The Yield Spread Premium: A Dirty Not-So-Secret In Real Estate

Posted by: Peter Coy on May 10, 2007

Today we received the kind of reader comment that I love to see: A smart and fearlessly stated position on an industry issue that really matters. It was written by Michael Hoskinson of Foundation Realty in Huntington Beach, Calif. (Browsing the web, I see that Hoskinson also made the point in Inman Real Estate News this week.)

Hoskinson is criticizing the yield spread premium, which is a cash payment given by a lender for higher-rate loans. The higher the rate on the loan (that is, the higher the “yield spread” over the lender’s minimum), the more the cash involved. Although in theory the cash can be used entirely to reduce the closing costs of the borrower, research shows that in practice most of it is kept by the broker. About 90% of subprime mortgages involve yield spread premiums, which can add up to thousands of dollars and constitute the biggest part of compensation that a broker gets.

Here’s an excerpt of Hoskinson’s comment to Hot Property:

"The YSP or "Yield Spread Premium" is nothing more than the Bank's kickback to the broker for doing the loan. The worse the loan, in terms of interest rate, that the broker gets the borrower to agree to, the higher the YSP dollars go to the broker. What exactly, other than honesty, is the broker's motivation for helping a borrower get the best available deal? Combine greed, low barrier to entry and minimal mandated disclosures and you have a recipe for a lending disaster at the borrower level. Until there are mandated disclosures that spell out, in 14-point type and plain language, what exactly a borrower is encumbering themselves to in total and how the broker or bank is compensated this system will continue to fail the public."

Giving yield spread premiums to brokers is one of those industry practices that has gone on for years but, on closer scrutiny, is extremely hard to justify. As Hoskinson says, it creates an obvious conflict of interest.

Click here to see what the Center for Responsible Lending said about yield spread premiums back in 2004, before the current subprime meltdown. The center wrote:

"The effect of YSPs is to steal equity from struggling families. Not all loans with YPSs are abusive, but because they are permitted and easy to hide, unscrupulous brokers can make excessive profits without adding value to borrowers."

Here's a more neutral take on yield spread premiums from Erate.

And here's a 2001 piece from Realty Times defending YSPs on grounds that most brokers turn over the payments to borrowers by applying them toward closing costs.

Reader Comments

Perry

May 10, 2007 4:10 PM

I know it's slightly off topic but this same thing goes on in the auto industry. A lot of people get auto loans they don't deserve because the dealer is getting a kick back from the bank. It seems like from the time we're born until the time we die the world is setup to skim as much money off of us as it can. From loan kickbacks to home warranties that end up covering nothing. Anyway, you get the point. I'll stop before I get too far off topic. This is a good post and more does need to be done to make consumers aware of what's happening. Maybe a plain English page that spells out those things.

badh

May 11, 2007 9:35 AM

There is more than one place to get a loan. In fact there are thousands of places. If one guy is going to charge you too much or too high of a rate you can walk down the street to the next guy and so on. With all of the information available in 2007, if you end up paying too much, whether in points etc. or in interest rate, it is your own fault. People will spend weeks researching to get the best flat screen for their dollar but stroll blindly into the biggest investment of their life. If your credit is shoddy, you are probably going to pay more. You are a higher risk and your loan is harder to get done. There are no ‘secrets’ anymore people. The information is right at your fingertips.

Stephen

May 28, 2007 9:40 PM

I guess my only question would be this...If Banks were made to disclose YSP would this still be a hot topic? Seems it is only a topic because brokers are easy targets.

In otherwords, there are "bad banks" just like there are "bad brokers." May I provide an example to illustrate my thoughts.

If a Mortgage Broker charges 6.25% (for this example there is 1% YSP) the 1% is disclosed @ Settlement on the HUD1. In the same scenario the Mortgage Banker charges 6.25%, and makes the same 1% YSP. But (ah hah) they do not have to disclose on the Settlement sheet.

Now here is where it really gets good. If both are "bad" and charge an upfront 1%, interestingly enough, only the "bad broker" has to disclose on the Settlement sheet. One could make the argument that the "bad broker" is at least taking advantage of the borrower honestly and diclosing all of the costs/premiums.

The YSP debate rages on...Full disclose by Brokers and Bankers would put an end to this all. Then what would be the next issue to pin on mortgage providers???

