Yield Spread Premium Defined

What is a yield spread premium?

2 Answers

Simply put, Yield Spread Premium, or YSP is a rebate paid by a lender to a mortgage broker for brokering a loan to that lender.

Mortgages are securities.
Mortgage-backed-securities are traded on Wall Street just like other bonds. They have a standard price (to buy) and a standard yield (to sell). The higher the yield, the more money the seller will make when they sell.

So if a mortgage broker originates a loan at 6.5% and 6.5% is the going rate for the mortgage-backed-security of which the loan will become a part, then there is no spread beyond the standard yield.

If however, the broker originates the loan at 7.0%, now there is a SPREAD beyond the normal YIELD, for which the lender will pay a PREMIUM. Hence YIELD SPREAD PREMIUM.

This can be kind of confusing stuff. So just remember, YSP is basically a rebate that someone gets for brokering a loan to a lender. It is not paid by the borrower (except that the homeowner's interest rate could be higher which will have them paying more over time).

SRP, or Service Release Premium, is a similar rebate paid from a bank to a bank when one sells a loan to another.

If Countrywide made a lot of loans for borrowers at 7.0% a few years ago, and now the going rate is 6.0%, they will get SRP because they are selling something more profitable than the current market.

This is a pretty technical side of the mortgage industry. If there is anything preventing you from rating this answer 10/10, please email me and I will update the answer.

Your definition of YSP is incomplete and the omission is quite important. You say that you are a mortgage broker, so you should know how important this subject truly is.

YSP can be profit for the broker but often times the interest rate is adjusted by discount point charges from the lender for specific profiles. An example is a cashout transaction at 80% LTV. There is a 50 basis points charge universally. That is absorbed by YSP. More important ,in this market, is fico score adjustments. A fico score of 620-639 has a risk assesment cost of 1.75 basis points. This is represented by an adjustment to the interest rate or else the consumer would have to pay this charge as a discount. We need to educate consumers that a simple answer that the going 30 year rate is 6.25% does not give them the true picture.