Mortgage brokers don’t lend money; they find money. And they find money from a group of mortgage companies called wholesale lenders. Wholesale lenders don’t make loans to consumers directly. Instead, they make loan programs available to mortgage brokers, who in turn ‘‘mark up’’ the interest rate to the retail level. The difference between the wholesale rate and the marked-up rate is how much money the broker makes. It’s not unlike any other wholesale/retail consumer product: Buy low, sell high.
Brokers can make more money on your loan with something called a yield spread premium, or YSP. Each morning, all wholesale lenders publish their interest rates for that business day. And while most of these rates will be the same, there might be a difference in how much each interest rate ‘‘costs’’ the mortgage broker.
For example, a mortgage broker will begin comparing interest rates from various wholesale lenders. The forte of a mortgage broker is that the broker has the ability to ‘‘shop’’ for the best mortgage rate by comparing the hundreds of lenders that the broker is signed up with.
But what the broker may really be doing is not finding you the best rate but finding himself the most money.
A broker can peruse the daily wholesale rate offerings and find three lenders offering a 15-year fixed-rate mortgage at 5.50 percent. The difference is not the rate; the difference may be the YSP. Lender A might offer a 1.00 percent YSP, Lender B might be offering
a 1.375 percent YSP, while Lender C is offering only 0.875 percent that day, all on the very same 15-year fixed-rate mortgage program. Remember, it’s the YSP that typically goes to the mortgage broker as its profit. So which lender do you think the broker is going to choose? Lender B.
On a $400,000 loan, Lender A pays the broker $4,000, Lender B pays $5,500, while Lender C can muster only $3,500 that day. Lender B gets your loan because the broker makes more money from it while you get the rate you were promised.
Is that mortgage broker going to give you back some of that money? No. Should she? I don’t think so, but others may disagree. If you agreed to a 5.50 percent interest rate and your broker locked you in at that rate, then you got what you wanted. Of course, a mortgage broker who picks up a few extra bucks because she found a slightly better deal at one of her wholesale lenders could certainly offer to give you some of that ‘‘extra’’ money, but she is not obligated to. Compare it to a retail store. If the store can cut its costs on a product, it can pass along the savings to you, but it is not obligated to do that.
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