YSP, the rest of the story.
Readers of this blog are likely the inquisitive sort, and have heard from more than a few consumer web sites about Yield Spread Premium. It’s popular these days to link the terms YSP and evil, greedy, or corrupt, but the reality is that YSP is a part of nearly every loan, from good brokers and bad. Your level headed understanding of why it exists will help you negotiate the best deal for you, regardless of wether or not a YSP exists on your loan.
Let’s start at the beginning. A mortgage broker is like an independent insurance agent. They work with several different lenders, each catering to different client bases. Some lenders specialize in high loans amounts, some in FHA & Fannie Mae “vanilla” loans, some in higher risk borrowers. Most of the time, many different lenders are competing for the same borrowers. Just how aggressively they wish to compete can vary from day to day. For this reason, most lenders publish a rate sheet at least once every day. A rate sheet is just a big price list of all the loans the lender offers and what they cost. Lenders charge the broker (and therefore the borrower) for lower rates on any particular program. Lenders also PAY brokers for higher rates. They pay even more for even higher rates. This payment from the lender to the broker is the Yield Spread Premium. To understand this better, lets look at a snippet from a random rate sheet.*
This is a very simplified example of what a broker is looking at. For this example, these rates are for a FNMA (Fannie Mae) fixed rate loan. This is the most common and basic loan in the industry. Two different terms are available; 30 years & 15 years. Lets look at the 30 year fixed loan in the left square. The first column is the interest rates that the lender is offering. The next four columns show how much the lender will pay/charge for these rates, depending on the lock period. A broker can choose from a 15 day lock to a 60 day lock. The loan has to fund between the time the broker locks, and the lock term expires. The most common lock period is 30 days, so let’s look at the third column. As you can see, I circled the Par Rate at 5.875% (0.000). The Par Rate is a wash. The lender neither charges nor pays to lock in this rate. If you wanted a 5.75% interest rate, the lender is charging 0.625 points. 1 point equals 1% of the loan amount. On a $100,000 loan amount, 1.000 equals $1,000. In this case, 0.625 points equals $625. The math works the same going the other way. If the broker locks you in a 5.875%, they earn 0.500 points, or $500 on that same $100,000 loan. They’d earn $2375 on a $100,000 loan if they locked you in at 6.5%.
I can see the steam coming out of your ears as you consider that somebody could actually earn an extra $2300 on top of all the other closing costs and origination fees for your loan. This has happened, maybe even to you, but step back and take a deep breath, there’s more to the story. A high YSP like this is often used to pay the borrower’s closing costs. When you here those ads on the radio about “no cost loans“, they use the YSP to fund all of those costs. Brokers may collect a YSP on smaller loan amounts. It’s just as hard to do a $80,000 loan as it is to do a $375,000 one.
Also remember that these are wholesale rates. That means (for hypothetical example) the rate that Countrywide Retail offers to you, the borrower, is not as low as the ones Countrywide Wholesale offers through a broker. Why? Because they don’t have to pay for the marketing and labor costs that the broker assumes in generating these loans. The Countrywide loan officer may be warning you to watch out for brokers and their evil YSP, but if he is offering a 6.125% loan at “par”, and the broker is offering you a 6.000% loan, and earning that 0.500 YSP, does it really matter who’s making what? The point is to look for the best deal, not who’s charging a YSP, and who isn’t
Some thing else to consider. I’m actually a Mortgage BANKER, not a Broker. That means my company will fund loans to you, then turn right around and sell them to lenders. By operating this way, I don’t even have to disclose that I’m earning a YSP (I do anyway), and can even earn an addition sum called a Service Release Premium that is based on total volume of loans delivered over a given month. Brokers, on the other hand are required by law to disclose this YSP on the HUD-1 Settlement Statement that you sign at closing. Because Bankers like myself can conceal this extra income, many of them are the ones yelling the loudest about how brokers must be screwing you because they earn this “kick-back” while they are as pure as the driven snow.
Face it. It’s unlikely that you will know just how much profit is being harvested on any given loan. But think about it. Do you know how much profit your insurance agent makes on you? Do you know how much profit Starbucks made on the latte’ you’re sipping? Does it really matter? I say no. What matters to me is, who is giving me the best deal. If you want the best deal on a mortgage loan, you need to stop worrying about how much everyone is making, and focus on what YOU are paying.