Guy

June 18, 2008 1:00 PM

I think it’s absolutely asinine for a real estate broker to be questioning what mortgage brokers make under any circumstances. I have been a real estate agent and a residential mortgage broker and can say that mortgage brokers work much harder for their money than real estate agents. The average mortgage brokerage makes a lousy 1%-3% in YSP and origination fees on the loan amount for placing loans versus 3%-7% of the sales price commission for the real estate agent. To get a borrower approved a mortgage broker may spend weeks or even months trying to find a lender, working on credit issues, down payment issues and other stuff the real estate agent hands off to the mortgage broker. Of course if the mortgage broker can’t find a lender for the buyer for whatever reason, the real estate agent goes crazy. I’ve had real estate agents ask me to cut my fees on a deal even though they were making 3 times what I was getting paid and it took me months to find a lender for their buyer.....asinine.

Nancy

July 24, 2008 3:18 PM

I just don't get the debate on yield spread premiums, if the mortgage broker is not paid by the lender, who do you think is going to pay. The Customer... Who does not want to pay or cannot pay. Yield Spread Premiums reduce out of pocket expenses for the consumer by letting the mortgage broker do two things, shop the rate to find the best available and make their commission on the rate. Most lenders have restrictions in place that limit the amount that can be made on the loan and in yield spread premium and consumers are not locked into using anyone on their loan. They keep saying this is confusing to customers but I think they are under estimating the customers buying houses. If anyone walked into any situation uninformed, its going to cost them more if its buying a car, a house, a TV, or a mortgage. Why are we only trying to regulate mortgages. If broker A can get a customer 6.25% on a mortgage and make 1.5% YSP and the local bank offers them the same deal then whats the problem. The banks are making the same amount if not more on the rates they charge but with no disclosure required. Another example as to how a YSP helps consumers, refinances, customer wants to refi their current home, they plan to be in the home for 3-5 more years. In most cases unless their is a significant savings in rate, the cost to refinance will not be paid for in those 5 yrs based on a savings rate. Bottom line they will not make enough savings to cover the cost of refinancing, if we raise the rate .5% pay all the cost and they are still saving money every month then they are actually having true savings and when they go to sell, won't end up with a higher balance. Like every business there are the good and the bad, customers need to shop their mortgage loan like they would shop everything else, they need to take time to decide whats best for them. The only good that might come out of this mortgage disaster is that the bad brokers/ Appraisers/ Banks/ Real Estate Agents/ Lenders/ everyone else who put the almighty dollar first are finding no other customers to work with. Respected brokers who looked at the big picture early on and decided customers for life and referrals were the way to grow and suceed will be the ones left. B

ling

November 18, 2008 4:53 PM

I don't agree YSP is dirty and kickback.
It is not a secret at all and is fully disclosed to borrower.

Most Brokers include me are doing honest business. We are ethical enough to quote the rates base on the borrower request. Majority of the homeowners only ask for no pt no closing cost loan.
So who is going to pay the cost???
If the broker quote a lower rate & charge 2pt, the borrower just walk away and shop around.
So why not quote them slightly higher rate and use the YSP to pay their cost and Broker merely earn the different as commssion. there is nothing wrong, it is legal and everybody got to get paid for their work, right?

Uninsane

March 13, 2009 10:43 AM

Out of 100 borrowers, 100 will state that they did not know the lender was paying their "broker" a fee DEPENDENT on how high the borrower's interest rate was. The typical settlement statement lists a broker "fee" of $1,000 and a broker "premium" of $2,500+. CLEARLY DECEPTIVE.

Brokers often have their "prey" sign an agreement that states that they are "independent contractors and not agents," which is like me pointing a gun at a bank teller, demanding money, and stating "no matter how this looks, this is not a crime." Brokers are agents and have fiduciary duties, period.

HUD's infamous Statement of Policy that "YSPs are not illegal per se" was obviously written by a bank CEO. Further, being "not illegal" doesn't mean that its not actionable in a civil court. Dual agency requires express disclosure and consent -- WHERE IS THIS DOCUMENT?

Olen

May 8, 2009 2:58 PM

As a mortgage broker, I have always disclosed to borrowers that I get paid by the lender or from points they pay upfront or a combination of both. The lenders set a rate schedule and the more points that are paid upfront, the lower the rate. Where is the crime, folks? It is not much different than an FHA or VA Funding fee which is built into the mortgage. In the long run, most borrowers are concerned with monthly payments. They don't have the money for costs at closing so they prefer to pay the fees over the course of the mortgage. Bankers do the same thing, but they don't have to disclose the YSP...supposedly because the loan has not been sold as of the closing. BUT, they darned well know what the YSP will be because they will have lock the rate and return on the funds prior to the closing.

