Let's start at the beginning. A mortgage broker is like an independent insurance agent. They work with several different lenders, each catering to different client bases. Some lenders specialize in high loans amounts, some in FHA & Fannie Mae "vanilla" loans, some in higher risk borrowers. Most of the time, many different lenders are competing for the same borrowers. Just how aggressively they wish to compete can vary from day to day. For this reason, most lenders publish a rate sheet at least once every day. A rate sheet is just a big price list of all the loans the lender offers and what they cost. Lenders charge the broker (and therefore the borrower) for lower rates on any particular program. Lenders also PAY brokers for higher rates. They pay even more for even higher rates. This payment from the lender to the broker is the Yield Spread Premium. To understand this better, lets look at a snippet from a random rate sheet.*



This is a very simplified example of what a broker is looking at. For this example, these rates are for a FNMA (Fannie Mae) fixed rate loan. This is the most common and basic loan in the industry. Two different terms are available; 30 years & 15 years. Lets look at the 30 year fixed loan in the left square. The first column is the interest rates that the lender is offering. The next four columns show how much the lender will pay/charge for these rates, depending on the lock period. A broker can choose from a 15 day lock to a 60 day lock. The loan has to fund between the time the broker locks, and the lock term expires. The most common lock period is 30 days, so let's look at the third column. As you can see, I circled the Par Rate at 5.875% (0.000). The Par Rate is a wash. The lender neither charges nor pays to lock in this rate. If you wanted a 5.75% interest rate, the lender is charging 0.625 points. 1 point equals 1% of the loan amount. On a $100,000 loan amount, 1.000 equals $1,000. In this case, 0.625 points equals $625. The math works the same going the other way. If the broker locks you in a 5.875%, they earn 0.500 points, or $500 on that same $100,000 loan. They'd earn $2375 on a $100,000 loan if they locked you in at 6.5%.

I can see the steam coming out of your ears as you consider that somebody could actually earn an extra $2300 on top of all the other closing costs and origination fees for your loan. This has happened, maybe even to you, but step back and take a deep breath, there's more to the story. A high YSP like this is often used to pay the borrower's closing costs. When you here those ads on the radio about "no cost loans", they use the YSP to fund all of those costs. Brokers may collect a YSP on smaller loan amounts. It's just as hard to do a $80,000 loan as it is to do a $375,000 one.

Also remember that these are wholesale rates. That means (for hypothetical example) the rate that Countrywide Retail offers to you, the borrower, is not as low as the ones Countrywide Wholesale offers through a broker. Why? Because they don't have to pay for the marketing and labor costs that the broker assumes in generating these loans. The Countrywide loan officer may be warning you to watch out for brokers and their evil YSP, but if he is offering a 6.125% loan at "par", and the broker is offering you a 6.000% loan, and earning that 0.500 YSP, does it really matter who's making what? The point is to look for the best deal, not who's charging a YSP, and who isn't

Mortgage BANKER's, not a Broker. Means my company will fund loans to you, then turn right around and sell them to lenders. By operating this way, we don't even have to disclose that we earn a YSP , and can even earn an addition sum called a Service Release Premium that is based on total volume of loans delivered over a given month. Brokers, on the other hand are required by law to disclose this YSP on the HUD-1 Settlement Statement that you sign at closing. Because Bankers like myself can conceal this extra income, many of them are the ones yelling the loudest about how brokers must be screwing you because they earn this "kick-back" while they are as pure as the driven snow.

Face it. It's unlikely that you will know just how much profit is being harvested on any given loan. But think about it. Do you know how much profit your insurance agent makes on you? Do you know how much profit Starbucks made on the latte' you're sipping? Does it really matter? I say no. What matters to me is, who is giving me the best deal. If you want the best deal on a mortgage loan, you need to stop worrying about how much everyone is making, and focus on what YOU are paying.

 Here's what's important. What are your closing costs? What is your interest rate? What's the APR?

APR, not YSP is the one simple number that determines who is giving you the best deal.