread premium (YSP) is extra profit slipped into virtually every loan (calculated as percentage of your loan amount) which is created only by the loan originator locking and closing your loan at a higher than market rate.
For example, your loan amount is $200,000. The loan officer locks and closes you at 6.5% interest rate. The real market rate…the truthful rate…the rate you could have…should have had… was 6.0%. The spread between the rates yields a premium (another way of saying…money).
Hence the name Yield Spread Premium.
The .5% rate spread on average creates 2.0% of your loan amount as the yield spread premium profit. That means the loan officer made an extra $4,000 (2% x $200,000 loan amount) on your loan in addition to any origination, processing, application, or underwriting fees they disclosed on the Good Faith Estimate or closing statement.
Professor Howell Jackson of Harvard Law School said in testimony before Congress,
“…borrowers are simply told that their loans will have a certain interest rate, and they never understand that the interest rate is higher than it needs to be.”
That’s a Harvard Professor testifying under oath before Congress on his findings after doing a 2 year yield spread premium study.
So if you don’t believe me, believe him!
Harvard professor Jackson’s study on yield spread premium found it’s existence on 90% of all loans and it equalled on average an extra 2% profit in addition to a 1% origination, mortgage broker, or discount fee. Which we can then deduce means 90% of all loans are closed with a rate .5% higher than the market rate.
Is that good to know?
It’s never good to find out you’ve been lied to for the purpose of taking your money, but it sure beats not knowing.
You are all being lied to…and it’s costing you a ton of money in the form of a yield spread premium.
UPDATE 11/15/2007: This week a bill (HR 3915) from Barney Frank’s House Financial Services Committee is going to the floor with provisions limiting yield spread premium income. We have seen this before on other bills and in the end, yield spread premium never gets eliminated. Sometimes I think the politicians just threaten outlawing it so they can put more lobby money in their re-election coffers.
Therefore, you’ll always need to protect yourself against yield spread premiums…. The government is impotent in that area…and there is no better way than witha copy of The Mortgage Advantage…check it out.
Good Luck!
Author: Rob K. Blake
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My husband and I were first time homebuyers and completely neive to the buying process. Our broker charged us 2.85 yeild spread premium on a $174,000 home loan. How do I know how much it has costed us over the last year of paying on the loan?
It says that the kick back from the bank was about $5500.
Lindsay,
To get close to 3 points in yield spread premium the broker jacked up the rate close to a full 1%. So if the rate you should have had was 5.75%…you got stuck with 6.75%….
On a 174,000 loan amount that equates to monthly P&I of $1128.56 instead of $1015.42…or overpayment of 1130.14 a month or 1357.68 for the year.
Over 5 years, that yield spread premium will cost you $6788.40 needlessly…just so your broker could get a “kickback” of $5,500.
Did the broker make any “front end” points like an “Origination or Mortgage Broker Fee” in addition to this yield spread premium income? You’ll see these income lines on the HUD1 closing statement.
Add those income figures to the “back end” figure of $5500 and you’ll get the brokers “total compensation”…
It’s too bad you didn’t find our website prior to closing on this loan, eh?
If these borrowers had shopped for a decent rate then they wouldn’t have gotten hit with the lender getting a high premium back. Are you advocating price controls? Each rate has a price with hundreds of adjustments depending upon the different risk factors. A buyer should be able to shop through a broker for the lowest rate at the lowest cost especially if they have a low risk profile. If you eliminate the premium totally then the wholesaler will be pocketing the yield spread rather than offering it to the customer through a lower rate. A mortgage broker cannot operate a shop on just a 1% origination fee. They need just a half point extra which will keep them competitive with the banks.
David,
I don’t believe if we as brokers vow to our clients not to profit from yield spread premium it means we can’t “compete with the banks”.
As a matter of fact, I believe it’s the exact opposite…show the client the overage the bank makes at their jacked up rate…show them your lower rate…win the deal and their life-long trust…which is really priceless.
The Mortgage Insider
Rob,
I agree totally with you on the trust factor and being extremely competitive in the marketplace. I wouldn’t have been in this business for over twenty years if I had not been. But, if I don’t profit from the yield spread premium or it is outlawed, I would have to price every loan below par and owe the lender. The borrower would have to come up with more money for me to just make a 1% origination fee.
How can I price a loan without a yield spread premium and still make 1%? As you are aware, loans are never priced at par with the thousands of different adjustments. I believe fully in complete disclosure, and offering a fair and competitive product to meet a borrower’s financial and lifetime goals. Eliminating the yield spread premium would have the unintended consequence of directing business to banks and the profit they make is hidden because they do not have to disclose.
David,
Your question, “How can I price a loan without a yield spread premium and still make 1%?”
Leads me to ask you, “Are you a mortgage broker or are you a loan officer that works on a split with your employing mortgage broker?.
If you are the later…working for somebody else..it would be virtually impossible to make 1% yourself without yield spread premium since you have to build in the employers profit too….
Which is why I counsel all the consumers who come to this site for advice to only work with the mortgage broker/owner…since he has the power to make a 1% total compensation deal…a loan officer on a split doesn’t.
As a broker owner for years, I sell at 1% total to my clients..no yield spread premium ..and still undercutting the big bank rate…ie. Wells Fargo, Bank of America, Countrywide Home Loans…by .5%-.75% everyday!