Joe

September 4, 2009 8:59 AM

Hi, I just applied for a mortgage through a Broker and they are charging me 1 point origination fee plus processing fee of $600 and documentation fee foe another $600. They are getting about over $5,000 from the Bank for YSP. Is this something okay or Am I getting ripped off? This is an FHA backed loan.

Dirt

September 16, 2009 2:15 AM

Joe, that depends on the amount of your loan. If it's $800K, then that's great. If it's $80K, then that stinks.

Jason Smith

September 18, 2009 1:40 PM

I am not a mortgage broker but I am in the industry so basically this person has a very bias opinion and what is it wrong for people to make money now. So instead of charging the borrower who does not have enough money to pay all their closing or higher ones you just give them a slightly higher rate lower there closing costs and now you helped them get into their first home you want this ability to help a buyer go away? Peter Coy you are one of the reasons why this county has problems you are MORON SIR!

vanessa

October 25, 2009 4:12 PM

I recently got my GFE from a mortgage broker..91K loan. 5.375%, 1 point origination fee, 545.00 processing fee...and then I see the YIELD SPREAD PREMIUM line says 1.76%...1607.14. I asked him about it and he told me that is the amount he may or may not earn from the bank. I am being ripped off?

Brian K. Marquette

October 28, 2009 11:44 PM

Your Quote is absolutely incredible...
"The YSP or "Yield Spread Premium" is nothing more than the Bank's kickback to the broker for doing the loan."

As a Government Approved Independent Mortgage Lender... how would you like me to pay for my $8,000 monthly overhead... Should I increase the borrowers fees? Or.. should the Lender pay me a fee (YSP) because I deliver the client and a beautiful mortgage to the end lender and take 100% of the risk?

The elimination of YSP means only one thing.. Mortgage Clients will pay more fees.. period, and the "Bankers" will be able to continue ripping off the uneducated borrowers. After 19 years in this business... I have yet to find a banker that can compete with my interest rates or good faith estimate of closing costs. Quit blowing smoke and get back to work. The problem is NOT YSP.. the problem is Bankers want a unfair playing field that will cost the consumer more in the long run.

My two cents worth..
Brian K. Marquette
Owner/Mortgage Specialist

Michael Porcelli

February 25, 2010 12:35 AM

Brian, you hit the nail on the head. Where's the outrage regarding UNDISCLOSED Bank Service Release Premium (SRP)? Mortgage brokers are all basically small businesses, run by entrepreneurs, loosely organized and powerless against the big banks with all of the money and power. Don't forget "The Golden Rule." (He with the gold makes the rules"

Signed - 15yr mortgage originator looking for a new career.

Michael Porcelli

February 25, 2010 12:35 AM

Brian, you hit the nail on the head. Where's the outrage regarding UNDISCLOSED Bank Service Release Premium (SRP)? Mortgage brokers are all basically small businesses, run by entrepreneurs, loosely organized and powerless against the big banks with all of the money and power. Don't forget "The Golden Rule." (He with the gold makes the rules"

Signed - 15yr mortgage originator looking for a new career.

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April 24, 2010 12:44 PM

Are you a business man or woman? Are you in any financial mess or do
you need funds to start up your own business? Do you need loan to settle
your debt or pay off your bills or start a nice business? Do you have a
low credit score, and you are finding it hard to obtain capital loan from
local banks/other financial institutes? Do you need a loan or funding
for any reason such as,

* Vehicle Loans
* Real Estate Loans
* Business Loans
* Other Loans
* Line of Credit
* MasterCard

Contact us via Email:marrydonaldloanfirm@hotmail.com
Note: Loan is giving out for just 3% interest rate yearly. Kindly be
informed that loan will be given to you in any country you reside
in the world.

Any client, who is in need, should provide the following information in
order for us to open a loan processing file.

1. FULL
NAME:...............................
2. ADDRESS:................................…
3. OCCUPATION:.....................
4. COUNTRY:........................
5. STATE:..........................
6. City:...........................
7. SEX:............................
8. Age.............................
9. CELL PHONE NUMBER:..............
10. AMOUNT NEEDED AS LOAN:..........
11.Monthly Income..................
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About

BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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