What is a Yield Spread Premium (YSP)?
The originating lender pays a mortgage broker (who acts as an intermediary) a yield spread premium (YSP) in exchange for selling a borrower an interest rate higher than the lender’s par rate and for which the borrower is eligible. Sometimes, the loan’s expenses may be paid with the YSP, saving the borrower from spending extra money.
A law implemented in 1999 mandated that the yield spread premium be commensurate with the services the mortgage broker provides to the house buyer. Additionally, at loan closure, the yield spread premium was required by law to be reported on the HUD-1 Form. The 2010 Dodd-Frank Financial Reform Bill, passed to protect consumers after the 2008–2009 financial crisis, later altogether outlawed the yield-spread tip.
How a Yield Spread Premium Worked
When a borrower pays an origination fee, a yield spread premium, or a combination of these, the lender pays the broker directly. This is how mortgage brokers get paid. If there is no origination charge, the borrower is probably consenting to pay interest at a rate higher than the going rate.
Although it may lower the upfront expenses of the mortgage, paying an interest rate over market rates to compensate a mortgage broker or lender is not always a negative thing for the borrower.
A mortgage that is 100% free of costs for the borrower does not exist. A borrower will ultimately be responsible for paying closing expenses and commissions throughout the loan through higher monthly payments if they choose not to pay them.
Paying a relatively high interest rate rather than hefty upfront fees may be more cost-effective for borrowers who intend to keep their mortgage for a short period of time. Any contracts should be signed once a comprehensive cost-benefit analysis has been completed.
Mortgage Brokers and Par Rates
The standard interest rate that a mortgage lender offers based on the loan conditions and the borrower’s creditworthiness is known as the par rate. This rate does not include closing points, discount (mortgage) points, fees, and commissions.
An independent mortgage broker may evaluate loans from many banks and mortgage providers when a homebuyer engages with them. The broker will get a commission for their services. Many brokers earn remuneration in the form of an adjustment to the par rate, known as the yield spread premium, rather than a cash fee. Any changes to the par rate must be acknowledged in the loan agreement and approved in the settlement statements (the HUD-1 form) at closing.
Conclusion
- An extra payment made to a mortgage broker in exchange for putting a higher-interest loan with a borrower is known as a yield spread premium (YSP).
- YSPs will be mentioned on the HUD-1 form that is shown upon closure.
- The YSP is only one of the numerous costs of buying a house or piece of real estate.
- A law protecting homeowners from excessive yield spread premium fees was enacted in 1999.
- The Dodd-Frank Act outlawed the YSP practice in 2010.