Disavowing yield spread premium profit as been the biggest boon to my business and the single biggest “differentiator” I’ve ever known getting my business on a “customer for life” basis which heretofore had eluded me.
Every mortgage broker could benefit from doing the same…before they are forced too!
Look forward to your reply,
Rob K. Blake
The Mortgage Insider
I just published on this topic, did Find, found your post and included it in my post, together with your URL.
BRILLIANT ARTICLE! We must stop these Capitalist TRICKS!
Regards,
Tabacco
Hi Rob,
If you were locking through Wells on a 30 year and 5.75% was 0.298 and 5.875% was (0.336), how would you price it? As I see it at 5.75% either you have to take a hit or the customer has to pay more in order for you to make a 1.0% origination. Or you could reduce the borrower paid origination at 5.875% but then you are using the yield spread to make up the difference. I am happy in many cases to keep the total gross on a loan at 1.0% but I will use the yield spread to subsidize part of the origination fee or other real costs in the transaction. I am very interested in your strategy as you appear to be so adamantly opposed to yield spreads. Thanks for your insights.
David
David,
I always give my clients the choice letting them see the wholesaler’s rate sheet and then we discuss the pro’s and con’s of both.
I must admit most realize that with the discount point (in your example of .298) being a tax deductible “interest” expense..since it really is going to the bank to lower the rate…they almost always pick the discount point option.
So I get a 1% Origination fee for my work and expertise. The wholesaler gets the discount point for lowering the rate…the client gets a tax deduction and a lower rate….win-win-win.
And for the first time in most of my clients life they were given a choice to pay true “discount points”…points not disguised as discount points, but really were originator points.
Rob K. Blake
Hi Rob,
Thanks for your insights as to how you price a loan and what you offer a customer. Our industry’s reputation has been so tarnished with the abuses of the yield spread premium that your method sounds like a great alternative to allay customer’s fears. It would be a little harder for me as I work in a shop where the split is 55-45, but usually I only gross on a loan less than 1.5. I have always been bothered when I hear other LO’s talk about the excessive fees they have gotten. I like your yield spread premium (unique selling proposition) and I wish you good luck.
Is a yield spread premium the evil of the mortgage industry as you make it out to be? Hardly, the yield spread premium is a very important tool in the mortgage industry. When used properly it can and will save borrowers thousands of dollars in closing costs. By the lender or broker using yield spread premium to reduce cloing costs, borrowers who do not intend to stay in the home for more than 5 to 7 years are the actual winners!
Also, many times when the lender or broker is being compensated by charging a higher rate, they will reduce or eliminate origination or broker fees, therefore saving the borrower thousand of dollars in closing costs or depleting them of their equity.
As of late the Mortgage industry has become the talk of the town as being an unregulated, savage business that has caused pain and trouble for the poor unaware consumer. Isn’t it ironic that, during the good real estate days the finger pointing and blame game was totally absent. I recall vividly how during the 2004 campaign election Bush was boasting about the highest numbers of Americans becoming home owners.
The reality is in ALL industries bad and dishonest characters exist and they will always find loop holes to cheat some consumers.
May I remind you; We live in a society were a doctor gets a kick back by prescribing a certain medication, a car sales man makes commission by charging a higher money factor (read interest rate) on a car lease on top of his commission for selling a car. Stock brokers get kick back by advising clients to buy certain stocks. Pepsi and Coke are selling bottles of TAP water for $1.50 by using fancy marketing. I’m sure it wouldn’t be difficult to write a book on deceptive business practices.
This is part of the territory in a free market capitalist system. So let’s remain objective when singling out one industry or one tool as the cause of many evils.
Sam,
Your “pro” yield spread premium arguments are very typical of industry folks. I’ve heard and debunked them many times on this website over the last 4 years.
Your Point 1 & 2 . yield spread premium off-sets closing costs… and originators “charge less” or “eliminate” their compensation because of yield spread premium .
Not true on both accounts. According to Harvard Prof. Jackson’s study 90% of mortgage include yield spread premium revenue for the originating company. And even when the closing costs are offset, a huge portion of the total origination revenue generated still comes from yield spread premium .
So your contention is NOT supported by the study. And my 15 year experience work for other companies, seeing emails to this website, or reviewing estimates from around the country DO NOT support your contention either. As a matter of fact, the idea that a “hidden” charge like yield spread premium will be less than a “front end” disclosed charge like an Origination or Mortgage Broker Fee, doesn’t even pass the “smell test”.
Read the Study…be honest with yourself, Sam. You know its wrong to raise some one’s rate just so you can make more money….and that’s what is happening.
Do you want to deny that yield spread premium is raising a rate to make more money?
You know, it’s funny, nobody who has every taken the “pro yield spread premium ” stance can ever deny that simple fact.
yield spread premium /SRP is there to make the broker/banker more money. It’s fact. Undeniable fact.
Your Point 3: I’ll paraphrase for brevity - “Other industry’s do it! Why jump on us?”
This is such a sophomoric argument, but it always comes up.
And I’ll I can say to it to give the appropriate answer is, “Sam, if everyone jumps off a cliff, will you jump too.” (syrupy sarcastic tone added for emphasis..haha!)
