“When are mortgage prices negotiable, or are they ever?”

The general rule is that interest rates and points are negotiable when the person the borrower is dealing with has the discretion to change them. (Points are an upfront charge expressed as a percent of the loan.) In most cases, borrowers deal with either commissioned loan officers (LOs) or mortgage brokers. LOs usually have discretion to change the rate and points, and brokers always do.

Commissioned loan officers (LOs) are employees of lenders, but they have many of the characteristics of independent contractors. Their main job is to find borrowers and take their applications. They are compensated largely or entirely by a commission expressed as a percent of the loan amount.

LOs usually have limited discretion to depart from the price sheets they receive every day from elsewhere in their firm. If they can charge the borrower more than the price on the sheet, it is called an “overage,” and the LO may share it. If the LO is forced to take less than the posted price to meet the competition, it is an “underage,” and may cost the LO part of his/her commission.

Some lenders allow underages but not overages. This is not necessarily consumer-friendly because the lender that only allows underages might be pricing above the market. “If the borrower is dumb enough to pay our price, fine, but if he wants to haggle we’ll come down.” Lender policies toward overages and underages are not public information.

Bottom line: if you are dealing with an LO, you should be in negotiation mode, because there is a good chance that your interests are not entirely in sync.

Lenders view LOs as a necessary evil: they need them to generate loan volume, but they are costly to support. Successful LOs can earn half a million dollars a year or more in commissions. I was once on the board of a large lender where the top LO made twice as much as the CEO. Lenders are always on the lookout for less costly alternatives, and the Internet is the most promising one to come along.

If you contact a lender through the Internet, the person who assumes responsibility for your transaction is most likely to be a salaried employee rather than an LO. The lender does not have to pay this person a commission, since he/she was not responsible for getting you in the door. He/she is also unlikely to have any discretion over prices. Hence, you need not be in negotiation mode, though you should compare prices across different sites.

Mortgage brokers are independent contractors who deal with multiple lenders. They receive price sheets every day, just like LOs, but brokers get them from every lender with whom they do business. Except in special circumstances, brokers do not have the discretion to deviate from the price sheets; the lenders will accept the posted prices, nothing less.

The prices posted by the lenders who deal with brokers, however, are wholesale prices, as opposed to the retail prices received by LOs. The wholesale lenders who post these prices rely on brokers to do the work that is performed for retail lenders by its employees. The broker adds a markup to these prices, which converts them into retail prices. Ordinarily the markup is not revealed.

The retail prices quoted by brokers are negotiable because they include the broker markup. An adjustment in the retail price by the broker is an adjustment in the markup. If you are dealing with a broker, therefore, you should be in negotiation mode, because your interests are not entirely in sync.

An Upfront Mortgage Broker (UMB), however, will negotiate his/her markup directly with you and pass through the wholesale price from the lender. Once the markup is established, the conflict between you and the broker is largely eliminated. UMBs are listed on my Web site.

What was said above regarding the discretion of LOs to change rates and points applies as well to fixed-dollar fees charged by lenders. However, these fees are seldom included in price quotes, on the theory that they are mechanically fixed by the lender to cover costs. Hence, even borrowers in negotiation mode often ignore them. This can be a costly mistake, because some lenders view them as a source of extra profit.

If you deal with a mortgage broker, this is not a problem because the lenders who use brokers don’t play this game. But borrowers dealing with LOs should always include fixed-dollar fees in their negotiations.

The writer is Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.

***

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