Lisa and Jim's Northern Nevada Real Estate Blog: I heard about new legislation on Yield Spread Premiums ... what is that?

I heard about new legislation on Yield Spread Premiums ... what is that?

Mortgage brokers and Broker Banks can enhance their profits by up-selling you on the interest rate you qualify for on your loan.  A loan broker may talk you into taking out a mortgage for 6.5%, but you aren't aware that you actually qualify for a 6% loan and the broker sold you a 6.5% loan.  Lenders pay Yield Spread Premiums to loan brokers when the borrower pays a higher interest rate than the best he could qualify for.  The higher the interest rate, the higher the payment to the loan broker.

You probably pay your broker origination points for a loan in the neighborhood of 1% of the loan amount. Be advised that the broker can get an additional 1-1.5% of your loan amount for each .25% they overcharge you on the interest rate! That bonus is called Yield Spread Premium (YSP) when it's paid to a loan broker and Service Release Premium (SRP) when by a bank.  The Yield Spread Premium can amount to being a payment to the lender for giving the borrower a worse deal.  Note that in some cases, paying a slightly higher rate and allowing the broker to receive a Yield Spread Premium can benefit a cash-strapped borrower who doesn't want to pay an immediate brokerage fee. The Yield Spread Premium can then spread the cost of the broker's service over the life of the loan in the form of higher interest.  Generally speaking, however, the consumer does not know they've been had by the lender.

Senator Dodd has introduced legislation that will prohibit steering borrowers to more expensive loans when they qualify for lower cost ones.  That will eliminate the practice of giving YSP or SRP bonuses to lenders by eliminating the excessive cost to the consumer that results in the broker getting an undisclosed premium.  His bill also provides for: a. Prohibiting prepayment penalties and Yield Spread Premiums in subprime loans., b. Requiring lenders to assess borrowers' ability to pay their mortgage after a rate reset if they are signing up for an adjustable-rate loan., c. Require lenders to verify subprime borrowers' income with documentation., d. Hold lenders liable for appraisals and for brokers' actions when the broker is paid based on Yield Spread Premiums.  The legislation has been proposed, not passed.

Our Advice:  Know what you are really qualifying and paying for with your new loan.  Loan officers are very crafty when explaining away Yield Spread Premium when you question them about it. Yield Spread Premium is wholly unknown to most consumers so the loan originator never has to answer questions about it. When they are questioned about it, they either: 1. Play dumb, 2. Get angry, 3. Attempt to play down or explain away, or 4. are so caught off guard they stammer and sputter.  Ask away and watch the response.  Hopefully, you will have one of the many honest and good loan brokers in our area and can proceed confidently to funding knowing exactly what you are really paying.

Legislation can't always protect you.  Pay attention when you conduct your business, you have a responsibility to yourself and your family to do so.  Don't just be happy to get a loan - find out what you are getting and why.

Experience is Priceless!  Lisa Wetzel & Jim Valentine, RE/MAX Realty Affiliates, www.carsonvalleyland.com, 775-781-5472.

Comment balloon 11 commentsLisa Wetzel • October 17 2007 12:11PM

Comments

Thank you for the education. This proposed legislations seems to be arriving a little too late for many of the homeowners that have been had by the dishonest mortgage brokers. It will possibly help going forward but it sounds like they are closing the barn door after all the animals are out!
Posted by Christiane Wyckoff over 11 years ago

Great post!  I love the last couple of lines because they are so true, "Legislation can't always protect you." & "Experience is Priceless!"

I think a big thing consumers should do is to ask questions until they fully understand what they are getting into.  Don't pretend like you know what someone is talking about because you don't want to feel dumb.  If you are talking to a professional they will take the time to throughly answer all of your questions.

