Dealing with yield-spread premium abuse
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| By Jack Guttentag
• Bankrate.com |
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The controversy over yield-spread premium, or YSP,
abuse has generated much more heat than light.
Yield-spread premium abuse is associated in most people's
minds with mortgage brokers, but the fact is it's not limited to
just them. The potential for the same or a very similar abuse exists
in connection with all types of mortgage loan providers.
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How to watch for, deal with yield-spread premium abuse:
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Types
of mortgage loan providers
For the purpose of this article, loan
providers can be placed into three groups: mortgage brokers, correspondent lenders
and true lenders.
Mortgage brokers typically perform all loan origination
functions except underwriting and funding. Some brokers underwrite
and some fund with money provided at the closing table by the wholesale
lender (table funding), but such exceptions don't matter. What matters
is that all brokers deliver loans at prices set by the wholesale
lenders with which the brokers deal. Borrowers pay the wholesale
price plus the broker's markup. The yield-spread premium arises
in this process.
Correspondent lenders do everything that brokers do
but, unlike brokers, they fund loans, with money they usually borrow
from banks. This is what makes them lenders rather than brokers.
However, correspondent lenders deliver loans at prices set by the
wholesale lenders with which they deal, in exactly the same way
as brokers. And the yield-spread premium arises in this process
in exactly the same way.
It is important to understand that
the line distinguishing brokers from correspondent lenders is often quite murky.
Some broker firms evolve into correspondent lender firms as they grow, acting
as a correspondent on some transactions and as a broker on others. Some quite
large correspondent firms may continue to broker loans of a particular type or
in a particular state.
What distinguishes brokers and correspondent lenders
from true lenders is that they do not take market risk. Market risk
is the risk involved in making loans at one price and selling
them later at the market prices prevailing at that time. The market
risk is taken by the wholesale lenders with which the brokers and
correspondent lenders deal.
True lenders do take market risk. They originate loans
to resell in the secondary market or to hold in their portfolios.
Because they do not lend against prices set by others, there is
no yield-spread premium, and therefore no abuse. However, such lenders
may commit overage
abuses, which are closely related.
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