It is money extracted from your pocket by the loan officer. In the high-stakes
poker game that is the home mortgage market, you lost. And the major reason you lost was
probably that you didn’t know you were playing.
Loan officers who work for lenders or mortgage brokers receive updated prices from their
head office every morning. These consist of rates and points for different loan programs.
They are the "posted prices."
The loan officer who executes a deal at the posted price gets paid a commission that may
be .5-.7% of the loan amount. On a $100,000 loan, the commission might be $500-$700. But if
the loan officer can induce the borrower to pay more than the posted price, the commission
rises. It now includes an overage.
For example, the posted price on a particular loan is 5% and 0 points but the loan
officer induces the borrower to pay 5% and 1 point. (Points are an upfront payment expressed
as a percent of the loan amount). That point is the overage. It is worth $1,000 on a
$100,000 loan, and typically the loan officer gets half. So a "nice overage" can double the
loan officer’s commission.
Overages are heavily concentrated on high-rate loans with negative points, called
"rebates". For example, the lender posting a price of 5% and 0 points might also quote 5.25%
and -2 points. The lender will pay 2 points on a 5.25% loan.
Loan officers push higher-rate plus rebate combinations because they can collect an
overage without taking any cash out of borrowers’ pockets. If the loan officer in the
example above quotes 5.25% and -1 point to the borrower, the other point of rebate becomes
the overage. The borrower pays for the overage in the interest rate for the next 5 or 10
years, but that’s down the road.
Overages associated primarily with rebate loans are an equal opportunity abuse, practiced
by lenders and mortgage brokers alike. The only difference is that mortgage brokers who
retain rebates from lenders leave a trail in the Good Faith Estimate of disclosure, where it
can be discovered by the borrower, although usually too late to do anything about it.
Rebates retained as overages by loan officer employees of lenders disappear without a trace.
Defenders of overages argue that they merely reflect wheeling and dealing characteristic
of many markets. They point out that sometimes borrowers turn the tables, forcing loan
officers to cut the price below the posted price, which results in an "underage." The
automobile market works essentially the same way.
The weakness of this argument is that most people who buy automobiles understand that
wheeling and dealing is part of the game, but most mortgage borrowers don’t. They are
innocents. That’s why the number of underages is miniscule compared to the number of
overages.
Now that you are no longer innocent, how do you protect yourself? You either confront the
loan officer, or you switch to a distribution channel where there are no overages.
By confrontation, I mean that you let the loan officer know that you know that mortgage
prices are not engraved in cement, and that you have or will explore other options.
Remember, she has been sizing you up from the moment you walked in as to whether you are a
good candidate for an overage. Your job is to convince her that you are not. Don’t be afraid
to ask point blank, "You won’t charge me an overage, will you?" Its your money.
Borrowers who find even the mildest confrontation disagreeable, and who are therefore
ripe for an overage plucking, should avoid commissioned loan officers. For a set fee you
negotiate at the outset, you can retain an Upfront Mortgage Broker (UMB) to act as your
agent in shopping for a loan. Or you can deal with an on-line lender, such as Eloan.com or
Mortgage.etrade.com, which do not allow employees to deviate from posted prices.