Posted by fdasfdsafa gegrerbv over 11 years ago

So Lisa how is wrong for mortgage people to be paid yield spread from a lender and not wrong when a buyers agent being paid a premium for showing and pushing a home were the seller is paying a premium to the agent who brings a qualified buyer. 99% of all "sales' jobs get paid on commission and the higher the price, the more commission people make, it is a free market economy. To clear things up, we generally tell our clients how we get paid so that they are aware but to label mortgage people as a whole as being "Crafty" or "Playing dumb" or the other derogatory explanation that you imply is basically saying that the mortgage industry as a whole is not trustworthy which is an extremely slanderous statement.

How is it that Mortgage people are "wrong" for being paid a yield spread while many agents will show a home that is paying a higher split to the buyers agent to entice more showings. Maybe you should be responsible for informing the buyer that "Mr. & Mrs. Doe this is a wonderful house and if you buy it, the sellers are going to pay me an additional $5,000.00 bonus in addition to the normal split".

I don't have any problem with keeping the public informed on how mortgage people get paid, because we get asked quite often and I freely tell our clients on how we can be paid on the front and the back and many times both ways. I then let the client decide how they want to proceed.

Sean Allen
The Mortgage Professionals

Posted by Sean Allen, International Financing Solutions (International Financing Solutions ) over 11 years ago

I would applaud legislation that would help protect consumers. I have been a mortgage lender for over 22  years and I can't believe how many consumers have been charged a higher rate just to make more money.

One way for a consumer to make sure that they are protected is to ask for referreals from a Real Estate Professional or from satisfied clients.  The Real Estate Professionals know who is honest and will treat their clients fairly. People who shop for a home loan from sources that are not recommended to them open themselves up to be cheated.

Posted by Lynne Dewar, Mortgage Loan Expert (Fairway Independent Mortgage) over 11 years ago

Lisa:

This legislation targets mortgage brokers only.  It leaves the banks and the lenders to keep the Y.S.P. they charge.

Those realtors who advocate eliminating Y.S.P., may find you are next.  The next stop is the top of page #2 of the H.U.D. settlement statement.

Y.S.P. is a way for mortgage brokers to get paid for their services without increasing the borrower's closing costs.

There is already legislation on the books which limits Y.S.P. and limits fees and every mortgage broker and every lender they sell to strictly abides by these guidelines.  These are Federal Guidelines.

How would realtors feel if they woke up to legislation that limited their commissions to lets say 3% inclusive of the listing agent and buyer's agent's commissions?  Then, lets say every so often, there is an outcry to cut it back again and again and again. 

WAKE UP!

Posted by » Bill Burress Nationwide Mortgage Originator (» Bill Burress Nationwide Mortgage Originator) over 11 years ago

Most Loan Officers would take this post and get upset about it, not me.  I completely agree (with most of your post), it is up to the Loan Officer to explain all of the options that the borrower has when it comes to fees and YSP.  One thing that I would add to this is that brokers are required to disclose both on the Good Faith Esitmate and of course they are also showing the YSP on the HUD Settlement Statement.  For the cash strapped borrower, charging YSP is a great tool, not only does it eliminate having to charge an origination fee in some cases or cutting the origination, but it also helps when the borrower needs it and the broker can credit some of it back to help cover some of the closing costs.  It is the responsibility of the Loan Officer to explain the fees, including the YSP to the borrower prior to sitting down at the closing table, if they do not, I as a broker make a final call to explain the fees and YSP so that there is no confusion or questions at closing.  Educatating the borrower is not only the responsibility of the borrower but also the broker/loan officer. 

If YSP is in fact eliminated, there will be more upfront closing costs for the borrower, whether it is closed by a broker or banker.  YSP is a good tool so long that it is explained and used properly. 

Posted by Chris Brown (First Federal Bank) over 11 years ago

Lisa,

We are working on a commission basis, just like agents. We can charge an origination fee up front or do a YSP on the rate. So long as it's explained to the borrower, he can then choose which way suits him best. Nothing fancy here.

Posted by Esko Kiuru over 11 years ago

Beware "feel good" legislation. Legislation that makes the lawmakers look all warm and fuzzy to their constituents but accomplishes nothing. Undocumented "liars" loans are one thing, but YSP is a legitimate tool that has been used for years by forthright mortgage brokers (and 99% of them are) often to actually reduce out of pocket costs to home-buyers making the loan more affordable.