Oh, in case you missed it….this is a consumer advocate mortgage website…what else would I discuss but yield spread premium and SRP overcharging?
Thanks for stopping by,
The Mortgage Insider
I have a question regarading yield spread premium ,
If I see on my GFE that a lender is paying my broker 1 point and it says (POC) is it safe to assume that that is yield spread premium taking place? Secondly, is it also safe to assume that if this fee was not being paid to the broker I would be getting a lower interest rate??
thx in advance,
harvey
chris,
Yes on both counts…the 1% paid by lender to broker is called yield spread premium and it is only created by the lender receiving a higher than “par” rate.
You got it…
However you should NEVER trust the GFE and believe me, the 1% yield spread premium will grow before closing. Meaning of course, the rate you see today will grow before closing. The old “bait-n-switch” is full force in the mortgage industry.
Be sure to read all the article here on Good Faith Estimates and rate locks to see how to “pin down” the originator to a rate and cost avoiding any last minute bumps to either.
Good Luck!
RKB
Rob:
I would like to congratulate you on being an honest mortgage broker. I honestly thought there weren’t any of you out there. I see clients and friends constantly get put into above-market loans and I have a question about the compensation a broker gets when the yield spread premium is above par.
Let’s assume that on a $400,000 loan, the par rate from the bank is 5.5%, and the broker gets the family into the loan at a 6.5% interest rate (1% above par). What is the yield spread premium on it - is it 1 (as in the percentage points above par), or is it another number? I realize this probably changes from lender to lender, but how much commission would a broker earn if they brought the bank a loan which was 1% above the par rate?
Also - do brokers receive a higher commission from the bank when they bring the bank an adjustable rate loan?
Thanks,
Craig R. Fechter, CPA
Craig,
A good rule of thumb is for every .25% rate increase over par, 1% of yield spread premium income is created fro the broker. So in your example of 1% over par, that’s is 4% of yield spread premium income. As far as the question about ARMs being inheretnly more expensive…not necessarily. The same thing applies: how much rate bump over par therefore how much yield spread premium is built in will determine on the ARMs as on the fixed rate loans the commission income.
Good Luck
RKB
So - the 4% of yield spread premium income, on a $400,000 loan, that would total a $16,000 payment from the lender to the broker? (400,000 * .04)
Yep…$16,000 on a very typical California, Florida, or New York home…not so here in Colorado where I live.
You can see now how profitable yield spread premium is. When Prof Jackson says yield spread premium is the largest source of mortgage revenue and yet most consumer don’t even know it exists…my 15 years in the industry showed me the truth of the statement and that’s when Terri and I decided to shine a light.
I’m glad you’ve seen it!
RKB
That’s amazing - I’ll bet you heard some horror stories throughout the boom of some brokers who absolutely took full advantage of some less sophisticated borrowers.
Just running a quick amortization schedule - 400k loan at 6.75 percent instead of 5.75 would result in an extra 93k of interest paid over the life of the loan for the borrower!
My thought is what must have occurred on a regular basis (since rates were going down continuously for the 4-5 year stretch) - homeowner had bought home long ago, comes in currently paying interest of 8-9%. Broker has par rate of 5.5% and offers homeowner 7%, who is thrilled to get it since they are currently paying much higher. Broker also charges an origination fee along with other expensive closing costs. Broker is probably making 20k on this deal if it’s a 350k loan!
I once heard a broker say that he could make a million dollars per year if he could just process loans the whole day - now I see how. Such an individual would truly be making his or her fortune on the backs of middle America (again, with the amortization schedule, the poor individual would be paying an extra couple hundred bucks per month).
Everything about the yield spread premium is against what capitalism really is - willing buyer, knowing all the facts and circumstances surrounding the service being provided, along with all compensation going to seller, decides to use seller. However, in this case, this is inherently anti-capitalistic since the buyer really has no idea what’s going on on the back end.
You got it Craig.
Just to let you know that every broker makes about 2% of yield spread premium and 1% origination on average for a total of 3%. Both the origination and the YPS are disclosed to the buyer at the closing…but of course, it’s too late at that point.
The banks also receive income from upping the rate but it’s called SRP- Service Release Premium…and due to a legal technically…they are not REQUIRED to disclose…even at closing!
So every loan in this country is either under-disclosed or NOT disclosed at all when it comes to the incentivised income created by upping the rate.
Spread the word!
RKB
Our Loan Compliance Advisory Group is committed to helping “Protect The American Dream.” We are dedicated to helping Homeowners Nationwide, that may be victims of Deceptive Lending Practices.We are open for any suggestions on how we can help. Please contact Joseph Bisogno at (800) 529-7184 or visit our web site at http://www.loancomplianceadvisorygroup.com
Several members of our Loan Compliance Advisory Group attended the “March on Wall Street.” We support the “Save Our Homes/Restructure Loans” important message that Rev. Jackson and his dedicated coalition members are spreading across America. The December 10th rally, one of several across the United States, sponsored by Rev. Jessie Jackson’s Rainbow PUSH Coalition, the National Association for the Advancement of Colored People and the Urban League, was a magnificent well planned informative event.
Yield Spread Premiums, Service Release Premiums, Dealer Holdbacks & Profit Margins: What’s the Difference?
