What is Yield Spread Premium (YSP)?

In its simplest terms, a yield spread premium (YSP) is the commission a mortgage broker is paid by a mortgage lender for locking in a rate for a borrower that is higher than what the borrower may normally have been able to qualify for. YSP is part of the way a mortgage broker makes a profit. Just as an auto dealer may profit by getting a wholesale price on a car from the manufacturer, and then mark up the price before selling it to a consumer, a mortgage broker can earn a profit by closing a mortgage at a higher interest rate than the the wholesale mortgage interest rate offered by the mortgage lender.

For example, let’s say that, based on the value of your home, your credit score and your down payment, you can qualify for a 6.0% 30 year fixed rate mortgage for $200,000 from a mortgage lender. If you access this loan through a mortgage broker, who then locks in the rate at 6.125% for the same borrower profile and loan amount, this amounts to a more valuable loan than the mortgage lender anticipated. For closing a higher value loan for the mortgage lender, the mortgage broker gets paid a commission directly from the lender. This is the yield spread premium.

Yield spread premiums have been uncontroversial for a number of years for two main reasons: one, consumers are typically not familiar with yield spread premiums and two, recent and proposed regulations have been taking a closer look at how yield spread premiums are disclosed on good faith estimates and other mortgage origination documentation.

At any rate, yield spread premiums are not considered unethical as a rule. To some consumers, it may appear that mortgage brokers would be incentivized to coax borrowers towards a higher interest rate in order to turn a profit. This may be true to a point, which is why yield spread premiums must now be disclosed on good faith estimates. But remember: many mortgage loans are not accessible to consumers unless they work through a mortgage broker. In the above example, the case may have been that the mortgage broker had access to that 6.0% loan, but if the borrower had shopped directly with the exact same mortgage lender, they would’ve been quoted a higher rate, since they wouldn’t be eligible for the wholesale price.

Interestingly, mortgage lenders who originate loans and then sell them on the secondary market must not disclose their equivalent of a yield spread premium. For example, if a mortgage lender originates and underwrites a 6.0% mortgage directly with a consumer, and then turns around and sells the mortgage to Fannie Mae, Freddie Mac or another mortgage buyer for a profit, this is essentially the same practice as a broker taking a yield spread premium. Yet there is no equivalent disclosure requirement for institutional mortgage lenders.

Part of the rationale for this is that there is more risk involved with the after market sale of mortgage lender. For example, a mortgage lender may originate a 6.0% 30-year fixed rate in anticipation of being able to sell it for a profit but may not find a buyer.  This is a non-issue with mortgage brokers.

With all that being said, there are fewer lessons to be learned through understanding yield spread premium than you might assume. Given that institutional mortgage lenders also effectively “mark up” interest rates in relation to their perceived market value, you cannot categorically assume that it’s always less expensive to originate a loan directly with a lender, rather than through a broker. You also cannot assume that a mortgage broker is purposefully upselling you when he or she collected a YSP. In some cases ,where loan aggregators are trying to fill out tranches, they may be looking for a certain type of loan, rather than higher interest rates. For example, a mortgage broker may collected a higher yield spread premium for suggesting a fixed-rate mortgage rather than an adjustable rate mortgage, if that’s what the mortgage buyer is looking for.

It’s also not an immediate red flag if you see a yield spread premium on your good faith estimate. And it’s also not out of line to ask your mortgage broker to explain it. Without being confrontational, simply ask them what the yield spread premium represents, and ask them if it is at all possible for you to qualify for a lower rate for the same mortgage loan. A professional and ethical mortgage broker will be frank and transparent with you regarding your options.

Note: a yield spread premium may also be noted on your GFE under another line item, such as “service release premium.”