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.


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