YSP is the mark-up between the wholesale rate on a mortgage and the retail rate (ie the rate given the borrower) on the mortgage. Much like one can buy products and equipment wholesale, and sell for a premium, the same applies for rates on mortgage loans.

Here's how it works…..when a borrower requests a “rate quote” from a loan officer, that loan officer contacts the wholesale division of the bank(s) he/she is doing business with. The wholesale division informs the loan officer what the “par rate” is, and also informs the loan officer the commission he/she will be paid for providing a higher interest rate to the borrower.

For example, the wholesale division may say “the par rate on a 30-yr fixed mortgage is 6.00%”, meaning the loan officer will not receive any commission from the lender if the loan is provided to the borrower at 6.00%. That wholesale division will encourage the loan officer to sell the mortgage at a higher rate, by offering commission for each 0.125% higher in rate.

For example, the wholesale division may say “we’ll give you $1,000 if you sell the borrower a 30-yr fixed mortgage at 6.125%, and $2,200 if you sell the mortgage at 6.25%”. This premium offered to the loan officer for selling the mortgage at a higher rate is known as Yield Spread Premium.

While one may say “well, the loan officer has to earn money some how”, the fact is this method of compensation opens the opportunity for Yield Spread Premium abuse….especially since the wholesale division of the bank offers different compensation amounts for different loan programs. In recent years, loan officers were being offered 3x their normal commission to sell the “negative amortization loans”, since these loans presented high profits to the banks....but often did not represent a good choice for the borrower.

While loan officers do need to get paid, the fact is their method of compensation needs to be aligned with the best interests of the client. Particularly, their compensation should be independent of the loan program and interest rate, and should instead be based on a negotiated fee with the borrower that represents compensation of services performed.

Jack Guttentag has been a pioneer in this reform movement, and created the Upfront Mortgage Brokers Association, a consumer advocacy group, to further the cause. The solution posed by Mr. Guttentag is that of transparency- fully disclosing the amount of Yield Spread Premium received by the loan officer, as well as any other commissions or fees received by the loan officer. Upfront Mortgage Brokers that are part of this association negotiate a service fee with their clients upfront, and rebate the borrower any and all YSP received on the loan.

This topic of Yield Spread Premium abuse was addressed in the formation of the Mortgage Reform and Anti-Predatory Lending Act of 2007. And hopefully very soon, we will have federal laws requiring loan officers to disclose this Yield Spread Premium to the borrower (though retail banks, sadly, may be excluded from this provision). In the meantime, borrowers should require their loan officers to disclose the YSP, for it is the borrower’s right to know the fees being charged for services performed.

For more discussion on this topic, the reader is invited to check out Mr. Guttentag’s articles: Can Mortgage Points Be Negative? and Eliminating Yield Spread Premium Abuse.

To add to the mix, the real estate and finance markets are continually changing. As these markets change, so does the value of your home.

The statistics quoted in the media don't offer much help in terms of understanding the current value of a single home. The National Association of Realtors (NAR) tracks the sales of existing homes in terms of median sale price. During a period of time, half the homes sold for more than the median price, and half sold for less.

When the median price increases, this can reflect higher overall home values. Or, it can simply mean that more expensive than inexpensive homes sold during a period. This was the situation in San Francisco last year when luxury properties outsold starter homes.

A decrease in the median price usually indicates that more inexpensive than expensive homes sold during that period. Many foreclosure properties are in the lower price ranges. In areas where the median sale price is declining dramatically, a higher volume of lower-priced foreclosure sales could be a contributing factor.

Regardless of price range, foreclosures tend to sell for about 15 percent below the rest of the inventory, according to Andrew LePage, an analyst with DataQuick Information Systems, a real estate information service.

HOUSE HUNTING TIP: Changes in median price at the national level gives you little information about changes in home values in your area. According to NAR, the national median sale price of existing homes declined 7.7 percent in March from a year ago. The California Association of Realtors reported that the median sale price of homes in the San Francisco Bay Area was down 10.2 percent from March 2007.

DataQuick came up with a different number. According to DataQuick, the median price of resale homes in the Bay Area declined 20.4 percent in March from a year ago. However, in Contra Costa County, one of the nine counties that comprise the Bay Area, the median sale price dropped by almost one-third from a year ago. This was attributed to that fact that 44.7 percent of the sales in March were foreclosures.

