To begin with, let it be said that most lenders are reputable and even honest in their dealings with the customer. That is they don’t consider their profit margins and how they arrive at them something that needs to be revealed to the applicant. In general, from a business perspective it is difficult to find fault with this point of view. Lending money to a mortgage applicant is considered a retail business. There are no restrictions against consumers shopping for the best mortgage terms just as they would any retail product and mortgage companies are not restricted to a maximum profit margin any more than a retail merchant.

Most lenders employ representatives commonly referred to as “Loan Officers”. They are sales associates charged with soliciting loan applications, qualifying applicants, managing loan processing, coordinating the loan settlement and keeping all parties content in the process. In most cases loan officers are commissioned. Commissions vary depending upon the company policy and the loan officer’s personal loan closing volume. The most interesting aspect of the commission structure is termed “underage and overage”. Under this practice the lender allows the loan officer to make loan pricing concessions to match or beat the competition. Generally the company and the loan officer share the shortfall or underage. Conversely, they both share in any gain or overage as well. Part of the company’s motivation in encouraging the application of this policy is to allow the loan officer to recoup commission loss due to the pricing deficiencies of the company. The intricacies of the mortgage markets are such that no mortgage lender can aggressively price their loan products to consistently undercut the competition and remain a viable business.

There are several methods of realizing overage. Mortgage interest rates are tied to long term stock market indices and are constantly changing. To suggest that the mortgage market is volatile is an understatement. The rate offered in the morning may not be available in the afternoon or it may also improve. It is infrequent that interest rates will change more than 1/4% in a twenty four hour period without the influence of catastrophic economic events but this happens often enough to deem the mortgage market as volatile. Interest rates and “discount points” are interchangeable. Generally with fixed rate mortgages 1/4% in interest rate is the equivalent of one discount point or one percent of the mortgage amount. A consumer shops three lenders for a mortgage today and calls the lender with the best terms the following morning. He requests that the terms quoted be locked in for a period of time to extend to the date of settlement on the property being purchased. The market has improved 1/2 point since the quote was made resulting in a 1/8% improvement in the interest rate. If the loan officer makes the consumer the beneficiary of the market improvement it would be unusual. The opposite is true when the markets deteriorate. The loan officer will normally delineate the market events that require the lender to increase the terms quoted.
Another scenario that may promote overage is termed “lock and float”. The consumer instructs the loan officer to lock in the interest rate. The loan officer is tracking an improving market and takes the risk of not locking until the following day when the company’s rate improves. Most lenders have strict policies against this procedure and the loan officer is taking a substantial risk of personal losses.
Mortgage interest rates can be locked in or guaranteed for prolonged periods of time but a lock of more than sixty days usually means a slightly higher rate and/or posting up front fees since the lender is exposed to excessive market deterioration.

When delays in closing on the purchased property occur, rate locks expire. Delays due to issues such as title problems or builder completion obstacles are common and frequent. Policy on extensions of expired locks varies with mortgage lenders and this is a question consumers should ask when shopping for a loan. The consumer is not likely to receive the full advantage of any market improvement and may even be priced slightly above the company’s best rate when rates have risen.

This article is certainly not intended to be a condemnation of mortgage companies or loan officers. It is simply a behind the scenes view of how mortgage business is conducted. Taking advantage of a window of opportunity to offset competitive factors is a common business practice. Gouging the consumer to realize massive gain is something else and not a common practice of the mortgage lending community as a whole. In fact, due to increased supervision during recent years, the mortgage industry conducts itself with a high level integrity uncommon to many industries.

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