Thursday, November 10, 2005

YSP & SRP

I think in this stage of the mortgage industry, more and more people are focusing in on YSP & SRP. YSP is short for "Yield Spread Premium" and SRP is short for "Service Release Premium". What are these? Yield spread premium is a compensation paid to a mortgage broker in exchange for providing a loan to a customer at a certain interest rate above the posted "par interest rate". For example:

If today's par rate was 6%, this means that the mortgage broker could offer you an interest rate on your mortgage of 6% and he/she would not receive any compensation from the bank for your loan. The mortgage broker would need to charge you as the borrower directly for their fee in the form of origination points or broker fee(s).

Let's say that the mortgage broker offered you a rate of 6.5% and you accepted. Well today's par rate is 6%. Well in exchange for giving you a loan at a higher rate, the bank will offer the mortgage broker a Yield Spread Premium of 1.5% of the loan amount if he locks in the rate today. On a loan amount of $200,000, that is $3000 in YSP that the mortgage broker is given by the bank at closing.

Now, a few things to keep in mind. First, YSP changes daily with the posted interest rates. Also, the longer the duration you lock an interest rate, the lower the YSP the broker receives. In exchange for a longer lock in period, you may have to pay a fee directly to the broker at closing or increase the interest rate to compensate for the lower YSP.

How do you know how much a mortgage broker receives in YSP?
Look at your Good Faith Estimate closely. It is usually reflected as a POC (paid outside of closing item). Also, look closely at your HUD settlement statement at closing to make sure the fee is close to what you were disclosed. If the YSP is higher, than you probably could have gotten a lower interest rate. If it is lower, look at the other fees on the HUD. Make sure the mortgage broker did not make up the difference in "junk fees". <--- that is a post for another day Is the par interest rate the same for everyone? No. A par rate for a person buying a home with 20% down and excellent credit might be 6%. If you change the perameters of the loan, you could very well change the par rate. There are adjustments for things such as loan size, the amount of down payment, whether you are refinancing or purchasing a home, if you are taking cash out at a refinance, your credit score, and so on. Now the "par rate" is considered a wholesale interest rate. You can get the par rate and pay an origination or broker fee. Ask your mortgage professional how this is possible.

For more information on wholesale interest rates and yield spread premiums (YSP), please visit the "wholesale interest rates" page on my website by clicking here.

What is SRP?
SRP is similar to YSP but it is paid to banks when they sell the loan on the secondary market. The other difference is that the banks DO NOT have to disclose the SRP to customers period. Banks usually receive more SRP than an ethical mortgage professional would receive YSP on like transactions. Usually, you will receive a lower rate from a mortgage broker that is receiving YSP on a loan that you would at the bank. At least, if you are working with an ethical mortgage broker.

So the moral of the story is, the bank is not offering a better deal. Find an ethical mortgage broker and keep him or her for life. You will not regret it.

Posted by Jason Lash at 9:22 AM

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