Question: I have read statements by you regarding “live mortgage pricing,” but I am not sure what it means or why it is important?
Answer: A live mortgage price quote is a price that the lender is prepared to lock at the time of the quote. A lock is a binding commitment to make a loan at the prices and terms specified in the lock agreement.
A live price quote is believable. A price that is not live, for any of the reasons given below, is not believable.
Yet many borrowers shopping for a mortgage select lenders on the basis of price quotes that are not live.
Lapsed Price
One reason a price quoted to you is not live is that it has lapsed. It was live but no longer.
Mortgage prices are set by loan originators on the basis of secondary market prices. Most loans are sold into that market after origination.
The practice is to price loans in the morning of each business day, after the secondary market has opened and trading prices have emerged. Those prices will hold for the remainder of the day, unless there is a significant change in the secondary market, in which case the opening prices will be replaced by new prices.
Price quotes after the close of business are the prices that existed at the closing. Comparing the prices of different lenders over a weekend, when websites show Friday’s closing prices, is convenient and can make your shopping more efficient.
But before making a selection decision, wait for the closing prices to be replaced by live prices on the morning of the next business day.
To avoid problems with lapsed prices, shop websites that provide a time stamp with all price quotes. The stamp should note the date and time of the quote, whether the quote shown is live, and if it is not, when it lapsed and when new live quotes will become available.
Unadjusted Prices
A second possible reason a mortgage price quoted to you is not live is that it is not properly adjusted for all the features of your transaction.
Just as shoe prices vary with the features of shoes, mortgage prices vary with the features of loan transactions. There are 10: loan purpose, property value, down payment, loan amount, property zip code, credit score, type of property, type of occupancy, lock period and escrow waiver. If the features assumed by the lender in quoting your price do not conform to your transaction, it may be a live quote for someone else’s transaction, but not for yours.
Lenders who quote prices over the telephone usually assume the transaction features that command the lowest price. Given the limitations of telephones, this is understandable, perhaps even defensible.
What is indefensible is the same practice on lender web sites, where it is all too common.
To avoid problems with unadjusted prices, solicit quotes only from sites that ask you to first input information about the 10 transaction features listed above that affect the price.
Partial Prices
A third possible reason a mortgage price quoted to you is not live is that only part of the price is disclosed. The price of a fixed-rate mortgage is the interest rate, lender fees expressed as a percent of the loan amount (“point s”), and lenders fees of fixed dollar amount. The price of an adjustable rate mortgage includes those, and in addition it includes the margin that is used to reset the rate on a rate adjustment date, rate adjustment caps, and maximum and minimum rates.
Some lenders have a bad habit of leaving out one or more components of the price.
Phony Prices
The fourth possible reason a mortgage price quoted to you is not live is that it is fraudulent.
The lender has no intention of lending to you at the quoted price. He is a “low-baller” who quotes a price below the market in order to get you started on the loan process.
Since prices will be reset many times while the loan is being processed, the low-baller always has a plausible reason for not being able to deliver the quoted price.
You make it easy for a low-baller if you solicit price quotes over the telephone. You make it difficult for a low-baller if you make sure the price quotes you get have not lapsed, are fully adjusted and complete.
About the Writer
Jack Guttentag is professor emeritus of finance at the Wharton School of the University of Pennsylvania.