Is home Depot penalized for pricing a gallon of paint slightly higher than its competitor Lowes? Is a car dealer penalized for offering a car for sale at a higher price than the dealer on the other side of town? Is the grocery store penalized for selling a gallon of milk for more than convenient stores? I ask you what the differences are? Where do we draw the line? Do we demand to see the profit in which Harris Teeter is making on the sale of a package of frozen french fries? Do we demand to see the profit margin the auto dealer is making on the sale of each vehicle? Why then, do we unfairly single out and penalize mortgage brokers while giving the mortgage lenders and banks an unfair advantage by not requiring the very same level of disclosure? What is being proposed is tantamount to price fixing, plain and simple - and anyone with even a rudimentary background in economics knows that this does not work.
If someone doesn’t like the price of the mortgage loan that I am offering they are free to secure their financing elsewhere. If you think the price of the car you want is too high at one particular dealer then you simply shop around and go on to the next dealer. If the price of groceries are not to your liking at your local grocery store then you are free to shop elsewhere. What’s the difference. Are we now to demand penalties and transparency from the grocery stores because one happens to profit more than another?
What consumer advocates are asking of mortgage brokers is ridiculous and outrageous. If we open this box, where do we draw the line. Why not destroy consumer choice and the capitalistic system while we’re at it…
RCF,
I heard this false analogy argument a ton of times. It’s a false analogy since providing a mortgage is NOT a product (and there are false advertising, bait-n-switch, truth in advertising laws on the books to protect “product” consumers)…mortgage origination is a service.
So knowing mortgage originators are providing a service…how would you like it if you were told your car repair service was going to cost $400…written estimate confirming the price…then you come to get your car and the price of this service went up to say $800…..rhetorical question of course.
Now that is the proper analogy…
Let’s go once step further and say after you paid the $800, you found out…the extra $400 over the original estimate was pure profit…they didn’t do anything physically “extra” on the car to warrant the extra cost!
They just decided you were dumb about cars…at least enough to be duped and gouged…so they did.
This debate is not about ethical “cost of goods sold” profit margins since consumer don’t have access to wholesale pricing on goods.
It’s about uneducated borrowers being duped by superior knowledged service providers who do nothing “extra” for the “extra” profit made from a hidden mechanism called Yield Spread Premium or Service Release Premium.
This is NOT about “shopping around” since every mortgage provider does the same thing and since the laws are impotent to protect consumers from an “unseen” and legal scam.
If a grocery store runs an ad for $1 - 12 Pack Of Coke…I get there and they don’t have $1 - 12 Pack of Coke. I get a “rain check”. So I get what was advertised. If they try to “switch” me to a different brand…they BROKE THE LAW!
Nothing like that exists- no Federal law, no state statute- in the mortgage industry…not now, not ever!
So let’s not be naive…you are trying to assuage your guilt by offering this specious argument for your continued wrong doing.
Raising a clients rate to make more money…and that is exactly and only what yield spread premium is…is wrong…and you know it or you wouldn’t have written 500 words in your comment.
Become a self-employed broker…originate the loan yourself, take 1% and no yield spread premium…that is the answer…not long-winded excuses.
RKB
Rob: I found this website to be mesmorizing!
My husband and I refinanced our home in July 2007. We were told by the broker that the loan being offered to us had a prepayment penalty as it was a very low interest rate. We have since found out (and had the broker actually admit to us) that the addendum we signed was not a soft but a hard prepayment penalty so we are currently “working” with the broker in getting them to honor their soft prepayment agreement made with us.
During this time, I’ve been educating myself and one major thing that has been brought to our attention is that in the Final Settlement Statement, there was a $13,875 Yield Spread Premium paid to the Peoples First Financial from the Lender.
It was never noted in any of our estimated costs, Good Faith Estimates, or estimated settlement statements. We’ve advised the broker that we have contacted the State of California DRE and have been advised to file a complaint and attach the documentation we have and that we’re also going to a lawyer regarding them not honoring the agreement made with us.
It’s just very irritating that there are companies out there who sleep well at night knowing that they’re out and out stealing from and lying to their clients.
Gigi,
Sorry to hear this happened to you to the tune of $13, 875 of Yield Spread Premium!
You are not alone…it happens on about 90% of all loans…and even if you’d used a bank instead of a broker you would’ve been ripped-off there too.
The only difference is you’d never been able to “see” it because the law is written such that banks NEVER have to disclose their income on the Settlement Statement from Yield Spread Premium like brokers do.
Good luck in fighting your battle…I just wish you’d found our site BEFORE this happened!
Rob,
We just bought a place in California and closed July 17th, 2007. I was looking at my paperwork after finding your website. It looks like the Mortgage Broker received (.75%) POC $2921.25. The Loan Origination Fee was 1.125% $4381.87. This was listed on the final Settlement Statement. On another form…called “Special Loan Instructions” under Mortgage Broker Fee $2,921.25 it states (HUD cannot reference Yield Spread Premium or YSP). I am completely confused - does that mean that more was added to our loan?
Thank-you,
Diane
Diane,
Thanks for posting your question.
This is just another way for the lie to continue. It seems Yield Spread Premium is getting more press these days…so brokers and lender are giving instructions to title companies NOT to reference it on the HUD1 Settlement Statement. It’s unclear at this point at this point if this is a violation of RESPA or not.
