Chapter 29 — Key Takeaways

The core claims

  1. A rate is assembled, not set. It starts as a security price on a trading screen and becomes a base price after the desk adds the servicing strip, subtracts its margin, and subtracts a reserve for hedging and fallout. Then the file's own adjustments are subtracted from it.

  2. Rate sheets quote price, not cost. 100.000 is par. Above par is a rebate the lender can pay; below par is cash the borrower brings. One subtraction converts between them.

  3. LLPAs are charged in price, not in rate. The matrix says "reduce the price by 1.125," not "add to the rate." What that becomes for the borrower — cash, or a higher rate — is a separate decision (Chapter 13).

  4. The credit-score-by-LTV cell is almost always the largest single adjustment on a file, and its bands are cliffs, not slopes. One point of score can cross a row.

  5. The lock period is an input to price, exactly like the credit score. A quote without a lock period is not a quote.

  6. A lender credit is not generosity. It is the yield spread: a higher rate prices higher, and the surplus can be applied to costs. The borrower buys it with thirty years of payment.

  7. The pricing engine is a lookup table with rules. It will price, confidently and instantly, a loan you described wrong, and it will never tell you.

  8. Pull-through moves against the hedge in both directions, which is why lock desks behave the way they do.

The formulas

  points  = 100.000 − price
  dollars = points × loan amount ÷ 100

  A POSITIVE points figure is money the BORROWER PAYS.
  A NEGATIVE points figure is money the LENDER PAYS (a rebate).

  On $365,750:   1.000 point = $3,657.50
                 0.500 point = $1,828.75
                 0.125 point =   $457.19

The five-line build

  1. Right product block, right loan amount band, today's sheet.
  2. Read the BASE PRICE at the rate.
  3. Subtract every LLPA (score/LTV, occupancy, property, purpose,
     product, subordinate financing, escrow).
  4. Subtract the lock period adjustment.
  5. FINAL PRICE → points → dollars.

The chapter's answer to the question the book opened with

  THE LINDEN STREET BUILD              [the Linden Street file; grids constructed]

    Base price, 6.625%, conv 30-yr fixed, 15-day lock ....  100.750
      LLPA  706 rep score at 95.00% LTV ..................   -1.125
      LLPA  primary / detached / purchase / 30-yr / no 2nd    0.000
      ADJ   escrow established ...........................    0.000
      ADJ   lock period 30 days (base 15) ................   -0.125
    ──────────────────────────────────────────────────────────────
    TOTAL ADJUSTMENTS ....................................   -1.250
    FINAL PRICE ..........................................   99.500

    points  = 100.000 − 99.500 = 0.500
    dollars = 0.500% × $365,750 = $1,828.75

    Same sheet, same morning, same 6.625%: a file with none of these
    adjustments gets a $2,743.12 CREDIT. This file writes a check for
    $1,828.75. The advertised rate was real. It was priced for
    somebody else.

Key terms

rate sheet · base price · par · premium pricing · rebate · yield spread · loan-level price adjustment (LLPA) · lock period adjustment · buy-up / buy-down grid · pricing engine (PPE) · lender margin · hedging · pull-through

Two things that are perishable and one that is not

Perishable: every grid in this chapter. LLPA matrices are revised periodically — they were substantially restructured in 2023 — and rate sheets are republished daily and revised intraday. Never quote a value you have not looked up today.

Perishable: the guarantee fee, the servicing convention, price caps, extension schedules.

Not perishable: the structure. Base price, minus adjustments, equals final price; price converts to dollars against par. That has not changed and will not.

Monday morning

You should be able to do all five of these without opening the pricing engine:

  • Convert any price to dollars, and any dollar figure to a price, in both directions, in under ten seconds.
  • Build a quote from a base price and a file's characteristics in about ninety seconds, and get the same answer the engine does.
  • Name the four facts you must have before you quote anything — representative score, LTV, occupancy and property type, lock period — and say out loud that you do not have a quote until you have all four.
  • Explain a lender credit to a borrower as a trade rather than a gift, and end the explanation with a question about how long they plan to stay in the house.
  • Tell a borrower what their credit score is worth in dollars on their file, using the cell above theirs on the grid — before they lock, while it is still free to do something about it.