The S&P/Case-Shiller Home Price Index uses a different method for measuring changes in the housing market. Rather than report changes in median sale price, S&P/Case-Shiller uses a repeat sales method that compares sale prices of individual homes that have sold at least twice over a period of time. This is thought to be a more reliable way to assess actual changes in market value. Corrections are made for such things as major renovations and deferred maintenance.

According to Robert Shiller, a Yale University economist who pioneered the S&P/Case-Shiller Home Price Index, home prices have declined 25 percent in the Bay Area since the market peaked in May 2006. Interestingly, Bay Area homes priced below $513,218 dropped 33 percent since February 2006. Higher-priced homes, above $756,420, declined only 6.8 percent.

The residential housing market is so localized that you need to consult with local professionals to get a realistic gauge of the current market value of your home. One approach is to have your home appraised by a knowledgeable local appraiser.

THE CLOSING: Or, have a local real estate agent who knows the market well prepare a comparative market evaluation for you.

Dian Hymer is author of "House Hunting, The Take-Along Workbook for Home Buyers" and "Starting Out, The Complete Home Buyer's Guide," Chronicle Books.

Once you have your permit, it's important to understand how the inspection process works, and what you need to do to be ready for it. Knowing when different inspections are required and what the inspectors are going to be looking for will help everything go much more smoothly.

When you receive your permits, you will also be given information about how to call for the inspections. Some cities utilize an automated call-in system, some do it online, some have live technicians that take the requests, and some offer all three. However it's done, be aware that most jurisdictions require that you request an inspection with at least one day's notice, sometimes more.

DIFFERENT PROJECTS, DIFFERENT INSPECTIONS

As you will see from your permit card when you pick it up, there are a wide variety of different inspections, many of which may not be required for your particular project. Many building departments will tell you specifically which inspections you'll need to request, but if they don't, be sure that you ask when you pick up the permits.

Here are some of the more common inspections, as well as when they occur and what the inspector will be looking for.

Footing Inspection: This is typically the first of the inspections, and occurs after the grading has been done and the forms have been laid for the foundation, or at least for the footings. The inspector is looking to see that the footings are the proper size and depth, that any reinforcing steel is in place, and that the location of the foundation does not violate any setbacks.

Underfloor Inspection: This occurs after the foundation has been poured and the floor framing is in place, but before the subfloor is installed. This gives the inspector the opportunity to look at the floor framing, as well as any plumbing or mechanical systems that might be in place under the floor. The inspector will be looking at the size and spacing of the framing; that proper materials have been used wherever the wood meets either the concrete or the soil; and that plumbing and mechanical systems are properly sized, installed and supported.

Rough Inspections: These inspections occur after the rough framing has been completed and all the rough wiring, plumbing and mechanical components have been installed, but before any finished wall and ceiling covering is installed. These are typically the most extensive and complicated of all the inspections, since there is a lot to review and it will all be covered and inaccessible in the future.

The rough framing inspection includes an inspection of all the structural components. The inspectors will be checking that the proper size and type of lumber was used, and that the spacing is correct; that hangers and steel connections are the correct type and are installed with the proper type and quantity of fasteners; that flashings and other weatherproofing measures are in place; and that the roof, windows, exterior doors and other components are in place to make the building weather-tight.

Rough electrical inspections include checking the size and installation of all the wires; the service panel; grounding; installation and location of boxes; installation of can lights; and whether the wires are properly routed and protected. Rough plumbing inspections look at the size and type of pipe that was used; proper slope for drain pipes; vent pipe sizes and locations; size and location of water lines; and that everything is secure and well supported. Rough mechanical inspections include the size, location, and installation of all ducts and vents; installation of furnaces and ventilation fans; and the proper ducting of fans to the outside of the building.

Insulation Inspection: This inspection occurs after the wall insulation has been installed and checks to see that it is complete and of the proper R-value.

Drywall Inspection: Some cities include a drywall inspection, which occurs after the drywall has been installed but before it is taped. The inspectors are checking to see that the proper number and type of fasteners have been used to secure the drywall to walls and ceilings.

Final Inspections: When everything is done, the inspectors will make their final inspections of all systems to ensure that everything has been completed correctly. They will test different systems, check for compliance with manufacturer's specifications, and ensure that everything is operating properly and the house is safe for occupancy.

Remember that this is just a brief overview of the inspection process, and that the actual number, timing and details of the inspections can vary widely. Be sure to talk with your building department to get the specific details of the inspections for your particular project, and to get any of your questions answered before you begin.

Remodeling and repair questions? E-mail Paul at paul2887@ykwc.net.