A lender's end to overages

Bank of America recently delivered the following message to its loan officers: "Policy Change: Effective with initial locks on or after Jan. 21, 2010, overages will not be allowed on either purchase or refinance transactions."

Some years ago, I had occasion to compare the marketing of home mortgages by lenders in the U.S. with the marketing of carpets in Middle Eastern bazaars. The comparison favored the carpet merchants, who didn't pretend their prices were fixed. Virtually all carpet buyers know that in the bazaar, bargaining is the rule.

While less-competent bargainers may pay a little more, they are paying for their incompetence, not their innocence of the rules. In contrast, a large proportion of mortgage borrowers did not understand that they were in a mortgage bazaar -- they paid for their innocence.

The price of innocence is called an "overage." It is the difference between the price a lender posts with its loan officers -- which is the price the lender expects to receive -- and the price the loan officer (LO) charges the borrower.

If the posted price is 5 percent and zero points, for example, and the LO charges the borrower 5 percent and 0.5 point, the 0.5 point is the overage. Typically, the LO will get half. Interested readers will find a full discussion of how overages work on my Web site.

We have not always had overages. In the 1920s, before there were secondary markets, consumers who wanted mortgages visited the offices of commercial banks, savings banks, or savings and loan associations, and dealt with salaried employees who had no discretion or incentive to adjust prices.

Overages arose following the development of secondary mortgage markets after World War II. Secondary markets made it possible to go into the loan origination business without becoming a regulated financial institution. Because you could sell loans as fast as you made them, all you needed was a little capital and a line of credit.

These firms are "mortgage companies," or (as they much prefer) "mortgage banks." I sometimes refer to them as "temporary lenders" as distinguished from "portfolio lenders" who hold the loans they originate in their portfolios.

Mortgage banking developed its own operating methods and a culture to match that were very different from those of depository institutions. They invested very little in physical facilities designed to attract walk-in traffic during business hours. Instead, they retained loan officers (LOs) to actively pursue clients, as opposed to sitting behind a desk waiting for clients to appear.

To develop purchase-loan business, LOs courted real estate sales agents, making themselves available to the agents wherever and whenever they were needed to take a loan application, which might be on the hood of an automobile on a Sunday morning. To develop refinance business, LOs might camp out in the office of a public agency that maintains records of deeds and liens, developing lists of borrowers who might profit from a refinance. ...CONTINUED

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