Instead of referring to Yield Spread Premium as the POC for $2,921.25…your Settlement Statement is referring to it as “Mortgage Broker fee POC $2921.25.
Some would call that actually a “better” disclosure since it’s actually more understandable by the average consumer. My guess is either your state law is requiring the YSP to be reflected this way at closing.
Don’t worry you didn’t get hit twice with YSP…but of course, you noticed, the broker made 1.125% Origination plus .75%…virtually 2% on the loan…and I’m sure that’s not what you agreed to at the beginning when you were reviewing Good Faith Estimates trying to determine who to go with.
If you’d known he was going to jack up the rate by .5% so he could pocket the extra $2921.25 sticking you with a perpetual higher payment, you’d have sought a loan else where…am I right?
RKB
PS: POC stands for “Paid Outside Of Closing”…so this means in layman’s terms a payment called “Mortgage Broker fee” was made from lender to broker outside of closing…for what?…for being a nice guy…no…for jacking up your rate without your knowledge or agreement delivering a more valuable loan to the lender. That is the one and only reason for a POC from Lender to Broker.
It’s too bad you didn’t find out website back in July….of course, this loan probably won’t be your last, so better late than never.
PPS: Banks get away with doing this and legally they never have even mention it on the HUD1 Settlement Statement…so you’d have never seen it in the first place.
Next time, use a broker, but learn how to impress upon them that YSP rate bumping will not be tolerated…The Mortgage Advantage shows you how.
I am another victim of the dreaded POC. Saw the POC charge on my HUD1, but after running the #’s it appeared not to affect my loan amount or wallet. So I disregarded it. Your site has educated me and it is clear the POC will affect my wallet for 360 months to come!! The broker was paid 1% POC so I know I was hit with an interest rate 1/4 pt above what I deserved . The rate is still very good, but the 1/4 pt will cost me about $700.00 a year. NOW I KNOW…thanks
FL Snowman,
Yep, about 90% of mortgage shoppers get nailed with the POC creating rate bump. You are right, sadly, your rate bump will cost you about $700 or $21,000 over the 30 years of the loan.
But it’s worse than that really, when you factor because of this lie you were never offered the opportunity to “pay discount points” to drive the rate down. Rate bumped loans creating YSP as a POC are by definition, not being sold with an opportunity to lower the rate.
If you had been given the opportunity to pay a small discount and lower the rate another .25%…now your “lost opportunity” equates to $42,000 …or .50%…well you get the picture.
RKB
As a mortgage professional, I want to make some YSP, and this does not make me evil. I offer a fair price, for a service I offer. I charge .5 on the front and .5-1 on the back. I am a Coorespondent Mortgage lender, and I do not have to disclose any ysp. And why should I, the customer has the right to shop me, which they do, and I still win them over. Because I offer a service. And I am good at it. I get loan closed, usually pain free, in a very quick manner. So, I deserve to get paid for my services, especially when I have to split my fees with my company. This business is quite expensive, for us. License fees, Credit fees, Fannie Mae/Freddie Mac fees, Point or Encompass application fees, leasing, phones, internet, shall I go on….it cost a lot of money to do this job.
And, does everyone have to disclose their profit on a particular loan. NO. Services or merchandise….do you walk in to a store and ask “what is your profit on this”. Or walk into a Insurance agency and ask the same question…no, you don’t….and we invest a lot of time into what we do…many, many hours, phone calls, emails…..etc….a lot goes into most real estate closings….
Bottom line, I believe many good mortgage professionals are penalized and should not be….I, provide a service and I do a very good job, steering the customers into the best loan possible…..and I deserve to get compensated…and the one compensating me is the customer at which I am helping…..
Fred,
Wanting Yield Spread Premium doesn’t make you evil…it just makes you a liar.
And I say that without any judgement or emotion…you lie to make more money….
Let’s just be honest about that…
Can you at least be honest enough with yourself to admit you make money by lying about the mortgage rate to your client?
You admitted as much above…but I don’t really think you get it.
Maybe this will shake some sense into you…you lie, the client gets a higher rate than had you not, you make more money.
Those are the facts…and they are undisputed and irrefutable.
You say you “win them over”….sounds like you hide 1.0% of the cost in a place they can’t see it…Yield Spread Premium….showing them a “false” cost of only .5% where they can see it.
Pretty easy to “win them over” when you don’t tell the whole truth!
Typical ‘banker’ rhetoric…”I’m worth it.” “They can shop around if they want”.
If everyone was paid what they think they are worth…hamburgers would cost $100. And if the clients could effectively “shop around” without being lied to everywhere they go…then that argument would hold water.
But since neither of those things are true…consumers get screwed…and you are doing your part…to hide how you make money off of the system setup to pay you more if only you don’t mind lying about the rate.
And you clearly don’t have any problem with that…
If you really had faith in your “service”, you’d show your 1.5% compensation you get as a clearly visible cost…as an “Origination Fee” and let the “your worth” be decided by the client…
RKB
First, I do not lie. I am not a liar.
The constant blitz of, “your a liar, you are taking advantage of, your cheating”, from you, from the media, from outsiders, is getting old….I do the right thing, and I always, always get repeat business….that has substained me thru this rough time we are in…..