YSPs as a financial instrument in and of themselves have never been considered controversial as your post would lead us to believe. What is controversial is how and when brokers and lenders have to disclose their existence and their amount to the borrower. The discount mortgage brokers have to disclose it as a fee but the retail lenders (banks and S&Ls) can build it into the cost of the loan and appear better at first glance because they don't have to explicitly list those fees at all. This puts the mortgage broker at a distinct disadvantage. If mortgage brokers are forced to disclose YSP fees sooner in the process (and I don't think they have a problem with that as the vast majority already do anyway) than institutional banks should too - but you don't see that written into Sen. Dodds proposal.

Follow the money. It's not hard to tell who's actually behind such legislation - the bankers. Yep! The same group trying to take our livelihood away from us REALTORs too! We should be careful what we wish for. "Feel good" legislation could be coming our way next.

 

 

Posted by Jack Pearce, Broker - ABR, ASP, CSP, ePRO, GRI (RE/MAX Valley Real Estate) over 11 years ago

Wow!  Who knew when I blogged about this today I would find such ire from some of the brokers on here!  Thanks for the post Lisa!

 

Posted by Keely Jared (RE/MAX Metro Associates & K2 Property Management) over 11 years ago

Yep, - when the government imposes their laws on any line of business, it's guaranteed to be shortsighted and ignorant. While on one hand, the government pushes banks to lend, lend and lend, - on the other hand it restricts lending by creating bushelfuls of new laws and rules which only tighten underwriting guidelines. It has already come to pass that the average Joe will have a difficult time obtaining a mortgage, - and that's to say nothing of the roughly 45% of our population who carry subpar credit.

I've worked in banks, national mortgage companies and at brokers, - over the course of 35 years. When I started in the business - everyone charged a 3% origination fee - everyone. The main reason these 3 points disappeared, was to benefit the borrower with lesser upfront costs. Eliminating yield spread will only serve to force points charged back to the aleady cash-strapped borrower, thus further restricting their purchasing power.

Personally, I have NEVER hid, or failed to explain yield spread premium, so I do take offense to your all-inclusive, broad generalization.  When explained to customers, no one has questioned the yield spread premium  - and I've explained it every time. Furthermore, professional loan originators rarely, if ever become flustered when any question is asked of them, as it's their job to explain all pertinent information.

Loan originators, especially today, work very hard to obtain new business. Being paid fairly and honestly for the work they do, is the least they expect. Given enough time, our government may run all mortgage companies out of business - just what this country needs is another million or more unemployed. When that happens, our average "Joe" will be forced to visit his bank, where he'll certainly be greeted with 2 or 3 points upfront to complete his mortgage transaction.

Lisa, think before you put your pen to paper!

Thank you.

Posted by Jim almost 9 years ago

Last time I checked it was  fully disclosed for mortgage brokers on the Good Faith Estimate and HUD-1 , most LO's & brokers would agree it reduces the out of pocket closing cost for purchase loans,and keeps the payment affordable which is usually the biggest concern for a borrower.... the payment. more affordable payment equals more qualifications in this hard to qualify market. Sales is about negotiation. Be a negotatior not a cry baby everyone meets in the middle and walks away happy.

 Sure there are abusers but is that not so with every industry?, I think my cable co , bank, credit cards, power co, cell phone, auto dealer, ect break it off in me every month  but the goverment is not doing enough on that end. I personaly think realtors charge way to much at 6%. Maybe Walmart should disclose thier cost on products to customers on the shelf. I think we should pass a law that allows us to know their cost so we can decide what to pay for those items and haggle at the front counter.

 I'm sick of borrowers that hear this crap and have no idea what they are talking about saying " I want a no points no cost loan" There is no such thing as a free lunch we all need to make a living.

However, I do believe borrowers should be educated and have a choice of how they want to be charged, front end or back end with full disclosure.

Posted by chris over 8 years ago

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