My answer is, “No, not always; but in some instances, yes.” I’ll explain.
YSP (Yield Spread Premium) is extra money (a premium) that the wholesale lender gives to the mortgage broker for selling you a higher interest rate than par rate. That difference between par and the rate you get is the “yield spread.” Par rate is the lowest rate you can get without paying extra in points to buy down the rate. If you don’t want to pay any points, then you want par rate.
Back in the Wild West days of mortgage lending (pre-2010), mortgage brokers could make extra commissions by selling borrowers a higher interest rate than par rate. The higher the rate they were able to sell, the bigger their premium commission was. Thus, it became the goal of greedy loan officers to sell you as high a rate as they could, and a lot of smooth double-talk ensued.
This led a lot of folks — after they realized they had been taken advantage of — to ask, “How can they sleep at night?”
And their answer was, “I sleep very well at night, because I’m making a ton of money, thanks to naive people like you.”
Of course, the savvy borrowers who took the time to read Mortgage Rip-Offs and Money Savers could not be taken advantage of.
So back to the question, “Is YSP illegal now?”
To answer, I refer to the Press Release by the U.S. Federal Reserve in regard to the law enacted April 1, 2011. In short, it says:
* Individual loan officers cannot be paid a higher commission by the lender they work for if they sell a higher interest rate to the borrower. (This takes away the incentive to sell higher priced loans.)
* A mortgage broker cannot collect both an origination fee and YSP. (If the lender charges you an administration fee, application fee, underwriting fee, processing fee, origination fee, or any other lender fees, then it is illegal to collect YSP. Any YSP would therefore have to be given to you, the borrower, as a credit.)
* If the mortgage broker is not charging any origination fee or lender fees whatsoever, then there is nothing in the law that prohibits them from making YSP.
In this last case, YSP is not illegal, according to the interpretation accepted by most lenders.
Mortgage brokers have a choice: get paid by lender fees or YSP, but no more “double dipping” like before.
BUT WAIT, THERE’S MORE TO THE STORY!
Banks and direct lenders love to say, “We are a bank; we don’t have YSP.” True enough, but that is also deceptive. Instead of having YSP, they have SRP!
SRP stands for Service Release Premium. It is money the bank or direct lender gets paid when they sell your loan after closing. Federal law does not require them to disclose it, and they never will. If you ask, the loan officer will say, “I don’t know what it is.” Which may or may not be true, depending on the bank and the loan officer.
Mortgage brokers say the law isn’t fair. It targets them, forcing them to disclose and credit their YSP whereas banks and direct lenders get to deny and keep their extra profit hidden.
Another question people ask me is, “Is there still par rate?”
My answer is, “Yes. If you don’t need money credited to you by the lender to help pay closing costs, then ask for par rate. Also, if you don’t want to pay points (or a partial point) to buy down your rate, then ask for par rate.”
Where to Get More Information
For more information on YSP, how it is directly tied to the interest rate you get, and charts showing actual rates with YSP, see Homebuyers Beware. Also, you will read the one thing you should never say to a loan officer, how to ask for a cost estimate upfront without giving out your social security number, and how to negotiate the best priced loan.
Home buyer Ilya A. Mazo said, “I feel empowered after reading this book.” As the saying goes, knowledge is power.
Thank you for reading my blog. My purpose in writing is to help people avoid rip-offs and get the best loan possible.
1) The book Home Buying Kit for Dummies tells you that if you close your loan on a Monday, you will have to pay interest starting on Friday, thus wasting your money on three extra days of interest. After giving you this bogus tip, the authors brag that they’ve just saved you the price of the book. But, IT IS FALSE! If you close on a Monday, your interest payments start on that Monday. You are never charged earlier than the exact and actual day of your closing.