So if you want to call me a liar, go ahead…I can not afford, to change the way I do things because people like you and Rob have a problem with it…are some people abusing, I know they are, I have worked for them and with them….but I have never been them….I had sales manager, order us to sale 2% on the back….told us were losers if we could not sale….well, I guess I am a loser…because, I never got 2 on the back….because that is not fair…but to add .125 to a rate, to keep the customer by not telling him this, and raising his payment only by $8…to feed my kids….I think it is worth is…I never lie, I never ever tell the customer, you will not find a better rate….but, I do tell them you will not find a better SLO. I guess you do provide a voice against people like my old sales manager, but people like me get caught in the crossfire.
Mr. Fred Jones:
Wanting to make YSP does not make you evil, but you’re disguising your cost of providing a service to the consumer - why do you do this? So you can increase your compensation w/o providing additional services and you know the consumer would refuse to do business with you if they knew the amount you were making on a loan.
When a potential client comes in to my firm, we sit down and tell them, it will cost you x amount of dollars to have your taxes or audit done - that way, the consumer can make the capitalistic decision of, “Is this service truly worth my money?” Since your compensation is hidden on the back end, the consumer realistically has no idea how much you’re being compensated for the service you are providing and can thus not make a capitalistic decision.
If you proud of what you did, and you truly thought that your service was worth the money, you would fully include ALL your fees upfront and allow the consumer to determine if the service you were providing is worth the compensation you are receiving.
Craig,
To add…. RESPAS has a document, maybe just in NC, that fully explains YSP…and what it does to RATE…and the customer has to sign it….so lets put the responsibility on the customer as well, Craig.
Fred,
In your first post you said, “I charge .5 on the front and .5-1 on the back”
Now, you say, “to add .125 to a rate, to keep the customer by not telling him this”
To get 1 on the back, you’d have to raise the rate by at least .25% and sometimes .375%.
You really are having a lot of difficulty telling the truth…
You do realize there is such a thing as “lying by omission”…another way of saying not “telling the whole truth”…if you are not telling the client about a lower rate he could have had…you by the omission definition…lying.
Don’t hide what you do behind “disclosures” …you know without a clear discussion most clients have no understanding what the “disclosures” really mean…just because a client signs a disclosure doesn’t mean he understands it….it’s what I call a “non-disclosure disclosure”.
I know you have to put food on the table, but you have options. Sell a No YSP loan at 1% origination fee…giving the client an instruction on what YSP really is…and why you are better.
You’d be surprised…you’d feel better and you’d make customers for life.
RKB
Fred,
As I am reading the post that you put up….you appear to be getting really upset for something you seem to believe that you are right in (regardless of the word liar). Why justify your position if you truly believe that? Please consider what you are saying as this website is being witnessed by who knows how many people and it could even be your clients.
Diane -
Rob,
Big deal you charge points and don’t take YSP… I get YSP on almost every loan. Yes, I get paid for my work. Doesn’t everyone? And yes they know what I get paid because it’s listed on the HUD-1!!!
If you are happy with the work performed…who cares what I make.
Most people SHOULD pay a point as it usually makes sense. But most people have listened to bad advice and refuse to pay. Of course you try and help them but most won’t listen.
Brent,
First, let’s get the terms correct…a No Yield Spread Premium broker doesn’t charge “points”…he charges an Origination or Mortgage Broker Fee…in my case 1%.
The term “points” is reserved for actual lender paid compensation that goes strictly to reduce the interest rate over the long haul. It is also the only closing cost that is tax deductible…so it’s important to use the correct terminology.
Second, the argument “I should get paid for my work”…is a non-starter. Asking a question everyone will agree with, is intellectual cowardice and it belays your real feelings about your ability to defend YSP creating rate bumping practices of yourself and loan officers in general.
The question isn’t should you get paid (as you know)…the question is should you get paid twice! And should the client pay your fee once as a “closing cost” or should he pay in perpetuity, as a rate increase? (Most everyone, even mortgage neophytes, know the answer to that one.)
A 1% payday via a fully understood method…a disclosed Origination Fee shown to the client on the Good Faith Estimate and on the HUD 1 at closing, is my submission as the only ethical way to operate.
A 1% payday as stated above….plus, another 1% or more in the form of a hidden, misunderstood, method called YSP…that only occurs when the rate is increased…is 2 paydays per loan…and is standard practice by loan officers all over this country.
Or…another very common structure to folks like yourself who promote the supposed “No Cost Loan”…
A 3% or more in YSP so you can pocket a 2% YSP commission leaving 1% to cover the actual closing costs is the norm in the “no cost” world…either way you get there ..you’re getting paid twice…and the client is suffering with a much higher rate because of it.
All the other “pro yield spread premium” arguments are debunked above or throughout the website.
RKB
Hi,
I was just wondering. What if the broker is employed by the Lender. Ie. A Wells Fargo Representative in a local WF office in my town got me the best deal on a rental home I own…hands down beat numerous other brokers’ offers.
I am now about to refi my primary, but came across your board and got to wondering. Is there a Yield Spread on an internally done loan if it originates in a brick and mortar location that has the lenders name on the door?
Matt
Matt,
If he was a Wells rep…it was a bank loan…not a brokered loan…and it wasn’t the best deal in town….you just thought it was. Not your fault really, since you didn’t know about YSP rate bumping until you came here.
