Mortgage Rates and Mortgage Brokers

To understand the function of a mortgage broker, a key component of understanding how they operate is to understand how the mortgage broker sets their mortgage rates. 

A mortgage broker is predominantly a credit facilitator.  Their job is to obtain the customer, which is the home loan borrower, process the loan request which entails verifying the borrowers employment as well as their assets and credit, submit the loan to a wholesale lender and upon loan approval, coordinate the loan closing.

Mortgage brokers may offer the lowest mortgage rates in the local market or they be the highest or just somewhere in between.  Since mortgage broker is technically a facilitator of credit, the mortgage loan is funded by a wholesale mortgage lender or bank.  Mortgage wholesale lenders fund the loans for the broker and provide the price at which they will fund the loans. 

During the peak boom in mortgage originations, most all of the major banks in the U.S. engaged in wholesale mortgage lending or obtaining mortgage loans from brokers. Citibank, Wells Fargo, Bank of America, US Bank, National City Bank, Chase Bank and HSBC all had wholesale lending divisions which acquired home loans from brokers. 

The mortgage rate and any discount points determine the price the wholesale lender will pay for the loan.  The mortgage broker makes their money on any extra fees and the increase in rate or points over that paid by the wholesale lender.  As an example, if the wholesale lender offers to pay the mortgage broker a mortgage rate of 5.25% and 1 point for a standard $200,000.00 mortgage loan and the broker in turn offers the customer a mortgage rate of 5.25% and 2 points, the mortgage broker makes the 1 point.  1 point represents 1% of the loan amount.  The broker could offer the customer 5.75% and 1 point and make their income based on the difference between the 5.25% and 5.75%, as well. 

When the amount of money the mortgage broker makes is based upon the difference between the wholesale mortgage rate and the rate to the borrower, this difference is referred to as a yield spread premium.

The mortgage rates established by the mortgage lender will be influenced by the type of loan, the size of the loan and how long the loan is locked for.  Different loan types such as adjustable rate mortgages or FHA mortgages have different rates.  Since most of the income derived form mortgage originating is based on a percentage of the loan amount, it is not uncommon to see minor difference sin rates base on loan size.  And finally, longer loan lock costs more money since the mortgage lender has to honor that rate regardless of what happens to interest rates and mortgage rates in the market during the time of the loan lock and loan closing. 

As a real life example of how this functions, the following is a rate from a wholesale mortgage lender in the U.S that funds loans for mortgage brokers and also engages in retail mortgages or loan that are direct to the consumer.  The mortgage lender’s name will not be mentioned.

For a 30 year loan, this mortgage lender offers brokers a mortgage rate of 5.00% on a 30 day loan lock at a price of 101.509.  This price means the mortgage broker that delivers to the lender on that 30 day lock at 5.00% will be paid 1.509% of the loan amount as a fee or yield spread premium. 

That same wholesale lender offers a mortgage rate of 4.625% on 30 day lock at price of 99.253.  This means the mortgage lender needs to be paid .747 points to obtain that rate.  This can be accomplished if the mortgage broker closed the loan with the borrower at a rate of 4.625% and 2 points.  0.747 points would go the wholesale lender and 1.253 points would be kept by the mortgage broker.  This kind of pricing is similar to bond pricing, in which 100 represents the par rate, over 100 is a premium and under 100 is a discount where each point represents 1% of the loan amount.

The longer the loan lock the higher the cost of the home loans.  In this example, that same mortgage lender offers the 5.00% rate at 101.022 for a 6o day lock.  Since it costs more for a longer lock, the broker makes 1.509% on the 30 day lock and only 1.022% on the 60 day lock.  It is a fair assumption that shorter lock makes more money.  In this case, the mortgage lender in fact offers a price of 101.696 on a 15 day lock, which is a slightly higher fee for the mortgage broker than the 30 day lock.

Here is what the rate sheet would like to the mortgage broker with the mortgage rate, lock period and price paid:

Rate         15 Day Lock        30 Day Lock       45 Day Lock         60 Day Lock

4.625         99.455                  99.253                  99.005                    98.765
4.750        100.450                100.253               100.000                   99.764
4.875        101.188                100.997               100.738                   100.509
4.990        101.530                101.343                101.080                  100.856
5.000        101.696                101.509                101.246                   101.022
5.125        102.122                 101.940               101.672                   101.453
5.250        103.119                 102.943               102.669                   102.456
5.375        103.798                 103.628               103.348                    103.141

Now, to make this fun.  Since this example involves a mortgage lender that offers retail services, we can compare the current mortgage rate offered on their website to any old home borrower to those rates they offer mortgage brokers.  ( the wholesale rate sheet is not available to consumers and therefore  this comparison is available for those in the mortgage business that have access to wholesale mortgage lender rate sheets )

On the mortgage lenders website, this bank is currently offering a 30 year fixed rate loan on a 30 day lock with a mortgage rate of 4.875% and 0.488 points.  The same loan can be had at a rate of 4.750% and 1.323 points or 4.990% and 0.142 points per the website on a home loan in Illinois for $200,000.00. 

It has been some months since we have reviewed the mortgage broker / retail lender pricing and I must say that the rates to the mortgage brokers look fairly aggressive.  If I apply for a mortgage loan with this lender, the 4.99% rate will cost me 0.142 points and whatever other closing costs they have at closing, the mortgage broker can offer a 4.99% rate to me as well and get paid 1.343 points from the lender and make another 0.142 points if they charged the same points that the retail division of that lender charges.  That is a total of 1.485 points on the home loan.  If the loan amount is $200,000.00 that equates to a payment to the mortgage broker of $2,970.00.  Not bad income for originating one loan.  Of course, the mortgage broker will have cost for processing the borrowers loan request as well as fixed costs and marketing costs to finds the customers.