So, my longest post ever explains a component of this industry that is largely a distraction to the bottom line. Here’s what’s important. What are your closing costs? What is your interest rate? What’s the APR?
APR, not YSP is the one simple number that determines who is giving you the best deal.
Check out my post APR Simplified for details.
*These numbers are just for hypothetical ponderings. The example I pulled is not up to date, nor does it display several other adjustments for things like occupancy and loan to value.
October 7th, 2006 at 1:38 pm
Hey Todd, I really enjoy your posts and blogs…read them weekly.
Appreciate the link-back as well.
Nice post here, bringing attention to a few little known and understood acronyms used by the mortgage industry, YSP and APR.
I would like to address a few of your statements:
1) ‘APR, not YSP is the one simple number that determines who is giving you the best deal.’
APR only reflects the interest rate for the first year of the loan. It is really nothing more than a quick way to reference how much in ‘up-front’ fees a broker is charging relative to the loan amount.
Since consumers are relatively savvy enough to pick apart the laundry list of fees on a GFE and recognize that a higher APR = more expensive deal, brokers and bankers have evolved to hide expenses…using YSP’s.
2) It’s popular these days to link the terms YSP and evil, greedy, or corrupt, but the reality is that YSP is a part of nearly every loan, from good brokers and bad.
Very true. The problem is 8+ of 10 brokers and bankers solely use YSP to enrich themselves, never paying some or all of other 3rd party closing costs. Sounds like you are one of the few who discloses YSP’s properly.
3) If you want the best deal on a mortgage loan, you need to stop worrying about how much everyone is making, and focus on what YOU are paying.
Aren’t these two statements too closely related to separate them? If you are making YSP, my interest rate is higher than I qualified for, and now I am paying more money every month for the life of the loan.
So, if you are making, I am paying.
A mortgage weighs substantially heavier on my personal financial situation than a cup of coffee or saving $20/year on my homeowner’s policy.
I recently assisted a consumer who was dealing with a broker on a deal that had the best APR (after shopping) as is suggested in your post. His GFE showed $2000 in broker compensation (along with other typical 3rd party costs).
His interest rate was 6.5%. Seemed like a great deal.
24 Hours before closing the broker gives him a document to sign saying it’s OK for the broker to receive $18k in compensation from the lender (in return for ‘Delivering such a good, qualified client’). Turns out that this deal was paying 1pt in YSP. Without the YSP, the borrower would have received a 6% interest rate.
Over 5 years at the YSP inflated rate of 6.5%, the borrower would have paid $43,000 extra in interest.
While APR is a relative indicator of loan expense on one side of the transaction, it fails to consider the other side’s barometer, YSP. The devil is always in the details.
October 7th, 2006 at 9:17 pm
Great explanation on the YSP… it’s a term getting sinister connotations. The problem for the borrower is even though he/she is aware of the YSP, it’s hard to recognize how the YSP is calculated in the quotes they are given. Your advice about focusing on the APR is right on, and this fact is generally not hammered down in many of the YSP and “hidden fees” discussions - for example, this article http://www.creditinfocenter.com/mortgage/PointsRipOff.shtml
will explain the scary fees to watch for, but doesn’t provide a solution to how a borrower should comparatively evaluate loan quotes.
October 8th, 2006 at 2:51 pm
Jeff, thanks for the good words, but I have to disagree with these comments.
“APR only reflects the interest rate for the first year of the loan.”
No, APR is calculated over the life of the loan.
“Since consumers are relatively savvy enough to pick apart the laundry list of fees on a GFE and recognize that a higher APR = more expensive deal, brokers and bankers have evolved to hide expenses…using YSP’s.”
YSP is included in the ARP. If Broker A offers the exact same loan (lender-program-lock, etc) as Broker B does, but collects a YSP, he has to charge a higher interest rate to do so. Higher interest rate equals higher ARP. No way around it.
“Aren’t these two statements too closely related to separate them? If you are making YSP, my interest rate is higher than I qualified for, and now I am paying more money every month for the life of the loan.”
