Residential Lending’s perennial pariah is YSP - Yield Spread Premium.   This single line on the HUD Closing statement is a bone of contention for basically everyone in the lending community.  Simply defined, YSP is the amount of commission paid to a Mortgage Broker by the lender.  It is broken down by a base interest rate called Par Rate and each incremental 0.125-.25% raise over Par Rate earns a certain amount of YSP back to the Broker.

The real way to think about YSP is:

• Mortgage Brokers originate loans for their borrowers and are given a wholesale rate. 
• The Mortgage Broker then adjust the rate up or down based on their arrangement with the borrower.  The resulting rate is the Retail Rate.

When going to a bank or directly to a lender, the rates received are already retail.  The bank has built its overhead, salaries, marketing costs and commissions into their loans so there really is no flex whatsoever in the rates that can be offered to the borrower unless the borrower wants to buy the rate down with Discount Points.

A Mortgage Broker can offer a lower rate to a borrower based on many factors from loan size to borrower’s needs to choosing a different lender to what the company needs to earn to sheer personal greed….

Ok… I said it… I broke a rule of the mortgage brokerage industry… I told the truth.  I now have a target on my head by the NAMB.

Well… the real issue isn’t that Mortgage Brokers earn their commission by raising rates to earn their commission.  Many times it is much easier to find a better rate through a broker than a bank that just can’t flex on your unique financial needs as a borrower.

Many people believe that the real issue is that Mortgage Brokers are not required to disclose YSP until the closing papers are drawn.  A practice that most Mortgage Brokers have no problem with whatsoever. Currently on the Good Faith Estimate and Mortgage Brokerage Contracts, the YSP is usually disclosed as “YSP from Lender 0-2%” or whatever the range is that Mortgage Broker usually gets on those loans.

The Transparency movement in Real Estate and Lending is forcing this issue right now…so much so that many states are mandating disclosure of YSP much earlier on in the loan process. 

I personally don’t have a real issue with YSP not being visible…. but that’s because I don’t take advantage of my clients.  That is where we come back to greed.  In the past few years of low rates and easy lending, Wholesale Lenders would offer Brokers a YSP range of 2 to -4. 

YSP of 2 meant that the Mortgage Broker would pay 2% of the loan amount to arrive at the rate.  0% means that the rate is Par or no commissions.  With these two rates, points are charged to the borrower to pay for the 2% the Mortgage Broker has to pay - called Discount Points since they discount the rate below par… and then Broker Points so the broker earns their commissions.

YSP of -4 means that the Mortgage Broker earns 4% of the loan amount.  On an $85,000 , extremely difficult loan - this isn’t that big of a stretch.  On a $400,000 cakewalk of a loan, it is definitely on the greedy side.

So how do we find a middle ground between those that think that YSP should be disclosed and those that believe that if they’re offering the best rate then why does it matter?  I don’t know that this is a question with an obvious answer beyond the typical rhetoric of the champions of either side of the argument.

Many Mortgage Brokers are now moving to the “Flat Fee” system where they disclose right up front how much they are earning on a loan.  That’s all fine and dandy… but that’s nearly impossible to do in all cases.  If a borrower wants to float the rate, the resulting YSP to the Mortgage Broker could be effected… if rates go up, YSP goes down!

So, now Florida is talking about a new regulation starting this October 2007 that would require the Mortgage Broker to disclose YSP anywhere in time during the loan process from Rate Lock to final disclosure which is 72 hours prior to closing…  What does that mean? 

That means that most Mortgage Brokers will choose the latter and say on Monday - “Here are your final disclosures.  At the rate of 6.5% the YSP paid to my company is 1.5% and that equates to a premium of $4,500 on your $300,000 loan amount.  Since I have charged you 1/2% in origination, that means my total commission will be 2% or $6,000…. thanks for signing and have fun at closing on Thursday”

What was gained by this regulation?  who really benefits? The consumer?  What are they going to do 72 hrs prior to closing if they think that $6,000 is outrageous for finding the perfect program for their tricky needs and fragile loan scenario??  Call off the loan and pray that the seller of their property gives them another 30 days to get a new lender?

If that scenario is one you believe that is probable… and something you feel would be legitimate for a buyer - answer me this… would you let the buyer of your home do it to you?  Where does that leave YOU on your next purchase?  What if you were already offered the lowest rate even at 2% total commission??

Personally, Transparency is a fine idea… people know that Realtors split 6% to the Listing and Selling agents in a transaction so letting them know that the Mortgage Broker makes X% is logical. 

What is not logical is that the state is mandating Mortgage Brokers comply by this rule and Banks/Lenders whose “YSP” often starts at -2 and then they add on a bunch of extra fees get to skate by a little longer.

What is just irrational is that Mortgage Brokers now get to be judged on how much they’re earning in a transaction - as if someone that makes 2% YSP on a rate of 6.5% is not as good as someone that makes only 1%!

Mandating new compliance issues for the sake of the consumer is honorable… but maybe the legislators need to be working more on a fix for those people advertising bad rates and then pulling a switcheroo.  Maybe Mortgage Brokers just need to say, “My average commission for this type of loan with these circumstances is X%”…

The problem I foresee is that there will be consumers who want the Mortgage Broker to work for free… and someone will come in and offer a low commission to get their business - but at what cost to the borrower??  No one works for free! The borrower would end up paying for the commission some how!

Would you really trust someone who’s idea of earning a living in lending is offering the lowest fees and offsetting that with a super high volume?

Or would you rather know that you’re getting a great rate and the broker is earning a fair living while providing stellar service and actually takes the time to find the exact right program for you and your unique financial situation?

Next time you are purchasing property or refinancing, call your trusty Mortgage Broker and have a civil discussion about what they are earning.  A good Mortgage Broker won’t take you for a ride and you’ll be happy you chose to work with him.