Yield spread premiums can bite you

NEW YORK (CNNMoney.com) — The yield spread premium (YSP) is a mystery to most home buyers, but it would pay them to get more familiar with this little understood feature of the mortgage business.It’s the basis for the fee a broker gets for selling a loan above the par rate, or the lowest interest rate a borrower qualifies for. It’s a standard industry practice, but it can also be an incentive for abuse.

Say a couple buys a new house and a broker finds them the lowest wholesale rate available of 6.5 percent for a 30-year fixed mortgage. The broker needs to make money on the deal, so he offers them a loan at say, 6.75 percent. The lender then pays the mortgage broker a percentage of the total loan based on the quarter point yield spread premium.

Even though they paid an extra quarter point, the couple probably got a better deal than they could have found on their own. Brokers can also guide consumers through the maze of confusing paperwork, including filling out loan applications.

Subprime loans get new standards

WASHINGTON (Reuters) — U.S. bank regulators Friday tightened standards for mortgage lending in a bid to curtail risky practices that have been blamed for a record level of foreclosures.

Borrowers should not be penalized for refinancing a mortgage before a low introductory rate resets to a higher level and lenders must have evidence a borrower can repay, according to a statement of principles issued by the regulators.