Client Question: Where is your YSP?

I've been asked this a couple times this week…I'm wondering if it's possibly caused by Aubrey Cohen's recent article in the PI about mortgage brokers, subprime mortgages and outrageous yield spread premiumsor if consumers are more savvy and aware of YSP.

Loan originators who work for mortgage brokers may receive a yield spread premium from the lender they are brokering the loan to.  This YSP is required to be disclosed on the Good Faith Estimate and the Loan Application Disclosure Form (if you're providing a mortgage for property in Washington State) and as well as the HUD-1 Settlement Statement.  YSP has not only been used for loan originator compensation, it has also helped pay for closing costs or provide mortgages with "no points". 

Loan originators who work for banks, credit unions or correspondent lenders are not paid YSP (unless they are brokering the loan).  However they may still be receiving compensation on "the back side" of the transaction.  It's just not required to be disclosed.  Part of the reason for this, with correspondent lenders, is the inherent difference between them and mortgage brokers.  Correspondent lenders underwrite, prepare loan documents and fund the transaction from their credit lines.  The mortgage is sold to the lender after closing.  A mortgage broker merely originates the transaction and may do some processing/coordinating with the lender.  They do not underwrite or fund the transaction.  A correspondent lender assumes greater responsibility for the transaction and may be compensated after the loan is closed.  Often times, correspondent lenders may receive favored pricing over a traditional mortgage broker as they assume more risk and are performing more of the work (underwriting, drawing docs and funding) than the broker. 

With the media focused on YSP, many consumers have become misdirected on how to select the person who will be advising them on one of the largest transactions they may face in their lifetime.  Focusing on how much they believe a loan originator is compensated will not provide them with the lowest rate, best service or most qualifed Mortgage Professional.  For example, if:

• Lender A is a mortgage broker who quotes 6.00% priced with zero points and a YSP of 1% of the loan amount.
• Lender B is a bank who quotes 6.00% priced with zero points (nothing is reported on the back end).
• Lender C is a correspondent lender who quotes 5.875% with zero points (nothing is reported on the back end).

All loan originators are being compensated in the scenario above…I would bet pretty close to the same.   If the going rate is 5.875-6.000% (as based on this example) why would anyone care how much someone is compensated?  I could totally understand if they received a rate of 6.500% (assuming all loans are locked at the same time/date as rates are currently changing on average three times a day and a 0.25% swing is not uncommon).   When you're shopping for a big ticket item, such as a TV, do you care what the salesperson is making or do you care how much YOU are paying?

If you're a long time Mortgage Porter subscriber, you know that I believe that selecting your mortgage by rate is not the best route to go.  Especially considering that you're making this decision based on a rate that is moot unless you are ready to lock at that moment.  Rates are a moving target.  For this reason, the YSP the mortgage brokers are forced to quote are only a best guestimate because they do not know what they will be paid until the loan is locked.

I don't have a problem letting clients who want to know what the compensation may be "on the backend"…just ask.  I question why a consumer would care if the rate is the going market or better.

Related post:

How Am I Paid?

Picking Your Next Mortgage by Rate Shopping?  You Might as well be playing Liars Poker.

Now is the time to work with a Correspondent Lender