Q: “What are rate sheets?”
A: Rate sheets are tables of interest rates and points (henceforth “prices”) prepared by a lender. The prices are those the lender is willing to accept at the time the sheet is distributed.
Q: “Who gets rate sheets, and when and how do they get them?”
A: Each morning, retail lenders distribute rate sheets to their loan officer employees, and wholesale lenders distribute theirs to all their approved mortgage brokers. The prices hold for the day, unless a new rate sheet issued later in the day replaces them. Rate sheets are distributed by fax or (increasingly) over the Internet.
Q: “Do rate sheets cover all the loans that a lender offers?”
A: Usually they cover the lender’s major loan programs only, because complete coverage would make them voluminous. Lenders vary in the number of programs included. If a broker or loan officer (henceforth “loan provider”) is looking for a program not covered by the rate sheet, they have to call the lender representative who handles such questions.
Q: “What is a loan program?”
A: It is a category of loans that is relatively homogeneous with regard to loan type and underwriting rules. Each loan program is separately priced.
Among 23 wholesale lenders that I looked at recently, I counted roughly 600 loan programs. Some are offered by all the lenders, others by some of the lenders, and still others by only a few or even only one.
A loan program offered by every lender is “Conforming 30-year Fixed”, which refers to 30-year fixed-rate mortgages that meet the eligibility requirements of Fannie Mae and Freddy Mac, the two federal agencies that purchase mortgages. “Conforming 15-year Fixed” is a separate program with its own pricing.
Q: “Are rate sheets binding on the lender?”
A: Yes and no. Lenders stand willing to lock the prices on the rate sheet if the lock is requested before a specified cut-off time, and if the shopper has met all the lender’s requirements to lock. These almost always include submission of a completed application.
On the other hand, a price taken off a rate sheet and quoted to a shopper by a loan officer or mortgage broker (henceforth “loan provider”) is not binding. If the shopper comes back the next day, the quote could be different.
Q: “Do borrowers get to see rate sheets?”
A: Borrowers seldom see them. Keeping such critical information under wraps gives the loan provider a negotiating advantage. In addition, rate sheets are quite complicated, and few loan providers want to take the time required to explain them. This is especially true of mortgage brokers, who receive different rate sheets, no two of them alike, from every wholesale lender with whom they do business.
Q: “Do the rate sheets distributed to mortgage brokers contain the broker’s fee?”
A: No, the broker’s fee is the markup over the wholesale prices shown on the rate sheet. As far as the wholesale lender is concerned, the broker’s fee is the broker’s business.
Q: “You say on your web site that Upfront Mortgage Brokers will ‘disclose the wholesale prices from which the broker’s selection is made… at the customer’s request.’ Does that mean that the customer looks at all the broker’s rate sheets?”
A: No, it means that the Upfront Mortgage Broker (UMB) will show the customer the price of the selected loan on the rate sheet of the selected lender. Going through all the rate sheets would be incredibly tedious and serve no purpose.
Q: “But wouldn’t it then be very easy for the broker to show the rate sheet that provides the largest payoff for him rather than the one providing the lowest rate for me?”
A: No, when you deal with a UMB, the broker’s fee is set and would be the same for a high-price lender as for a low-price lender. The broker has nothing to gain, and plenty to lose (including the customer) by selecting a price that is not the lowest of those quoted by all the lenders with whom the broker does business.
Q: “But how do I know that my particular UMB deals with the lenders offering the lowest prices in the market?”
A: You don’t know. On common programs offered by all or most lenders, however, competition results in very small price differences between wholesale lenders. It doesn’t much matter, therefore, which group of lenders your broker deals with.
On the other hand, price differences can be sizeable on programs offered by only a few lenders, and there is no reliable way for borrowers to find the best deal. The remedy is a system where borrowers will be able to shop wholesale prices themselves and take their selected loan to a broker to be processed. I’m working on it.
The writer is Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at http://www.mtgprofessor.com.
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