Loan Pricing and Lock Management

Mortgage pricing begins with the secondary market price for the specific loan type, which reflects the price investors will pay for the loan. This base price is adjusted by loan-level pricing adjustments (LLPAs): credit score adjustments (borrowers below 740 pay higher rates or fees), loan-to-value adjustments (higher LTV means higher pricing), property type adjustments (condos, multi-unit, investment properties carry surcharges), and documentation type adjustments (non-QM products carry significant risk premiums). The lender adds its margin (typically 100-250 basis points in rate or equivalent points) to determine the borrower’s offered rate. Pricing engines from providers like Optimal Blue, Polly, and Mortech automate this calculation across multiple investors simultaneously, allowing the lender to find the best execution for each loan. Margin management is critical: too-thin margins (under 100 bps) risk profitability if costs increase; too-wide margins (over 300 bps) price the company out of competitive markets.

When a borrower locks an interest rate, the lender commits to delivering that rate regardless of market movement between lock date and closing date. Lock periods typically range from 15-60 days, with longer locks carrying higher costs (approximately 0.125-0.25% per 15-day extension). Rate lock risk arises from two scenarios: if rates rise, the borrower benefits from the locked rate but the lender must deliver the loan at a lower-than-market price; if rates fall, the borrower may break the lock and refinance elsewhere (fallout), leaving the lender with an unrealized hedging loss. Lock management strategies include: mandatory delivery commitments to investors (the investor accepts rate risk in exchange for delivery commitments), best-efforts delivery (the lender commits to deliver if the loan closes, with no penalty for fallout), and hedging through TBA mortgage-backed securities (used by larger lenders to offset rate risk). Most startup lenders use best-efforts delivery to avoid mandatory delivery penalties on loans that do not close. Pull-through rate monitoring (70-85% is typical) is essential for pricing and profitability management.

Margin optimization maximizes per-loan profitability without pricing the company out of the market. Strategies include: best-execution analysis (comparing pricing across multiple investors for each loan to select the highest-paying purchaser), concession management (structuring lender credits and borrower-paid fees to optimize the combination of rate and points), and rebate pricing (offering above-market rates where the investor pays a premium that funds borrower closing costs or generates additional lender revenue). Product mix optimization shifts origination toward higher-margin products: non-QM loans typically carry 200-400 basis points of additional margin versus conforming loans, and renovation loans carry 100-200 basis points of premium. Geographic pricing adjustments account for competitive intensity—margins may be tighter in metropolitan markets with dozens of competing lenders and wider in underserved rural markets. Loan officer compensation structures should align with margin goals: compensation based on basis points of margin rather than flat per-loan fees incentivizes pricing discipline.