The “yield spread premium,” or YSP as it’s known in the industry, is the fee (commission) paid by the mortgage lender to the broker in exchange for a higher interest rate, or an above market mortgage rate.
This practice was originally intended as a way to avoid charging the borrower any out-of-pocket fees, as brokers could earn their commission and cover closing costs with the YSP.
However, as expected, the yield spread premium wound up as just another fee the borrower got stuck paying. So instead of being charged YSP only, borrowers were often charged YSP and an origination fee.
Effectively, borrowers were charged twice, which explains why this practice has since been outlawed.
Also note that the verbiage can vary, and yield spread premium may read as “par-plus pricing”, “rate participation fee”, “service release fee” and so on. Make sure you go over each fee to ensure you don’t get duped!
Careful You Aren’t Charged Twice
- A mortgage broker or loan officer
- Could effectively charge a borrower twice
- Once on the back-end and once on the front-end of the loan
- And make a ton of money per loan
You shouldn’t be charged a substantial amount on both the yield spread premium and the loan origination fee. It’s hard to say what’s too much and what’s too little because every loan is different, but keep an eye on the fees and ask why they’re being charged.
Also keep in mind that a broker may split up his or her fees by charging a half percent in the yield spread premium and another half percent in loan origination fee.
This wouldn’t mean the broker is necessarily charging you twice. Their commission is simply being broken up, with some money coming out-of-pocket and some coming in the form of a higher mortgage rate.
If you’re buying down your rate, there should not be any yield spread premium, since you’ll actually be paying discount points to lower the rate on the back-end. Of course, this means you’ll need to pay a commission as well, so it can get pretty expensive if you go after that low, low rate.
Yield Spread Premium Used for No Cost Loans
- For borrowers who didn’t want to pay anything out-of-pocket
- It was common for loan originators to get paid via YSP
- Which simply raises the borrower’s interest rate
- But doesn’t result in any direct costs at closing
Basically, the bank or broker will charge a YSP large enough to offset any upfront fees the borrower would have to pay, and still end up with enough money to make a decent commission as well.
An example would be a broker who charges no mortgage points or fees, but charges a YSP of 2% on a $400,000 loan. The total compensation to the broker is $8,000, and the other fees associated with the loan may be $3,500.
The borrower won’t have to pay the $3,500 in fees as it will be subtracted from the broker’s YSP of $8,000, leaving the broker with $4,500 net commission. It sounds like a good deal, but the interest rate the borrower ultimately receives may be substantially higher than it would be at the par rate.
This means the borrower will have both a higher monthly mortgage payment and pay much more interest throughout the duration of the loan term.
There is a lot of controversy surrounding yield spread premiums, and an ongoing fight between mortgage brokers and institutional lenders.
The issue is that brokers must disclose the YSP, whereas large lenders can avoid disclosing it as their yield spread may not be determined until a later date when the loan is sold on the secondary market. Put simply, if it’s not yet known, it can’t be disclosed.
Be sure to compare and contrast different scenarios and combinations of YSP and loan origination fees – both are negotiable, and don’t necessarily need to be charged to begin with.