Buying a home is far different today from how it was before the economic collapse. The Federal Reserve has introduced a variety of changes to help ensure that another financial crisis will not occur. Amongst these changes are provisions that require income to be a factor in any home loan approval and, most recently, to ban yield spread premiums, or YSPs.

Yield spread premiums were largely responsible for the housing boom and the subsequent market crash. This controversial lending practice, now banned, allowed lenders to generate additional profits from loans by charging borrowers interest rates that were higher than market. In essence, they are something like a kickback.

Here is how they work:

A mortgage lender issues a loan for a specific interest rate (e.g. 6%); the mortgage broker then attaches an additional percentage to that sum (usually between 0.5% and 2%). For example, an addition of 0.5% will, on average, create a profit of 2% of your loan amount that would be paid to the broker (i.e. $2,000 for every $100,000 financed).

This additional sum was in addition loan origination fees (usually 1%), broker fees, and discount fees. What made them particularly ominous was that many borrowers were unaware this was costing them money; in fact, more than 90% of all loans were closed with a rate at least 0.5% higher than it needed to be prior to the changes introduced by the Federal Reserve. Yield spread premiums had cost consumers an estimated $16 billion every year.

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