What
Are Yield Spread Premiums and Service Release Premiums?
Yield Spread Premiums...
The yield spread premium
is a controversial way to compensate brokers. Here's how it works: Let's
say you qualify for a loan at 6 percent interest. The broker persuades
you to take a loan at 7.5 percent. The lender pays the broker several
thousand dollars for signing you up for the higher-rate loan. That
payment is a yield spread premium.
Consumers who do business
with mortgage brokers generally have the understanding that the brokers
will provide them the loan at the lowest rate which the broker finds for
them. Consumers have generally understood and agreed to a specific
broker's fee to be paid directly by them - either in cash or by
borrowing more - to the mortgage broker to compensate the broker for
obtaining the loan.
What consumers do not
understand, and have not agreed to, is when the mortgage broker
receives an additional fee from the lender, called a yield
spread premium. This is a fee which is paid by the lender to the
broker solely in compensation for the higher rate loan.
In other words, the
lender would have made the consumer a loan at one rate, but because the
loan is provided at a higher rate, the broker is paid a fee, or
kickback. These lender paid broker fees are not for services provided to
the consumers, nor for services provided to lenders. They are solely an
extra fee the broker is able to extract from the deal. The result is the
borrower will have a higher interest rate for the life of the loan.
Is it Ever Beneficial?
Yes, a Yield Spread
Premium can be used to a borrower's advantage and is an
important homeownership tool that ought to be available for consumers to
use in financing their homes. The cost of closing today is burdensome,
especially for lower-income and others who have trouble
saving enough cash to satisfy the downpayment and other closing costs.
Yield spread premiums allow cash-strapped buyers to pay
some or all of the settlement costs over the life of a mortgage via
their interest rate. This option will give more Americans the
opportunity to close on a new home.
However while we adhere
that yield spread premiums can be very helpful in putting families in
homes that otherwise wouldn't be able to do so, we believe in full
disclosure.
Theoretically, yield spread
premiums aren't necessarily harmful to borrowers. If you don't have the
money to pay closing costs, the broker can get you a loan at a slightly
higher rate and apply the yield spread premium toward closing costs.
Banks do the same sort of thing - underwrite no-cost loans for slightly
higher rates than borrowers otherwise would qualify to pay.
An Example of
How it Can Go Bad...
A $120,000
loan on a home is obtained.
·
The Borrower
agrees to pay the loan officer a 1.5% origination fee or $1800.
·
At closing
they notice a payment on the HUD to the loan officer for 2.125%* of “YSP”.
·
The Closing
agent tells them that yield spread premium (YSP) just paid the loan
officer an extra $2550.*
· On the
initial estimate of fees, they were told there may be a “YSP of 0-3%”
but were never told what that meant and/or how it affected them.
What
You Need to Know…
· What they
didn’t know is that this yield spread premium actually
increased their interest rate by $48.91 per month!*
· Over a 30
year mortgage term, this “yield spread premium” actually will cost
them $17,607.60!*
· This extra
monthly cost could mean qualifying for a smaller home! In this case,
the ‘present’ payment would be equal to a $128,000 home loan if this
“yield spread premium” weren’t ADDED to the rate!
Brokers
MUST disclose the yield spread premium, but the law is vague
on how specific one must be and many loan officers simply put "0-3% YSP" on
the initial Good Faith Estimate without ever informing the borrower what it
means or how it can possibly impact them.
**And Some Lenders DO NOT Even Have to
Disclose YSP!! Enter the SRP...
SRP or Service Release Premium
That’s
right! Banks and brokers that fund with their own money (or warehouse line) do not have to disclose that they are pumping up your
rate to make more money from you! So just because your HUD doesn’t
list “YSP” doesn’t mean you’re not getting it tacked onto your rate!
SRP
is similar to YSP but it is paid to
banks when they sell the loan on the secondary market. The other
difference is that the banks DO NOT have to disclose the SRP to
customers, period. Banks usually receive more SRP than an ethical
mortgage professional would receive YSP on like transactions.
Usually, you will receive a lower rate from a mortgage broker that is
receiving YSP on a loan that you would at the bank. At least, if you are
working with an ethical mortgage broker.
So the moral of the story is, the bank is not offering a better deal.
Find an ethical mortgage broker and keep him or her for life. You will
not regret it.
An
Example of How it Works!
Mary and
Joe Homebuyer are looking to buy a home (or refinance). They don't
(or can't) want to pay any out-of-pocket at closing. Their loan
officer suggests that they increase their rate to use the "yield
spread premium" to pay for the broker's compensation and other fees.
Mary and Joe are provided all the options of either fees paid in full at
closing via origination, etc., OR using the yield spread to pay
the various fees OR a combination thereof.
Tax
implications can also play a factor in how fees are assessed.
Paying fees at closing allows for some to be deducted the next tax year,
but using the yield spread premium means a higher rate and thus
more tax-deductible interest throughout the life of the loan.
This is
why a good loan officer (RMA) will
discuss ALL of the options available and fine tune the loan to your
needs. There is no "one-size-fits-all" mortgage as each situation
is unique from the other.
In some
cases, yield spread premium usage means the difference between
getting a home loan or not getting one. It is a vital tool that
helps the mortgage professional best build a mortgage around the
consumer.
A Good
Broker is a Vital Part of the Mortgage Process
Brokers perform a
vital
function in the mortgage industry and while some would call for the
immediate elimination of yield spread premiums, to do so would be
to shut the door for potential home buyers who cannot afford to pay the
compensation that a broker does legitimately earn.
No one should be expected
to work for little or no compensation but at no time should a broker or
loan officer EVER charge excessive fees to a client and should NEVER
accept a yield spread premium or service release premium without the borrower fully
understanding what it all involves.
A good broker, one that
is committed to their borrowers' needs, is worth the commission they
earn. Our member lenders have signed
the Residential Mortgage Advocate™ commitment
to proclaim their willingness to be 100% honest, ethical and upfront
with their clients on every aspect of home financing.
All members on this site have signed a
Residential Mortgage Advocate™ (RMA) commitment to be totally upfront about
their fees, rates and items they will need from you.
Been Scammed or Dealt with an Unethical Lender?
Contact Us or Report it to
Your State authorities.
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