Client bought a home last year. On the HUD-1, second page, under Items Payable in Connection with Loan, Line 805, there is an item called "Yield Spread," of $1,283.26. Can this be construed as prepaid interest?
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If it's a percentage of the loan amount, I treat it as points. (Yield Spread, Yield Spread Premium, Yield Spread Adjustment, etc). I take it to mean that it's a charge for the difference between the current cost of money and the note rate. In other words, another junk fee with a fancy name to try and confuse the borrower. It usually works."The only function of economic forecasting is to make astrology look respectful" - John Kenneth Galbraith -
My understanding is that the Yield Spread or Yield Spread Premium is a fee which the lender pays to the broker or loan originator. This fee is does not technically cost the client or borrower anything and is paid kind of like a commission to the broker for using said lender to originate the loan. In my opinion it is not deductible.
As an example if the current rate today is 5% on a 30 year fixed loan. The lender may pay the broker a $1500 dollar YSP. But if the broker has the client pay discount points to buy the rate down the YSP might only be $750. Conversely if the broker quotes the borrower 5.25% the YSP might be $2200.00. Either way it is not technically a fee the borrower pays. It is a fee the lender pays to the broker for there business. At least this is what it was when I did mortgages years ago.Comment
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sea-tax: I understand your point if the YSP is paid outside closing, but I've seen many in which it's listed as one of the items in the 800 section of the HUD-1 and paid by the buyer. To me, that would fit the definition of "points". Maybe I'm wrong..."The only function of economic forecasting is to make astrology look respectful" - John Kenneth GalbraithComment
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Like Sea-tax, I usually see YSP as a fee that is not paid by the borrower, but as far as inclusion on the HUD-1, yes, it is there, but usually memoed "POC" by the lender.Originally posted by sea-tax View PostComment
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This is how I see it as well, I have never known or seen it paid by the borrower.Originally posted by BP. View PostComment
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As a practical matter I'd argue that as an economic reality everything is ultimately paid by the borrower - otherwise the lender and broker would have no reason to be in the game. But I also understand the niceties of the HUD-1 have to be followed.
Now this discussion has me thinking about digging up some of the returns I've prepared in the past to review how I handled them. I'm certain that I have seen many with Yield Spread Premium which was not POC, but naturally you guys have me second-guessing myself."The only function of economic forecasting is to make astrology look respectful" - John Kenneth GalbraithComment
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I posted the original question and yes, mine was noted POC and not actually included in either the buyer's or seller's column. I did not think this unusual, as a number of things are routinely noted this way on the HUD. It was the first time I had seen "yield spread."Comment
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Talking to a mortgage friend of mine who I know has been in that business for the better part of 25 years. He says that a couple of years ago the brokers had to start disclosing these fees, " relationships" if you will on the HUD. They are in fact paid by the lender says he and don't cost the borrower technically .
John's point of the borrower ecomonically paying for it by either a higher or lower interst rate is true but I am not sure that arguement would with stand an audit.Comment
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