What Is the Yield Spread Premium on a Mortgage Loan?

It’s important to ask your mortgage broker how they get paid. In many cases, mortgage brokers receive a yield spread premium (YSP), which is a payment from a mortgage lender for signing a borrower up for a mortgage loan with a rate that is higher than they actually qualify for. The larger the spread between the two interest rates, the more money the broker makes.

Subprime Mortgages and YSPs
YSPs are getting more scrutiny these days because many consumer advocates and legislators say they’re simply kickbacks to mortgage brokers to steer borrowers into high-cost mortgage loans. Critics also say YSPs contributed to the subprime mortgage crisis. A study by a Harvard Law professor found that 90% of subprime mortgage loans involved kickbacks that averaged $1,850 each.

YSPs also hinder progress toward eliminating racial discrimination in home lending, according to the Center for Responsible Lending. That’s because statistics show that African-Americans and Latinos disproportionately receive mortgage loans with higher interest rates. Even when their credit risk is identical to that of whites they had higher interest rates, and many experts believe that’s probably related to YSPs.

Reverse Mortgages and YSPs
The state of New Hampshire recently passed a bill that bans YSPs on reverse mortgages, the first state to do so. As a result, one reverse mortgage lender, Generation Mortgage, told its brokers it’s pulling out of New Hampshire. Other states could also pass similar measures to rein in YSPs. In the meantime, the Federal Reserve Board is pushing for better disclosure to borrowers. Among the changes it recently proposed to Regulation Z (Truth in Lending) are prohibiting payments to mortgage brokers based on interest rates and prohibiting brokers from steering borrowers to transactions that are not in their best interest.

This entry was posted on Thursday, July 30th, 2009 at 8:25 pm and is filed under Reverse Mortgage . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.