Many factors determine the rate, but basically interest rates are a function of risk:
• The risk that the investor will not get paid back. (This is why D credit mortgages cost more than A credit mortgages.) This is why adjustable-rate mortgages are cheaper than fixed-rate mortgages. (The further you lock in a rate, the more expensive it is.)
The risk that the servicer will get paid back too quickly. (If a servicer paid a certain number of points for servicing rights to a loan and the loan is refinanced in a few months, then obviously the servicer is unable to recapture his investment. This is why above-market, or no-closing-cost, loans are more expensive.)
How Do Mortgage Companies Make Their Money?
Mortgage brokers make their money from origination fees, rebates or yield spread premiums, and miscellaneous fees (such as processing and application fees). Mortgage bankers and lenders make their money from the following principal sources:
1. Origination fee. The origination fee is typically 1% of the mortgage amount. For example, if the mortgage loan amount is $100,000, the loan origination fee (1%) is $1,000. The origination fee is a fee to compensate for the costs of originating the loan.
These costs include:
- Commissions paid to the loan originator
- Salaries for the operations staff (receptionist, processors, underwriters, funders, and managers)
- Office overhead (rent, utilities, phones, equipment, etc.)
2. Miscellaneous fees. Lenders may also charge third-party fees (fees that are paid directly to a third party and that include document preparation fees, underwriting fees, and tax service fees). These fees can make the mortgages more profitable to service in the long run and supplement the income from the origination fee.
3. The difference between the lowest available price and any higher price he borrower agrees lo pay is an overage. Many lenders allow their loan originators lo sell mortgages with overages. The average is part of the commission paid to the loan officer. Not all lenders allow overages.
4. Servicing income. As we discussed earlier, servicing income can be quite lucrative for the lender. Another benefit is the fact that servicing is a year-round source of income.
5. Sale of servicing rights. The earnings made in the sale of the servicing rights can be quite significant. On most mortgage loans, the servicing rights can be sold for anywhere from 1 to 2% of the mortgage amount. If a mortgage lender loses one point on the origination fee (one point in commission fee and overhead), the lender will still be at a profit if it receives 2 points for the servicing rights.
Key Note: The servicing released premium (SRP) is the amount a wholesaler is willing to pay for the servicing value of a loan.
