Yield Spread Premium - What Is It, And Why Do You Care?
October 25, 2007
The yield spread premium is a confusing and under-explained closing fee that leave borrowers lighter in the pocket once the closing has occurred. Simply put, it is a payment made by a lender to a mortgage broker in connection with a borrower’s mortgage transaction. It is shown on the Settlement Statement (HUD-1), but often in a way that is difficult to understand. It is a cash rebate that the lender pays to the broker for selling a loan with an interest rather that is above the wholesale rate that the borrower would otherwise qualify for.
In other words, it’s a way for the mortgage broker to be paid more money for “up selling” the borrower on a loan that is less attractive than that which would otherwise be obtained.
Mortgage brokers are required to disclose YSP as a fee “POC” (Paid Outside Closing) on page 2 of the HUD1 Settlement statement, inside the margin, away from the column marked “Paid from Borrower’s funds at Settlement.”
So how does it leave the borrower with less money? Because if the mortgage broker sells a loan at 7% when the wholesale rate would be 6%, the borrower pays more money over the lifetime of the loan because the broker wanted to make a few extra dollars.
The Mortgage Reform and Anti-Predatory Lending Act of 2007 introduced to Congress October 22 by Rep. Bradley Miller (D-N.C.) and co-sponsored by 16 members of the House including Financial Services Committee Chairman Barney Frank (D-Mass.), could be interpreted to do away with the yield spread premium. Not surprisingly, the National Association of Mortgage Brokers has come out against this provision in what is swiftly turning into one of the most important mortgage lending bills to come out of Capitol Hill in years.
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