Question: I am interested in becoming a mortgage broker. I have read a lot of controversy about "yield spread premiums" and how some people say they are really nothing but back door kickbacks from a lender. It seems to me that if a mortgage broker charges a borrower a one percent origination fee and also receives a one percent fee from the lender, he's getting paid too much. What is a reasonable compensation for a mortgage broker? Should yield spread premiums be banned?
Answer: This topic certainly needs to be discussed because there is a lot of misunderstanding. Let's start from the beginning.
A Yield Spread Premium, or YSP, is indeed a fee paid by a lender to a mortgage broker. The higher the interest rate, the higher the YSP. YSP's are nothing but discount points in reverse. The lower the interest rate, the more discount points charged by the lender.
On any given day I receive close to 60 wholesale rate sheets through the fax. All of them offer a variety of 30 year fixed rates with different "prices". The price is either a discount or a premium. Let me illustrate:
- 6.00% 1 Point
- 6.25% Zero Points, or Par
- 6.50% 1 Point YSP
- 6.75% 2 Points YSP
Okay, let's dissect the above chart. The lender is offering a 30 year fixed rate at six percent. At that rate, it will charge one discount point. At 6.25 percent, it charges zero points because it receives a higher interest rate for thirty years. Moving on up to 6.50 percent, the lender actually pays the mortgage broker one percent in the form of a YSP. At 6.75 percent, the broker receives two YSP points from the lender.
Remember that these are wholesale prices. The lender doesn't pay the costs of originating the loan such as loan officer commissions, processor salaries, office overhead, etc. At these prices, the lender receives a complete loan package ready to close.
So the mortgage broker will add a fee to each rate option, or "coupon". This will result in the actual rate and price to the borrower. Let's say the mortgage broker charges one point. The prices to the borrower will look like this:
- 6.00% 2 Points
- 6.25% 1 Point
- 6.50% Zero Points
- 6.75% One Percent Closing Cost Credit to the Borrower
In each of these situations, the broker will end up with one point - his fee. The borrower can choose the program that best fits his needs. If he has the money and he is certain he will hold the loan for a long time, he may want to choose the lower "bought down" rate and pay the two points to receive six percent.
On the other hand, if the borrower isn't sure how long he's going to be in the property, he would want to take a higher rate, less expensive option. At 6.75 percent, he receives a closing cost credit of one percent. On a $200,000 loan, that's $2,000.
YSP's are not "kickbacks". They simply allow the borrower more choice. The entire country is enjoying an immense refinance boom. Millions of homeowners are saving money by lowering they're rate. Let me illustrate how popular the higher rate, YSP options are. At my company, we originated about 150 refinances last month. Of those refinances, nearly 90 percent chose either "zero point" or "zero closing cost" options. This means that the broker compensation comes entirely from the lender through YSPs.
If YSPs were banned, zero point loans and zero closing cost refinance programs wouldn't exist. The only choices to the consumer would be lower rate, high cost options. You would be unable to obtain a mortgage without forking out thousands in fees.
One more thing about YSPs. It is illegal for a YSP not to be disclosed on the Good Faith Estimate of Closing Costs. The law requires that all fees paid to the broker from the lender be disclosed.
You have also asked me what is reasonable compensation for a mortgage broker. That answer is easy and the same answer for any other product or service in America - whatever the market can demand. A Ford dealer selling a 2002 Explorer for $35,000 isn't going to get a lot of sales of the dealer across town is selling the same model for $30,000.
Luckily, competition will keep mortgage rates in check. The mortgage business is extraordinarily competitive. In my area, mortgage broker fees typically vary from one to two percent -- paid either by the borrower or through a YSP -- plus a reasonable processing fee. On large loan amounts, the percentage will drop. On small loan amounts, the percentage will be higher. A little bit of comparison shopping will help you confirm whether or not you're getting gouged.
I've said this a million times before. The best way to choose a good mortgage broker is to seek out referrals from friends, family and business colleagues. Those folks who have had positive experiences will make a positive recommendation. At the same time, those who had a bad experience will share it. This will greatly increase your chances of choosing a competent and honest mortgage broker.