Comparing loans and mortgage brokers? Ever wonder how mortgage brokers can make extra money on your transaction?

Economists believe that there’s more to the current mortgage crisis than the sub-prime fallout, and that the actual cause maybe mortgage brokers who inflate their client’s interest rates to secure large lender rebates. 

My mortgage broker drives a Bentley

Getting a good loan can be a slippery slope. At the highest level, all loans include fees and costs, but there may also be negotiated rebates that the mortgage broker will receive from the lender as part of their compensation. These rebates can be 2,3 or even 4% of your loan amount.

For example, maybe your credit isn’t perfect and your mortgage broker has locked you into an 8%, 30 year fixed, $1,000,000 loan—congratulations! But, here’s what might be happening in the “back room.” Maybe you actually qualified for a 6.5% loan and your mortgage broker “steered” you into the 8% program. When the loan closes, the lender will rebate the mortgage broker the delta between the wholesale rate you qualified for and the rate that was sold to you. In this case, $15,000. This rebate is also known as the Yield Spread Premium (YSP).

Caveat emptor

NOT ALL MORTGAGE BROKERS ARE ROGUE AGENTS. In very general terms, most honest mortgage brokers will generate income equivalent to 1% of the loan amount (give or take a little.)

Is the YSP always a bad thing?

No, absolutely not. When working with a mortgage professional who puts your needs ahead of their desire to sponge money from you, YSP’s can be used for:

To help pay closing costs

To help offset cost on a refinance

To cover fees, costs and expenses in a “0” point, “0” fee loan

To compensate the broker for particularly difficult and time consuming loans

Plus 101 other legitimate reasons

YSP is absolutely a fantastic tool when used with the knowledge of the borrower or for the borrowers benefit.

When is the YSP a bad thing?

When the lender or mortgage broker try to hide the rebate

When the lender or mortgage broker put there financial gain 100% ahead of your needs

When a mortgage broker is dishonest with you about their fees

When a mortgage broker puts/steers you into a loan program that is at a higher interest rate than you qualify for

What some mortgage brokers say about YSP?

This is how we make our money

It’s paid to us by the lender and as such, the “client” shouldn’t care*

Without rebates mortgage brokers will go out of business

Another example

Michael the mortgage broker recently assisted his client in securing a “great” interest rate after shopping the client’s “package” within his pool of investors and lenders. As listed in Michael’s Good Faith Estimate, he was to be compensated $2,500 for his mortgage broker services. In addition to the broker’s commission, the good faith estimate listed several other fees and 3rd party costs.

Because interest rates are still near historic lows, Michael was able to lock this client into a 6.5% loan—which seemed like a fantastic deal, right?

Here comes the tricky part. Because of the time-line used by lenders to complete loan packages, the client won’t see their full loan disclosure until they are signing loan documents, which normally happens a few days prior to the funding and closing of a deal. For Michael’s client, there was a line item paid by the lender to the mortgage broker for $18,000. Of course the client was ecstatic that the lender was paying the $18,000, no-harm-no-foul and the client goes forward with the loan (ouch)!

What’s really happening in this $18,000 windfall example?

*This is a 1% Yield Spread Premium at work. Without the YSP, the client should have received a 6% interest rate. Over the first five years of the loan, the extra .5% represents a whopping $43,000 in extra interest.

Last updated on January 24, 2012 by Blake Roberts