Refuse to yield to oversized yieldspread premiums YSPs

Most mortgage originators want to sell you a loan to earn a commission. No loans, no paycheck. Plus, loan reps earn their highest commissions when they sell you higher-cost loan products. If your loan rep says, "The best I can do is a rate of 6.25 percent and 2 points," don't accept that claim as the gospel truth. Just like a car salesperson (or any other type of salesperson), the loan rep may be testing you.

If you agree, great. If you balk, the rep can say, "Oh, wait a minute, I've just thought of something else. Maybe I can get the lender to slice a point off those origination fees. Those folks owe me a favor."

To avoid overpaying, ask to see the loan rep's rate sheet. The rate sheet shows the "wholesale" cost of various loans. The bigger the spread between the wholesale price and the price (interest rate and points) you pay, the larger the loan rep's commission. Ask the rep, "What's your YSP on this loan?" For cookie-cutter Fannie/Freddie loans, a fair YSP should not exceed (in my view) $1,500 to $2,500. If more, ask the rep to explain and justify. Ask Realtors or other loan reps whether the quoted YSP seems fair and competitive.

Credit Blemishes

Mortgage lenders sometimes classify borrower profiles into categories of A, B, C, and D. The lower your grade, the more you pay for a mortgage. But just like in school, the grade you receive depends on who does the grading. Even with credit blemishes, one mortgage lender might give you an A-, another might downgrade you to B or even a C status—and, correspondingly, persuade you to pay a higher interest rate and fees. Generally, profile "grading" includes more borrower data than credit scoring. No precise distinctions apply because lenders differ in their approach to underwriting and loan pricing. Lenders also use categories called prime, Alt-A, and subprime.

If you get downgraded because you fall short of the perfect borrower profile, challenge that assessment. Ask why. Is the loan rep testing you so he or she can make more money? Or do you deserve your downgrade? Also, learn how long it will take—or what you can do—to reach A status. Maybe you should defer buying until you can qualify at lower rates and costs.

Talk with other mortgage companies. If your blemishes consist of nothing more than a few late payments, you can probably find an A grade mortgage. Even when you've suffered more serious setbacks, it's sometimes possible to provide an excuse that will at least get you Alt-A pricing.

One mortgage broker confessed to me that 30 to 40 percent of B and C borrowers could probably qualify (with a little tweaking) for an A or Alt-A pricing. If you deserve a B grade or lower, negotiate and persuade. Emphasize your strong points (the eight Cs). Ask whether a higher down payment of co-signor (or co-borrower) will gain you better pricing. Talk with an FHA or VA loan rep. These programs offer good pricing and benefits, yet with relaxed qualifying. (Many loan reps won't suggest these possibilities because they do not originate FHA/VA loans.) Provide compelling reasons. When asked, some loan reps will come down from their sticker prices when you bolster your borrower profile.

Prepayment Penalty Discount

A loan rep can receive an extra yield-spread premium (commission bonus) by slipping a prepayment penalty into a mortgage contract. Prepayment penalties deter loan runoff when interest rates fall. So, typically, a loan that restricts (or prohibits) prepayment can be offered at, say, .25 percent less than a loan that lacks such a penalty. But if the rep does not pass along the rate discount to you, the lender shares its gain with the rep.

Whether you should request the discounted interest rate in exchange for prepay penalty depends on the same rate/point questions that always come up: How long do you plan to keep the loan if interest rates don't move down? And, does either inflation (or disinflation) seem imminent, leading to higher (or lower) interest rates?

If the odds point to lower rates, skip the penalty. If higher inflation and higher interest rates look more likely, then you won't refi any time soon. So, if you accept the penalty for the rate discount, you can profit from the trade-off. (Remember, many mortgages omit prepay penalties. Therefore, this trade-off issue will not arise because accepting the penalty does not become an option.)

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  • idris
    Can borrower refuse yield spread premium?
    7 years ago

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