Debating Yield Spread Premiums: RU Talking to ME?

Aug 19, 2010

From Gregg Christoff, who apparently doesn’t like what I have to say and thinks I don’t know what I’m talking about —-

Ok, no offense but this Garfield has no clue what he is talking about in this article. Let me tell you how YSP actually work. Typically banks send mortgage originators (lender) rates every day. The lender then chooses which rate he is going to offer the client. Frankly the higher the rate above the raw rate the higher the yield spread premium. (Which translates to higher commission paid to the lender.) Obviously, the lender cannot offer the raw rate to the client because no profit will be reckonized unless the lender can charge for numerous fees. Normally, charging additional fees is challenging due to the competitive nature of mortgage lending. Therefore, most lenders make thier income from YSP.

When it comes to charging YSP frankly it depends on how much time is spent preparing the loan. If it is a quick and easy loan a minimum YSP can be “charged”. Therefore the loan rate should be close to the raw rate for that loan product. On the other hand, some loans can take months even up to a year to close. So obviously the YSP has to be higher to offset the time and overhead needed to prepare that loan.

The bottom line is no one can stay in business without collecting some type of profitibility. Do you know of any business that can survive without any income?

Like any business, there are always ones that act responsible and with integrity and those that don’t. There are a number of cases where people abused the mortgage industry as it was originally intended. These people have created a black eye for the industry.

But to say that YSP is used to lie to clients claimed by Garfield is utterly ridiculous. If it wasn’t for YSP, how was a mortgage company to stay in business?? Answer that Garfield………..[OK see below]

ANSWER: NO OFFENSE TAKEN, BUT I ALWAYS KNOW WHEN SOMEONE SAYS “NO OFFENSE” WHAT THEY REALLY MEAN IS THAT THEY DON’T WANT TO HEAR AN ANSWER THAT MAKES THEM LOOK FOOLISH.

YIELD: The rate received by the lender on a loan adjusted for the effects of amortization, points and other factors. That is why the APR is different than the nominal rate quoted to the borrower. The actual yield is considered to be the percentage return that goes to the lender, taking into consideration the amount of money the lender advanced and measured against the amount of money the lender actually receives on an annual basis.
If there was ONE YIELD there would be no YIELD SPREAD. And if there was no YIELD SPREAD there would be no YIELD SPREAD PREMIUM.
A Yield SPREAD arises when there are two different possible yields for the same loan. One is better for the borrower and one is better for the lender.
If the spread favors the lender, then a PREMIUM is paid to the one responsible for creating it — i.e., the mortgage broker or mortgage originator.
YIELD SPREAD PREMIUMS for 2001-2008 ran 3-4 times higher than the figures you quote. In some cases, they were much higher than that because all the premiums and commissions were raised to keep mouths shut who knew that the appraisal would never stand the test of time — even one day worth of time.
While it is possible that an argument could have been made for the old yield spread premium of 1-1/2%, it still amounted to a commission that paid for asymmetric information — i.e., the lender/broker knew more than the borrower or the borrower would not have paid it.
In order to “earn” a yield spread premium, the broker or originator must convince the borrower to accept a loan which gives the lender a higher yield than the borrower could otherwise pay. If the borrower takes the bait (you come to the table with less money, you reduce the the monthly payments at first anyway, etc.) then the yield spread occurs and the premium is paid.
In order to convince the the borrower to take the loan terms that give the lender a higher yield, the broker must downplay the negative aspects of making the switch and play up the apparent advantages of the terms that give more to the lender.
To seal the deal, the broker pretends to be acting in the best interests of the borrower when in fact he is acting in the best interests of himself and the “lender.”
Pretending means the broker is lying to the customer about who to trust. And the substance of the lie is that the loan that gives the higher yield to the lender is better for the borrower. This lie can only be accomplished in complex transactions like real estate purchases with one or more loans. Otherwise the borrower would see right through it.
Thus I stand by my rendition of yield spread premiums and assert that you are counting the pits in the orange while someone is driving off with the grove — with your help.