How could such a book print incorrect information? Looking at the authors’ biographical information, neither one has ever worked as a loan officer, loan processor, escrow closing agent, real estate attorney, or loan funder. So it appears that they are writing about an industry in which they’ve never worked. The fact that one of them worked in finance does not make him a credible authority on mortgages, just as someone who has “worked in sports” is not necessarily make him an expert in karate, and someone who has worked as “a cook” is not necessarily an expert in French pastry.
2) A high-ranking website offers a free 38-page e-book, How to Buy a House, A Guide for First Time Buyers. Again, false information is given. The author states that it’s a good strategy to include your closing costs in with the loan. BUT THAT IS NOT ALLOWED! With a purchase loan, the closing costs cannot be rolled into the loan; only in a refinance is that option available. So although the e-book is free, is it worth taking the time to read a guide that contains inaccurate information? The website says he is an “award winning writer,” which does not qualify him to dish out home buying or mortgage advice.
3) An Amazon book reviewer posted that Yield Spread Premius (YSP) is now illegal. THAT IS NOT TRUE! A lender has two options for collecting YSP (money for charging a higher interest rate than par rate). First, they can keep it for their own profit if they do not also have an origination fee. Second, they can credit it to you to help pay for your closing costs.
Be aware of the credentials of the person offering mortgage information and advice. Just because something is printed in a book or published on the Internet, it does not guarantee you that it is factual. Speaking for those of us who have spent careers working in multiple areas of the mortgage industry, there is no substitute for experience in the field.
To answer, when a lender gives you an interest rate higher than par rate, there is an extra profit, or extra cash that can be given to you as a credit. Par rate is the base rate that does not yield extra profit to the lender nor require money (charged in percentage points) to buy it down. Par rate changes daily.
A perfect example is a set of two mortgage estimates I reviewed yesterday for one of my coaching clients. The lender had given him these choices for a 30-year fixed rate, 10 percent down payment, top tier credit:
3.375% with a cost of 0.4 percentage points. For his loan amount of $405,000, that was a cost of $1,701.
3.75% with a lender credit of $8,059. That would give him over eight grand to pay his closing costs. The lender had that much money to give, because 3.75% was over the par rate of 3.4% (on that day).
Which is Better?
The difference between these two loan offers is $9,760. (A cost of $1,701 versus a credit of $8,059.) Talk about going from one extreme to another!
First, I do not recommend paying $1,701 to get an interest rate one eighth of one percent (0.125%) lower than par rate. For his loan amount, it would take five years just to break even on that cost. That is too long, in my opinion. Also, he happened to be tight on money for closing costs after he made the 10 percent down payment, so why would he spend so much extra to buy down his rate? Better to keep that money in an emergency account.
I recommended asking for 3.5% with zero cost. This is because 3.5% is the closest rate to par rate for the day (yesterday). Depending on the day he locks in, there may or may not be a small credit, depending on exact par rate.
However, if he found that his dream house — the one he and his wife fell totally in love with and absolutely had to have — took all of his cash for the down payment, leaving him without enough left for closing costs, then taking the higher interest rate (and higher monthly payment) so that he’d get the big lender credit to cover closing costs was a viable option.
Personally, I would rather see him take 3.5% par rate on a more affordable house with a lower monthly payment.
But for a person with a low debt ratio and high income, the higher interest rate is not a turn-off, and the lender credit is an advantage one might choose to take.
By the way, if you read Mortgage Rip-Offs and Money Savers, you know this lender credit is the Yield Spread Premium (YSP). Per new lending laws, if a lender is charging an origination fee (including processing fee, underwriting fee, administration fee, application fee), then any YSP they receive must be given to the borrower as a credit. However, if the lender is a bank or a direct lender using their own money to fund the loan, they do not have to reveal or credit you any extra profit they make. And don’t bother asking, because they will never tell you what their overage/profit is. Most will deny it altogether, because as a bank or direct lender, they don’t call it YSP; they call it SRP (Service Release Premium).
If you have any questions about lender credit, please feel free to ask. And once again, thank you for stopping by to read my blog.