What is YSP or SRP?

A reader recently called me and wanted to have a working understanding of the term Yield Spread Premium (YSP). YSP or “premium pricing” is somewhat synonymous with Service Release Premium (SRP) in many consumers’ minds; in that it is a mysterious term they hear and assume it is costing them extra money. So what do all these terms refer to and why do you need to be aware of it, you ask? Well it can be a part of the overall revenue generated by a mortgage loan and certainly plays a significant role in the rate and points you pay on a mortgage.

There is actual a difference in the meaning of the two terms technically. The SRP is best described as the value inherent in the servicing of your mortgage loan on a long term basis. So let’s say that you get a 30 year fixed rate at 6.25% and pay a 1% fee at the closing. On a conventional loan the SRP is approximately 1% as well. So does that mean you are paying that amount? No, the SRP is not a direct charge to you at the closing, but does create additional revenue to the mortgage company when your loan is securitized (or converted to a mortgage backed security).

So what about when you closed that loan at 6.5% and you paid no points/fees? What happened then you may ask? That is where YSP comes in to play. At 6.5%, Wall Street was likely paying back a 1% YSP to your mortgage company. So the mortgage company got a 1% SRP and another 1% YSP, so they still earned 2% of the loan amount in total revenue. The rate created the same revenue to the lender in both cases. In fact whenever you see a “low” or “no cost” loan or refinance, this technique is exactly how that gets done. Many readers are probably familiar with DiTech and their $395 flat fee loan. It is an entire marketing gimmick built around just this principal and can be performed by any lender.

So at the end of the day YSP and/or SRP is a normal part of many mortgages, and for the most part goes unnoticed. However, there is potential for abuse because neither YSP nor SRP is required to be disclosed in the truth-in-lending annual percentage rate (APR). Further, mortgage bankers are never required to disclose it at all, on any of their documents. Meanwhile mortgage brokers are only required to mention it in the margin of the HUD-1 settlement statement and Good Faith Estimate disclosure, despite the fact that there may be no difference in the overall price between the banker and the broker. Most of the abuse I see in this area will occur when someone has awful credit and has to enter the world of B&C financing. The YSP may be several points in those cases, even to a level where I think most consumers would agree it constitutes usury. Unfortunately if you have any suspicion you are being gouged in this fashion, your only method of avoiding it is to shop somewhere else and get several different quotes.

For financial advice on this or any other aspect of home finance, call the professional. Dan Smith can be reached at 303-674-0201 or visit his web site at www.ColoradoHomeLoans.com .