No, they are not related at all. What a borrower PAYS is way more important than what Broker A or B earns. I would have absolutely no problem knowing that one grocery store earns more profit than it’s competitor across the street. I’d shop at the one with the best prices, service and selection. If it’s the one making more money, more power to them. I work for one of the larger private mortgage bankers in the US. Because we can deliver such a huge volume of quality loans to investors, we generally get better rates than small brokers, or brokers who submit poorly processed loans. If I can beat the rates offered by a small broker, making a few more bucks while I’m at it, then I see nothing wrong with that. My obligation to the consumer is to provide them with the most competitive deal possible, not to earn less than anyone else.
October 8th, 2006 at 9:53 pm
‘No, APR is calculated over the life of the loan.’
I stand corrected in the context of this discussion…I had the fact that if you payoff the loan sooner, your APR increases, and crossed wires… ADD in action
For the other comments, they simply represent a fundamental difference in our current business models, best left to a different conversation.
You appear to represent the minority: a banker that practices high levels of skill and ethics. Fortunately I get to ‘meet’ people such as yourself ‘at’ places like this. Where are you licensed to do business?
October 18th, 2006 at 10:27 am
Good stuff, Todd. Your post is music to my ears.
Jeff, here’s another way to put it:
Who are you to decide how much the broker (or banker) can or will make on your loan? Is it your job to tell Wal-Mart or Target that they shouldn’t make over 50% profit on many of the items you buy (and surely they do)? Is it up to you to declare when profit is too much profit? That’s where capitalism becomes socialism. Try running a mortgage business yourself without making any YSP. I dare you.
Your only job is to get the best deal you can. If the best deal you can get pays the broker $5, $500, or $5,000, that is still the best deal you will get.
October 23rd, 2006 at 7:06 pm
Randall,
“Try running a mortgage business yourself without making any YSP. I dare you.”
I don’t propose to run a brokerage without charging YSP, that would be denying a consumer the right to finance their closing costs. Why would I do that?
I propose running a brokerage where 100% of YSP is disclosed and credited appropriately. Transparency and disclosure, 100% of the time.
I propose you read my comments more thoroughly…although I notice Todd did not post my response comment to his last comment…so I took upon myself to write the post he has linked to below.
“Who are you to decide how much the broker (or banker) can or will make on your loan? Is it your job to tell Wal-Mart or Target that they shouldn’t make over 50% profit on many of the items you buy (and surely they do)? Is it up to you to declare when profit is too much profit?”
Poor analogy by someone who does not intricately understand RESPA law. I will be happy to recite specific statutes that support my view.
Who am I to decide what should be charged, no one. But I can provide the transparent correspondent rate data that high volume bankers are currently privy too, directly to consumers, and allow them to decide what to pay per loan transaction (with some well-thought suggestions)…which will dictate what a given broker/banker makes.
I’m not casting stones, just keeping it real on how this business can (and will) be done.
My gaffe re: the very literal APR talk should not be mistaken for random and thought-less opinion.
I hope Todd posts this
October 23rd, 2006 at 11:35 pm
Jeff, I’ve never rejected any of your comments. I don’t know what the problem was if your comment was not published. The only posts I reject are spam comments or misleading information.
Also, where did you come up with the idea that YSP is only for closing costs? That’s not the reason it exists. The reason is capitalism. One lender tries to lure business from another lender by paying their clients (brokers) better. That’s it, plain and simple.
As I stated before, the company I work for does better business than most brokers. We deliver more volume, and better processed loans, with less fallout than our competition. Because of this, wholesale lenders will pay us better than they will a mediocre broker. We can earn more, and still give a consumer a better deal than our competition because we operate at a higher level. A consumer that pays to much attention to YSP, and not what is the best deal, can end up paying more for inferior service.
Numbers wise, the best deal is the best deal. APR is the only true measure of the best deal.
October 24th, 2006 at 7:49 am
Todd…probably on my end (the non post…
I am putting together a post re: the intended and stated purpose of YSP (case law, statutes, etc).
It will be an interesting dialogue…
October 29th, 2006 at 10:14 am
I do believe in disclosing everything to my clients. However, I have never been able to understand why it is so important how much I make on a loan. I’m going to spend a day with a video camera and everytime I buy something Im going to ask how much they are making on it. McDonalds, the gas station, the toll booth, the news paper guy, etc.. comming to a blog near you