Yield Spread Premium: The Mortgage Industry’s Dirtiest Secret
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.
Numbers from the government 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.
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 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?
Here is our straight forward definition:
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 equaled 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.
Therefore, you’ll always need to protect yourself against yield spread premiums…. The government is impotent in that area.
Good Luck!
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.
UPDATE 4/4/2011:The Federal Reserve finally laid down some rules concerning Yield Spread Premium compensation. In short, they did not outlaw compensation to come from YSP, they simply said a mortgage company or loan officer could not derive income from both places…directly from the consumer (ie. Origination Fee) and YSP simultaneously.
Well, that rule was supposed to go into effect this month, but mortgage companies sued, and the judge but a stay on the rule!
As I have said, many times…You must protect yourself against YSP overcharging…the government is too weak to help.
Author: Rob K. Blake
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Tags: False Advertising • Mortgage Scam • Yield Spread Premium • YSP
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WOW! As a loan officer for past 11 years I see the final nail in the coffin for all of us “rip off” artists trying to make an honest living.
The federally chartered banks have been lobbying congress for years in an attempt to take every buck away from the mortgage broker and soon the mortgage banker possible. Everything they have pushed for over that last 10 years has come to pass. Now they want the Yield Spread Premium to be taken away too.
Not all loans have a loan “origination fee”. This means that a loan officer will be reduced to charging an origination fee on every loan. This will cost the consumer more up front. Yes…they will get a slighty lower rate, but it will be far from .5%! This will also hurt the already terrible purchase market. Most of the homes I see being bought are in the very low price range by people with little or almost no money. How are they going to pay additional fees?
The new regulations (if passed) state that the loan officer cannot make more money based on loan size or type. He or she will have to be satisfied with a flat fee paid by their bank. The origination fee cannot be split with the loan officer either so why bother charging it at all other than to satisfy his or her employer.
The average loan officer only originates about 2 to 4 loans per month in the current market. How in the hell are they going to survive on almost no money per loan? But then about 80% of the originators are already gone anyway.
I agree there have been and always will be “bad apples” out there taking advantage of someone. Good luck making that go away altogether.
I have always practiced responsible lending and have always treated everyone with honesty and respect. That is how I have out lasted most of the people I started out with in this business.
Here’s an idea…..why not just cap the total allowed earned in percentage points that a lender can make on a loan? This is how it is with FHA and VA.
On top of all of this, all loan originators now have to be licensed in states that are part of the new NMLS (Nationwide Mortgage Licensing System). This costs about $1200.00 per person, and on top of that pay an additional annual fee, you have to pass a state and federal exam and enroll in a continuing education class each year. This is not all bad mind you, but!..guess who is exempt from all of this. Only the federally chartered banks. Go figure!
I guess I’m fed up with having the dirty finger pointed at me when it was the big players like WAMU and Countrywide and God knows who else that did the most damage. They are the single greatest offenders and committed the most fraud in the industry. And even though they were both being investigated by the FBI, as soon as they were purchased by….you guessed it…..federally charted banks…it all seemed to just go away.
Oh! and how about our federal government and Wall Street for doing their part too. They were the ones that set the ball in motion and ultimately caused this mess to happen.
They are the ones that ultimately caused the collapse of the housing market and continue to perpetuate the declining market, pissed off the consumer and in the end pointed the finger at the loan originator. WHAT A CROCK!!!
Nothing our goverment has done to straighten this mess out has helped the consumer one bit. It has made the federally chartered banks fat and happy though. But hey….isn’t that the way it works anymore? A hand full of people get stinking rich and the rest of us get screwed.
Again…We didn’t invent the game, but most of DID (and do) play by the rules that your federal government and Wall Street set forth.
Well I guess that’s it. Just so you all know, I am leaving the industry at the end of July. I cannot take it anymore. The hoops I have to jump through, the resposiblities I have and the liabilities I have to endure if everything is not exactingly perfect is just not worth the stress anymore. The pay in this business is terrible as it is and I cannot imagine what will happen if all an originator makes is a small flat fee per loan.