Bank loans all have a rate bump too…but legally they never have to disclose it, so you’ll never see it on a Good Faith Estimate or HUD1 Settlement Statement.
After 15 years, I’ve never seen a bank loan that was “cheaper” …a better rate…over a “par” broker rate.
Of course, to get the “par” broker rate, you must know how to shop…getting a handful of estimates from a few brokers doesn’t cut.
You have to know who to call, how to “talk their language”, and have access to “par” rates (ie. our daily rate podcast) to know who lying….and you must know how to lock when the time comes.
Once you know this every banker rate will be at least .5% higher than you can negotiate on your own.
Our BUILD System walks you through the process step-by-step, if you’re interested…
Thanks for stopping by,
RKB
Rob,
Thanks for the quick reply. I haven’t read the entire post but do you do loans and if so how could I contact you off board either via phone or email?
Matt,
We focus on “teach a man to fish” rather than “giving a man a fish”.
Read the website and gather as much info as you can or just invest $50 and get a step-by-step guide…either way…
As Nike says, “Just do it”.
RKB
I can’t believe Fred’s response to these message being posted! He says he needs to get paid for the job he does but I always believed that that was what the Broker Origination Fee was all about. I our case that fee was $3,880 which I think is a pretty good pay check to get per loan processed (even when you substract the other costs of doing business he listed). I wanted people to know that according to the California Dept of Real Estate, it is law that the YSP be disclosed at least 3 days prior to the final docs being offered to the client. If this isn’t done and they just appear in the final settlement HUD (as ours did) then the broker has violated the law and you can file a complaint with the DRE who will go after the broker for this.
Thanks Gigi,
To recap..for those of you who didn’t read it above.
Gigi’s loan had an Origination Fee of $3880…as she said a pretty good “paycheck” for one loan.
But her loan also included a YSP of over $13,875 as well making the total compensation (Origination + YSP) on the loan $17,755…OUCH!
Even though this is an “outside the norm” YSP…norm being about $8,000 on a loan this size…it is a perfect example of how YSP is slipped in without full disclosure or client understanding or agreement.
Thanks for commenting Gigi..
RKB
Rob:
Again, I’ve been following this conversation for a couple of months now and I’m fascinated by this insight.
Question about the banks - the banks that charge YSP - do they actually fund the loan then sell it, or do they simply service it like the mortgage brokers and get one of these wholesale banks to fund it?
Craig Fechter, CPA
Craig,
Banks call their profit from rate bumping “SRP” or Service Release Premium. By Federal unlike mortgage brokers, they NEVER disclose this either on the Good Faith Estimate or on the HUD 1 at closing. All banks close and fund in their own name whether they service the loans or not.
Closing the loan with their own name with their own money affords them the legal cover NOT to disclose rate bump income. So many once brokers, converted their operations to a more “bank like” operation by obtaining sizable lines of credit so they too could close / fund the loan in their own name, bundle the loans up at the end of the month, and sell to the secondardy market…paying back their credit line to begin again clean the following month.
So one must be really careful to work only with a ‘true broker’ …one who DOESN’T close in his name…this is the only way the law kicks in and shows you any rate bump income…regardless of what you call it.
RKB
Hi Rob: I would like to know how the YSP is paid out to the broker. Our broker is telling us it’s paid over the term of the loan, but our current lender is telling us that it was paid at closing in one lump sum. Could you please let me know?
Thanks, Gigi
Gigi,
It’s a lump sum at closing to the broker. Look on the HUD1 closing statement on line 810, 811 somewhere in there…you’ll see an entry call Broker Rebate YSP (POC) $***.***.
That’s the lump sum your broker got paid at closing for delivering a “higher than par rate” to the lender who will benefit over time collecting articificailly higher monthly payments.
RKB
Rob: Thanks! That’s exactly what I needed to know. Do you know if , being that they are a form of “points”, if they are tax deductible like points are?
Gigi -
No the lump sum YSP you see on your HUD1 are not considered “discount points” so that number is not tax deductable. However, the only way that lump sum got there was by increasing your rate which in turn creates a greater monthly interest expense…you do get to write that off at the end of the year assuming this is your primary residence we are discussing…hardly a consolation though…
RKB
The issue is “negative points” ie points paid by the lender to obtain a higher interest rate. By right, these “negative points” should be paid to the borrower for accepting a higher interest rate. This is the opposite of “positive” ie discount points the borrower pays the lender for a lower interest rate.
For a broker to keep these “negative points” instead of passing them on to the borrower, is just outright theft. The borrower earned the “negative points” by accepting the higher interest rate. “Yield Spread premium” is just a fancy word for theft of “negative points” by the broker.
Hey Mike,
I couldn’t said it better myself.
Thanks for stopping by,
RKB
I just closed on my first house. My mortgage broker verbally and with the Good faith Estimate promised me an origination fee of 1%. Since she was an in-house mortgage broker working with my real estate agent, I thought she would be truthful. At closing, she presented the actual charges with a $4500 added for yield spread. At that point, I was backed into a corner and really wanted the house so I signed everything.
My question: Is there any ethics involved in this occucpation that makes this wrong?
No, Paula, I am afraid there is no ethics that counter-act the typical way mortgage rates, costs and terms will be disclosed.
