Overages, Mortgage Pricing and Race

Overages, or yield spreads, are common in the pricing of mortgages. However, few customers realize that such yield spreads exist. Given that overages often constitute a significant portion of the income of the mortgage loan officer, one would assume that the loan officer seeks to maximize the yield spreads. Our analysis finds that overages are seldom maximized and in most instances are not included in the price of the mortgage. We find that the bargaining abilities of the loan officers and the borrowers are important in determining the amount of overages paid by borrowers. In particular, we note that there are differences in the incidence of overages and the amount of overages by the race of the applicants. Thus, such behavior would lend itself to scrutiny by the regulatory authorities. The data set is unique and is proprietary data from a national mortgage lending institution located in a major U.S. city with a high population of Hispanics and African-Americans. We find that bargaining power of market participants is an important determinant of overages. We find that the yield spreads of Hispanic applicants who purchase homes are larger than those of whites. We also find that there are no differences by race for black applicants when compared to white applicants. We also find significant racial differences in overages for Hispanics and blacks for houses that are refinanced