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.