A reader asks: What is a yield spread premium? A yield spread premium (YSP) is a rebate from a commercial lender to a commercial mortgage broker for delivering a commercial loan with a higher interest rate than the lender required. For example, suppose ABC Finance is making subprime commercial loans at 9% today. If a mortgage broker delivers a borrower prepared to pay 10%, ABC Finance will pay the mortgage broker, at the close of escrow, a rebate of up to two or three points. Is this fair to the borrower? Isn't this rebate a kickback? A yield spread premium should definitely be disclosed to the borrower, both for legal and ethical reasons. Nevertheless, many times a YSP makes good sense for all concerned. For example, let's suppose a borrower needs a maximum loan on the refinance of his office building worth just $200,000. A loan of 75% is just $150,000 - and that's the gross loan amount. Commercial loans are much harder to close than home loans, and the loan amount is tiny. The mortgage broker has to legitimately have a chance to make at least $4,500 - otherwise it makes little sense for him to accept the assignment. But the borrower cannot afford to have $4,500 come out of the proceeds of the loan. He needs every cent possible from the proceeds of the loans to pay off the existing first mortgage and to buy this special machine for his business. Therefore the mortgage broker might say to his client, "If we raise your rate from 9% to 10%, I'll make my three point fee on the backside, as a rebate from the lender, rather than take $4,500 out of the proceeds of the loan." This arrangement works for everyone. Commercial lenders cannot pay yield spread premiums, however, unless the loan has a prepayment penalty; otherwise the loan could pay off the next day and the lender would be out his three point rebate. Yield spread premiums are rather new to commercial mortgage finance. They have been common in home loan finance for a decade, but they didn't appear in the commercial mortgage finance business until the last two years. Banks rarely offer yield spread premiums. In fact, I have never heard of any banks offering them. If any of our readers know of any banks offering yield spread premiums on commercial loans, would you please write to me at George@Blackburne.com? The type of lender offering yield spread premiums on commercial loans are the sub-prime lenders who bundle their loans into pools and sell off bonds secured by the loans in the pool. You can think of these lenders as the "B" lenders, the lenders who make the deals that are not quite good enough for the bank but the deals are too good for a hard money lender. They key issue to understand is that these lenders all have huge prepayment penalties. You can find over seven hundred and fifty different commercial lenders, including hundreds of subprime commercial lenders, on C-Loans.com.
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