Yield Spread Premiums - Part 2

In the last article I discussed what Yield Spread Premiums are and how they are utilized to offset some or all of the costs of getting a mortgage.   In our example we showed how a borrower could get a no-point loan by paying .25 percent more in rate on the loan.   In the example, they paid 6.25 percent instead of 6 percent.   But here is the more insidious aspect to this practice.  

The bank in our example got back the $1,000 that it cost them to originate the loan. There are many mortgage origination sources that would not be satisfied with just getting back the $1,000 to cover the costs.   They might want $2,000.   And in a 6 percent market, FNMA will pay them $102,000 for a $100,000 loan that carries and interest rate of 6.5 percent.

I have dealt with over 2,500 borrowers in my career so let me share my experience on this issue.   Most times people are going to be in their homes for a long time and it makes sends for them to pay points. When they write a check for it, they are keenly aware of how much they pay.   But there are also times when we do no-point deals when they make sense, as when a borrower isn’t going to own the property very long.   What do the borrowers think in these cases?  

Well, my belief is that they just know that it doesn’t cost them anything upfront, and they simply do not think about what I am making on the transaction.   Now, I may be unusual because we treat our clients honestly. If we have agreed to a fee of one point, whether it is from them, or if they pay a higher rate and we make one point from the lender as a YSP, or if it’s a 50-50 split, we get the same compensation regardless of which option they choose - i.e. - we don't charge them $2,000 as in the paragraph above.

Unfortunately, there are many, many people in the mortgage business who are not constrained by ethics or truth, and the people who deal with them are in for a ride.   But because their sense of caution has been turned off, they just don’t ask the questions they should because they don’t understand what to ask. I can tell you that there are millions of borrowers who were told they were going to get charged a no points, a half-point, or one-point and believed that was all their broker was making. Not true.

Is this widespread?   I study I heard about (but have not read) suggested that in about 80 percent of loan transactions the originator is actually making money than originally disclosed. With borrowers’ sense of caution turned off and not knowing how to identify the lender’s compensation anyway, they are unaware that they are being gouged.

So what can you do to protect yourself?   For openers, choose a lender on the basis of recommendation and referral, not calling around getting quotes. Get references and check them out.   If you are dealing with a mortgage broker, and there are many advantages in doing so, enter into a contract with them the sets a specific fee for their services.   Then when you sign loan documents, have the closing agent show you what the broker is receiving in Loan Origination Fee and any rebate they are getting in any item labeled P.O.C, which stands for Paid Outside of Closing. The sum of those two items should add up to what you have agreed to in your contract.   If they add up to more, don’t sign the docs, and ask them to be re-drawn to correspond to what fee was initially agreed upon.

Quite frankly, in my opinion, in most no-point and no-cost transactions, YSP’s are used, not to benefit consumers, but to disguise extra profit that the lender makes.   If borrowers are unaware of the process, they can’t complain or try to renegotiate the deal.

Remember at the beginning of Part 1, I talked about the disparity in knowledge between the loan rep and the customer.   These articles have been about whether the loan rep uses his knowledge about YSP’s for the benefit of his borrowers or whether he just used that its knowledge to take advantage of their ignorance.

Be careful. It's a jungle out there.