Determining the Merit of Mortgage Loans
In a supplement to the Journal of Financial Planning January 2008 issue, Christine McClatchey, Ph.D., assists financial planners in determining the merit of mortgage loans. The article, which I could not find online, discusses compensation in a mortgage transaction, discount points, lender rate sheets, yield spread premium (YSP’s) and their abuse, along with tips for borrowers.
To summarize, the loan officer is the primary contact for the borrower. He can be either a lender or a broker, but acts like an independent contractor because he is often times compensated via commission. These commissions derive from the origination fee (finders), processing (paperwork), and the Yield Spread Premium (YSP).
The officer has latitude when it comes to YSP. Yield Spread Premium is the difference between the going rate and the rate the borrower chooses. Typically if a borrower plans on living in a house for a while, they may pay “points” to bring down the mortgage rate. What is less known is that you can also receive credit for a higher rate. Called a negative YSP, this is typically used when a borrower doesn’t plan on staying in the house very long. Whether this money is suppose to go toward lowering the closing costs I’m not sure. However; where abuse comes in is when loan officers do not pass YSP credits directly to borrowers. Abuse can also come in when the disclosure requirements aren’t met regarding these YSP’s and compensation.
If it were me, I would be concerned if I was paying points, or receiving credit, that I was getting the full amount of this YSP. To determine this I’d check sites like www.bankrate.com to determine interest rates in the area you are looking to borrow, and talk to lenders that are willing to give you a copy of their Lender’s Rate Sheet so that you know exactly what rates are offered (by lenders) and what the costs are for the points.