Hum….sounds like someone could have actually created a machine that will just generate additional fraud and in the end, hurt the consumer even more.
Good luck to everyone. You’re going to need it.
Edward:
You are so right on! My husband and I once had a mortgage brokerage but had to shut it down because wholesale lenders were not loaning monies to Brokers anymore and the YPS was being taken away by the govt. We now are an employee of a Mortgage Banker and we have to pay fees to them in order to do that which is better than being out of business.
We too are responsible loan officers and cut the origination fee many times to help the consumer with closing costs.
This will ultimately hurt the consumer as fees will go up and origination fees will always be charged.
This new law passing that does away with LO’s getting part of the YPS will put a lot of LO’s out of the business.
Then the consumer will not only the banks to do business with.
What a monopoly!
Good luck with your new business. I am happy for you. Sadly we are too old to start over. I am just hoping that Social Security will still be here for us.
I could not agree more. I’m not sure what Rob Blake’s claim to fame is, but there’s a good chance he’s not a Loan Officer. Maybe he’s the President of a Federally Chartered Bank. I’ve been an LO for 10yrs, I’ve passed all my State and Fedaral Licensing and all of my continuing Education. And Yes, I’ve paid for it out of my own pocket, just like most LO’s have. My company does not pay me a salary nor do they pay for my health benefits and now some brilliant person in our Congress wants to take away from us the only way that we can make money in our profession? That’s hard to swallow. I write 3-4 loans a month. I make around 1ysp on each and do not charge points. Like many other LO’s, I do not get any piece of the application fee, processing fee or underwriting fee that my company charges. The rates are pretty competive from bank to bank. If I decided that I wanted to make 3ysp on a deal, it wouldn’t be very hard for the borrower to realize that the rate I was offering was higher than other banks and I’d probably lose the deal. Could I push it to 1.5ysp?…Maybe. Is a LO making 1.5% on a Loan that much of a crime that we have to have our livelyhood stipped from us? Will the banks that we work for give us a salary and pay for benefits now? I doubt it, and if they did it would be a 25k a year salary. How come nobody cares that the Realtor can make up to 6% on a closing? If I chared 6pts on a deal I’d never work again. How come nobody screams about the Title Company that charges $2800 on a 100k Loan? How come its ok for New York State to Charges up to a 1.25% State Tax Stamp on every loan in NY? You could purchase a $200k home today and pay over 2k to NYS, then if you refi next year, you could pay that 2k all over again. How come nobody questions the “par” rate that the Lenders offer us, already have been bumped up so the bank makes additional YSP even on a “par” rate?
There are plenty of things that led this Country to where it is today. Its hard for me to believe that taking a Loan Officer’s ability to make money on YSP will put the economic status of America back on track. Maybe we should look at the salaries and spending in Congress? How about regulating the Million dollar salaries of high ranking Bank Officials or the bonuses that they give to each other? No, let’s go after the group that is trying to make a living on the front-line. The group that has to adjust to and deal with every law and guideline that is put before them. Let’s tighten the strings on the Loan Officer, make them walk a tightrope on every loan from start to end, and now lets stick it to them and take away their only way to generate income. The American Dream.
Thanks Rob Blake. Enjoy your next paycheck, cause you’re trying to take mine.
Well done very good answer. To understand YSP you have to understand how mortgage industry function in general. Brokers are not the only entity that receive YSP, bankers do also receive it when they sell and or pool their loans which normally they share their projected profit or YSP with the originators wither those originators are their loan officers or a brokers the only difference between the bankers YSP and the brokers YSP is that the brokers YSP is received up front and disclosed to the clients and the bankers YSP is received after closing and not disclosed to the clients. What ever is going on are ridicules the same people created the crises, they solving it now, from regulators to government officials specially the one made millions of creating these toxic products and then accept a government jobs to fix it. The whole thing is exactly like if a company produced a bad baby formula caused many deaths and we leave the company who produce it but we put its owners and officials in the prosecutors sets to prosecute the vender who sold it unknowingly, imagine if this happened in china, I think we should gave the Chinese this fixing job after all they are directly or indirectly owns most of our loans.