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June 23, 2003
"I eavesdropped on my loan officer and
heard him say that he was on his way to a �nice overage�. What is an
overage?"
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.
Copyright Jack Guttentag 2003
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