Yield Spread Premium - What Is It?
Yield Spread Premium is one way that all mortgage professionals can get paid. As I sit and write this I cannot help but get the willies from thinking of all the times I have heard this term used incorrectly by real estate agents and even mortgage professionals. I'm a mortgage broker and I've been in the business since 1996. One of the first things that I learned when I started was that the only way for me to make money as a mortgage broker was to charge points or get Yield Spread Premium.
Yield Spread Premium is money that a lender pays a loan originator or in my case mortgage broker for the interest rate that the borrower takes for their loan. For example, let's say that you call me to get a mortgage and it's for $200,000 and all things for you are great like credit, income etc. You are the perfect borrower. So after I pull your credit and look up interest rates I say to you that I can get you an interest of 6% for no points. How do I get paid? Well, I have priced your interest rate to pay me a point from the lender. With this in mind you ask, is there a way to get a lower rate? I say "yes" and to get 5.75% I will charge you 1 point. It is an either or choice for you.
Who Charges Yield Spread Premium - Every Loan Officer Does
Now here is where I'm going to set the record straight. Any loan officer no matter where they work - let me repeat - no matter where they work are pricing interest rates based on some elevated interest rate or charging points to make money. The investors who fund the loans that you can get for your home have a wholesale price that they offer to the mortgage company. Just like any retail store in the world, there is some markup so that the mortgage company can make some money too. This happens at Costco, Walmart, Target, Barnes & Noble, Amazon.com, Toyota, and Sears - to name a few stores. For that matter, even real estate agents are charging to help a homeowner sell their home - they aren't working for free.
If you don't believe me, do some rate shopping. Get a quote from a local mortgage broker - make sure that you get their good faith estimate - and ask for a point and non-point quote. You can also refer to the non-point pricing as "par pricing". Then go to a company like CountryWide Home Loans, or Wells Fargo, or Bank of America and get the same quotes from them. Then sit down to compare them. 95 out of 100 times in my years working at a mortgage broker, I at least matched or beat CountryWide, Wells, and BofA. Most of the time, I would be the first to quote and I would tell my customers to go get other quotes and then come back to me. Like I said, quite often I would beat them without touching my original quote.
Only Mortgage Brokers Have to Disclose Their Yield - Don't Get Fooled by Bankers
The unfortunate thing is that Congress has decided that only - yes only - mortgage brokers have to disclose how much money they are making on the interest rate that they are charging you. Can you imagine going to McDonalds and ordering a Big Mac and having the person behind the register say to you, "if you pay us the $2.49 that is on the menu then the store owners will make exactly $.73 cents?" This is the condition that mortgage brokers have to conduct their buiness in. Not only that, but other mortgage professionals and real estate professionals bad mouth mortgage brokers for charging a Yield Spread Premium when the other mortgage professionals do it too - they just don't have to tell you about it. The guilty real estate professionals who say what they are saying about mortgage brokers is because most of them have their mortgage person that they want to send you to.
Perhaps you are asking why the belly ache about Yield Spread Premium. Well the belly ache comes from a general attack on mortgage brokers nationwide from mortgage bankers and other real estate professionals. Mortgage brokers and their companies are responsible for approximately 65% of all loans written in the U.S. That is a big chunk of money that the mortgage bankers are losing out on to mortgage brokers.
Another argument I have heard against mortgage brokers is that mortgage brokers don't have to have, or don't have their loan originators be licensed. Well, that's true, but neither do mortgage bankers and other banking institutions who give mortgages. There are some states in the U.S. that do require originators to be licensed. This is a very good idea. But the U.S. Congress should make it a national requirement that every single loan originator no matter who they work with should have to get a license and maintain it with continuing education. A licensing and continuing education requirement like this would put loan originators in a similar situation to real estate agents, attorneys, stock brokers, financial planners, insurance agents and most other professionals who handle consumer money and financial affairs. The National Association of Mortgage Brokers - NAMB.org is in support of a national licensing program that licenses every loan originator no matter for whom the originator works.
Why Use a Mortgage Broker?
Mortgage brokers have incredible flexibility in the types of loans that they can offer. Why? They maintain relationships with many different wholesale lenders. They typically don't work on salary so they are highly motivated to find solutions to challenging loan scenarios. Also, they heavily rely on referrals because they don't work on salaries so they have an incentive to do a geat job for their customers. For more information on using a mortgage broker see GetPreQualified.com's article: Why Use a Mortgage Broker?
So the next time you go shopping for a mortgage to buy a home or refinance, check with a broker too. Do your home work, but do not be afraid of getting ripped off when you see them disclose Yield Spread Premium. Also, do not let your real estate agent talk you out of using a mortgage broker because of the Yield Spread, their mortgage person is getting it too, you just might not be told how much you are paying them to do your mortgage. Wouldn't you like to know?
