I thought I’d start with a little about wholesale rates and how they are marked up by the broker. I’ll end with YSP, the best kept secret in mortgage lending. (You need to know that discount points, YSP, and origination fees are all computed against the loan amount. You also need to know that the lower the interest rate, the more discount points you pay the lender; and the higher the rate, the more points the lender will credit you or the broker, called Yield Spread Premium or YSP).
I strongly suggest you log onto Wikipedia and read their article on Yield Spread Premium. They say it so much better than I. www.wikipedia.com
Currently the best wholesale rate out there for a 30 year mortgage for a strong borrower (good credit, job, etc) is approximately 6.375%. So we will use that for our examples to follow. What is interesting is to see how the the cost of that rate changes depending on the loan situation.
That 6.375% 30 year rate based on a 5 year fixed ARM might receive a .5 discount point credit from the lender, whereas the 6.375% rate based on a 30 year fixed is going to cost about .25 discount point payable to the lender. Remember, this is still wholesale, next the mortgage broker might need to add his markup. The markup will vary on how much you are borrowing. If you are only borrowing $50,000 the broker will add more markup than if you are borrowing $500,000.
If you borrow $50,000 and the broker charges you 1.0% origination, the broker is only making $500 on the 30 year fixed scenario. That is not much, so he might add more origination. On the other hand, if you are choosing the 5 year ARM, the lender is giving the broker that .50% credit ($250) so now the broker is up to $750 while still charging the same 1.0% origination fee.
Now, lets say you are borrowing $500,000. On the 30 year fixed, if the broker charges you the same 1.0% origination fee, the broker is receiving $5,000 instead of $500. You would still be paying the .25% discount point ($1,250) payable to the lender. Hopefully in this example the broker would pay the .25% discount point out of his origination fee and still make a nice $3,750 on the loan.
If you were borrowing that $500,000 on the ARM, the lender is still paying the broker the .50% credit or YSP ($2,500) so hopefully the broker is not also charging the 1.0% origination fee. Even if the broker now only charged .50% origination, he is still making $5,000 on the loan between the two forms of compensation.
These credits from the lender to the broker are where the lending industry needs transparency in lending. The credits are called Yield Spread Premiums or YSP for short. YSP’s are barely disclosed to the borrowers, yet are a major source of compensation to the brokers.
YSP is not a bad thing. Borrowers can choose a higher rate so they can use the YSP to keep loan costs down by letting the lender pay the broker and even the loan costs. The important part for you is to be informed of how your YSP, if any, is being used. Are you getting any benefit from the higher rate is the question?
My next blog will deal with the concept of To Whom does that YSP belong to anyway? YSP has been considered the brokers windfall to deal with as the broker sees fit. However, I maintain that since the borrower is paying for that YSP in the form of a higher interest rate over the term of the loan, it is the borrowers YSP. Yet the government supervisory agencies, the banks and the mortgage industry treat the funds as the brokers.
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PS. My last blog warned of tightening underwriting guidelines which will effect the ability of some of you to borrow. I just now got this notice of new, restrictive changes from a large, very respectable equity (refinance) lender:
Mack Ransom
Mack Ransom Mortgage
mackr@charter.net
541-488-0340
*Maximum CLTV full doc for all borrowers will be 95% (currently 100% CLTV)**CLTV greater than 89.9% will require a 700 mid score (currently 660)*
*Stated Income will only be available to self-employed borrowers (currently available to all borrowers)*
My point is that whether you use me or someone else, if you are refinancing or purchasing and you are dealing with loan to values in the 95% range, you should get moving, especially if you are a stated income type loan. Values are dropping in the valley and you may get to where you can’t refinance and have no choice but to accept the new rate on that ARM that you already have.
