YSP - Why Is it Important In The Mortgage Process?

YSP is an abbreviation for Yield Spread Premium. Like most
"verbal shorthand" that is industry shop talk, it's not immediately
obvious what is stands for, or why you would care.

Let me take a moment to set a foundation regarding mortgage
rate and fee pricing.

Lenders will typically offer interest rates that cover a range of
roughly one to two percent. For example, in today's market,
lenders may have quotes in 1/8% increments from 5.5% to
7.25%.

So, if lenders are offering 5.5% and 7.25% loans, why would
anyone ever take a 7.25% interest rate?

Lenders (and investors) want to achieve a particular yield or
rate of return on putting their money to work. In order to
achieve this yield they may charge loan points with the lower
interest rates (discount points) or credit loan points with the
higher interest rates (rebate or yield spread premium). As
a reminder, one loan point equals one percent of the loan
amount paid as a fee.

Here's an easy way to think of this: If the lender get something
of lesser value (a lower interest rate) they will charge fees to
increase the value. If the lender gets something of higher value
(a higher interest rate) they give something back to create a yield
equivalency.

A rough rule of thumb for a 30-year fixed rate loan is that a
1/8% change in interest rate corresponds to a 1/2 point change
in loan fee. So if you want an interest rate that is 1/4% lower,
it would cost you approximately one point in loan fee. This
gets a little distorted as you move away from the center range,
like a bell curve.

If the borrower accepts a higher interest rate, there could
be surplus YSP over and above the origination fee that could
be applied toward the borrower's closing costs.

This would be the major reason why someone would take a
higher-than-normal interest rate - to have the lender pay most
or all of their other closing costs.

The most common use of yield spread premium as a loan
pricing tool is to offer borrowers a "no-point" loan. If we
assume that the typical loan origination fee is approximately
one point, then the borrower would accept an interest rate
about 1/4% higher in order to have the lender pay the origination
fee. The other choice would be to accept a lower interest rate
and then the borrower would pay the origination fee as part of
their closing costs.

As a result of the "subprime crisis" mortgage meltdown, there
is a lot of discussion about the abuses of the yield spread
premium in the mortgage community, and how borrowers have
been taken advantage of by greedy mortgage originators. The
most common discussion point is that borrowers were put
into loans at higher interest rates than those for which they
qualified.

A borrower could have been victimized if they were poorly
counseled, lied to, or failed to shop around to know what was
available in the market. Their loan could have been created
at an interest rate that paid a yield spread premium to the
originator and the borrower may have paid loan points as
well.

If the compensation received by the originator was
excessive for the service they provided, then the borrower
did pay too much (in interest rate and/or fees) for their loan.
This would be especially true if the borrower did not under-
stand how much they were paying, or did not shop around
enough to understand what the prevailing interest rates
were.

The responsible use of yield spread premium is to clearly
disclose options to the borrower, and to have the compen-
sation received by the originator be fair in the marketplace
for the service provided.

There are proposals coming from government to eliminate
YSP's because some originators have been unfairly enriched
by using them. But if these proposals succeed, then borrowers
will not be able to negotiate "no point" or "no closing cost" loans.

This would create an increased burden on a borrower who
is strapped for cash to pay these fees, or who is refinancing
a loan that is at the maximum loan in relation to the value of
the property who cannot increase the loan amount to cover
the fees.

The more loan programs and tools that we have to create
customized solutions for a borrower is a good thing. It is
our responsibility at originators and the borrower's respons-
ibility as consumers to have all the important facts, all the
costs, the risk tolerances, time horizons, goals and priorities
identified and discussed as we work together.

Closing Costs -Fair or Excessive?

You are ready to buy your home. You've saved for the
down payment and you know that you have to have some
money left over for reserves. You also know that there
will be some costs for various services to support your
transaction.

Then you are presented with a long list of fees and
charges. You don't know if they are necessary. You don't
know if they are reasonable. They are confusing and
mysterious and unclear.

Even after you are able to determine that the charges
are acceptable, you still want to be as sure as possible
that you won't be presented with additional charges just
prior to close of escrow.

The best way to assure yourself of this is to work with
someone you trust. You should actively seek referrals from
others who have gone through the mortgage process recently
and from your real estate agent.

Despite the press coverage of the unhealthy relationships
between unethical real estate agents and unscrupulous mort-
gage originators, the vast majority of real estate agents
are interested only in successful closings with the buyer
being well-served with honest dealings, competitive loan
terms and no-nonsense communication.

The professional real estate agents will know the mortgage
originators who are able to deliver quality service.

When you interview your prospective mortgage originator,
prepare some tough, direct questions for them. Assess
how they answer the question. If they are evasive, you may
find that you have someone who is unknowledgeable or
worse, someone who is deceptive.

You should be looking for someone who is transparent
about the process and who isn't defensive or evasive.
Clear communication should be an item high on your list.

The lenders are required to send you a "Good Faith Estimate"
of closing costs shortly after you submit a loan application.

It will include charges that are called recurring closing costs
that will include pro-rated interest on the new loan, pro-rated
property taxes, property insurance costs and the premium
for private mortgage insurance if required. If you have an
impound account for collection of taxes and insurance as
part of the monthly payments, your initial deposit to create
that account will also be shown.

A list of transactional costs, or non-recurring closing costs
will include loan points for discount and origination, escrow
fees, title charges, appraisal fee, credit report cost, loan
processing fees, underwriting charges, document prep-
aration fees, bank wire charges, courier fees, a charge
for notary/document sign-up and a few others.

When you receive this Good Faith Estimate, you should
review it right away. If you have questions or concerns,
contact your mortgage originator. They should be able to
answer your questions about the lender-related charges
at least. If they are experienced, they should be able to
give you a good overview of all the items on the Estimate,
the services that are being provided and an explanation
as to why they are necessary. Or, they should be able to
direct you to the appropriate escrow and title persons to
speak for their portion of the charges.

Once you have a clear idea of what to expect, let your
mortgage originator know that you expect to be informed
about any significant changes to the Estimate as soon
as they know. You can determine for your own purposes
what is significant, but make it clear to them what your
expectations are.

The escrow company will be pulling together figures from
all of the service providers as they approach the closing
date. You will be presented with a "Borrower's Estimated
Closing Statement" so that you know how much money
you need to bring in to close the transaction. Your escrow
officer can also tell you if the charges that are presented
are common for most lenders.

You will want to compare this to your Good Faith Estimate
to see how close the numbers are. If there are new line
items or if significant changes are now appearing, you will
want to contact your mortgage originator for explanation.

There are times when unforeseeable events occur that
affect closing costs. Contact your real estate agent as well
to determine that the new item was truly warranted
and unexpected. If it was foreseeable, or if the estimates
are not close, hold your mortgage originator accountable.

After all, they are the ones that deal with this every day and
they should be giving you a fair estimate at the beginning.

You do not want to have a request for additional money
to close presented to you just prior to your close of escrow.

If you follow this plan, you should be able to feel confident
that you have done everything you can to be prepared for
the closing. You will have a good idea of what to expect,
have a plan for being kept informed, been clear with your
originator that you will not tolerate significant inaccuracies,
and have found someone that you are comfortable with.