You have to protect yourself…It’s buyer beware in the worst way.
Good Luck!
PS: Our book, The Mortgage Advantage will help…
Like Rob, I discuss how much I am charging up front with my client and come to an agreement up front, then honor it. It matters little to me whether it is as orignation fee or YSP. We try to do the best for each situation. It bothers me little that others charge excessive YSP. It does bother me that some folks don’t have to disclose this or only do it at the end when it is unlikely to stop the deal.
If everyone had to disclose this up front it would put everyone on equal footing. Then you could choose your business model that you feel best working with.
Now here is how low the real estate business has gone. Many real estate brokers have created “ABA’s” with lenders which allows them to share in the lending profits legally. Because there is now an extra partner (real estate brokers) the loan officer tends to increase the cost of the loan so they can make a living. Realtors are sometimes paid bonuses for bringing their clients to the in-house lender (this is illegal but happens anyway). So when your realtor suggests using their in-house lender, remember there is probably a reason for this that will cost you in the long run.
Builders do this too using incentives to encourage you to use the in-house lender which allows them to recoup the incentives.
Finally, what really causes consumers to get into bad loans is the general lack of financial education most loan officers have. Getting in the wrong loan program costs consumers much more than paying an extra 1/4% on a loan.
Like most things in life the consumer is better off finding a financial sales pro who they can trust and build up a longstanding relationship with him/her. As long as consumers are willing to trust their biggest financial decision to someone on the other end of a 1-800 line or internet site or even someone at a bank (ask the mortgage person how much finance background they have at banks if you want an eye opening experience) the consumer will get into bad loans.
If I am told that the YSP will not exceed 2.5% of the loan amount, for a 308K loan, equaling $6930 and that there are other fees required, such as processing fee -$400 - and “other” fee -$600-. Is this a red flag? This is a great site and I appreciate the valuable information that you have made available to us through it.
Thank you.
GYK,
I’m going to assume you’ve read every article on YSP and know that the only way they get 2.5% in YSP is by sticking you with a higher rate.
Now the question is, “How much higher?”
Let’s believe for a minute when they say they will only get 2.5% they won’t actually sneak in 3% or 3.5%….and how would you know if they did?
For them to get 2.5% they will have to raise the rate about 1% full rate point.
Let’s do the math. I’m going to assume this is a refi and you have 2 options…roll the $7,000 of costs in the loan or let YSP pay them.
Non-YSP Adding $7K Costs to $308K: $315K @ 6.25% = P&I $1939 per month.
YSP Covers Costs Balance Stays: $308K @ 7.25% = P&I $2101
A difference of about $200 more per month every month on the YSP method even with a lower balance.
Hold the YSP loan for just 5 years and you’ve paid $12,000 for should have cost $7,000.
Hold it for 10 years and you’ve paid $24,000 for the same $7,000 of costs.
In the inflationary economy we are in rates will do nothing but go higher, so you could have this loan for a very long time. Heck, we are already in a housing and banking slump that could last years…even a decade.
Get a 30 year, fixed rate loan, roll the costs into the balance, don’t play into their hands with YSP, and get the lowest rate possible. That way you’re positioned best for the rocky road ahead.
Yep…there are red flags alright!
RKB
PS: If you don’t know where I got the 6.25% rate on a 30 year fixed loan…we publish that rate daily on our Real Rates Daily Page.
PPS: By the way YSP of 2.5% on $308,000 is $7,700, not the $6930 cost figure you mentioned. Why are they telling you you’ll still have some costs to pay, when they are pocketing an extra $770 right there? My predictions is the YSP will grow…probably at the closing table when it’s too late to do anything about it. You need to find an ethical, local, mortgage provider who doesn’t play these smoke-and-mirrors games with YSP.
Good Luck!
How do we protect ourselves from YSP? Thanks.
Michelle,
First you read every article on this website about YSP.
Second you learn how to shop correctly for a mortgage. The best way to do that in the shortest time possible, is download a copy of our shopping system call The Mortgage Advantage.
Shameless plug I know…but it also happens to be true!
RKB
I have been getting educated about YSP. I discovered a YSP on my Good Faith Estimate and HUD1 settlement statement. On the Good Faith, it did not indicate what it was, on the closing settlement statement, it indicated that it was 1.3% ($2349) paid from lender to broker. I suspect it was an illegal kickback for behind the back rate boosting. As I understand it, this is illegal. How do I find an attorney experienced in this?
Dave,
YSP is not illegal. It’s so common almost every loan includes it in one form or another.
Read this post,
Is Yield Spread Premium illegal or will it become illegal?
I am refinancing a 223,400 mortgage. I have a 750 credit score and they offered me a 30 year fixed 5.0% rate with YSP of $2,200 or 1.75%. An origination fee of $1,675.50 and processing fee of $450. Then it said down below “total ysp, points, fees, and commission of total loan is 3.10%. Is this not good?
Yes…not knowing how to find, interview, negotated with, and hire a local, ethical, professional mortgage provider is sure to end in loan with terms you don’t understand at rates much higher than you qualify for…and any loan with YSP and a Mortgage Broker or Origination Fee is clear evidence you - like virtually everyone I’ve talked too- need help developing these skills.
Learn more …click here.