A Breakdown of the Yield Spread Premium

In today's market, if I charge a rate of 6.25% to the consumer, I am making 1.38% if the loan amount from one of my investors. State law requires that I disclose that on the HUD-1. If you go the local Savings Bank, their rate is 6.375%; go to the credit union and the rate is even higher at 6.5%. (I am using Middlesex Savings Bank and Digital Credit Union). In both cases, there is no Yield Spread Premium but the customer is actually paying more in their monthly payment.

Good banking practice, no matter if you are a Bank, Lender, Broker, whomever you go through for your mortgage, is to gross 1 to 1.5% of the loan amount. Most people agree, you do not want to have to pay points up front and in some cases we can charge a little higher rate, say 6.5% and make enough on the YSP to pay for the closing cost. At the end, my rate is the same as the credit union and the consumer had no closing costs. In that example you would save about $2500 in closing costs and would have a very competitive rate.

There is so much gray matter here because the consumer, politicians etc do not have an understanding of how the YSP actually works. Lenders such as East West, Drew Mortgage, and Leader Mortgage, to name a few, all act as Brokers in this arena. They are selling their mortgage (placing them directly with certain investors) and in return receive a Yield Spread Premium- no different then a mortgage broker would. The difference between the two is that I am placing the loan with that investor right way as opposed to the correspondent lender that is closing on the mortgage in their own name (leader mortgage) and then shipping the package right off to that investor.

What worries me most is that there are so many bad or uneducated loan officers out there. It does not matter who they work for- lender, broker, or bank. My company is a group of “bankers” from the 80’s and early 90’s with morals, and we are disgusted with what we see other lenders and brokers charging clients. To make this very simple: Yield Spread Premiums should be allowed but should be capped. No one in this industry needs to be making more than 2 to 2.5%, anything over that is just plain robbery. Our entire 2006 year of mortgages, roughly 55 million, we average 1.375% in the Yield Spread Premium. Our mortgage rates on average are 1/8 to 1/4 lower than all the local banks and credit unions who do not receive YSP.

Did you know that Federally Chartered Banks do not have to adhere to the State and Local lending laws? They do not use the disclosures we as brokers or local lenders have to use. What should be done is that all lending should disclose what they are making on the HUD-1 Settlement statement. Real Estate Brokers have to disclose their commission, the attorney posts their fees, mortgage brokers, appraisers and the list goes on, so why not make everyone disclose what they are making on the mortgage?

And for the record: I am definitely for tougher legislation in the mortgage industry! It is long time overdue and we need to weed out the mortgage companies and originators who are taking advantage of the consumers.