Lender Overrides

Definition of Lender Overrides

In the context of commercial mortgages, a Lender Override refers to an additional percentage of interest or a fee that is added to the wholesale cost of a loan. This "spread" is typically retained by an intermediary, such as a mortgage banker, a lead lender in a participation agreement, or a correspondent lender, as compensation for sourcing, underwriting, or servicing the loan. Essentially, it is the difference between the interest rate the borrower pays and the rate the ultimate funding source or investor receives.

Detailed Description of How Overrides Function

Lender overrides function as a primary revenue stream for financial intermediaries in the commercial real estate (CRE) market. When a primary lender (the originator) works with a wholesale funding source—such as a life insurance company, a pension fund, or a CMBS (Commercial Mortgage-Backed Securities) conduit—the funding source sets a "buy rate." The originator then adds a small margin (the override) to this rate before presenting the final terms to the borrower.

For example, if a wholesale lender offers a rate of 5.50% and the intermediary applies a 25-basis point override, the borrower receives a final rate of 5.75%. The 0.25% difference is collected by the intermediary throughout the life of the loan or as part of a capitalized upfront payment.

Common Types of Lender Overrides

• Servicing Overrides: This is the most common form in commercial lending. The lead lender manages the collection of payments, tax escrows, and insurance. In exchange for these administrative tasks, they retain a small portion of the monthly interest payment.
• Yield Spread Premiums (YSP): This occurs when a broker or correspondent lender originates a loan at a rate higher than the par rate offered by the investor. The investor then pays the originator a lump sum premium for delivering a higher-yielding asset.
• Participation Overrides: In large commercial syndications, a lead bank may retain an override on the portions of the loan sold to participating banks. This compensates the lead bank for the due diligence and ongoing management of the credit facility.
• Origination Overrides: Fees charged at the closing of the loan that are "wrapped" into the points paid by the borrower, which are then shared between the funding entity and the broker or correspondent.

The Role of Overrides in Commercial Finance

The existence of lender overrides is a standard practice that facilitates liquidity in the commercial market. Because commercial loans are complex and require significant manual underwriting and ongoing monitoring, overrides provide the financial incentive for local and regional banks to act as "boots on the ground" for massive institutional investors who do not have the infrastructure to manage individual property loans.

While an override increases the Effective Cost of Borrowing, it often grants the borrower access to institutional capital and lower "wholesale" rates that would otherwise be unavailable to individual investors or smaller development firms. Transparency regarding these overrides varies by jurisdiction and the specific lending agreement, but they remain a fundamental component of the commercial mortgage secondary market.

Impact on Borrowers

From a borrower's perspective, the lender override is often "invisible" because it is baked into the quoted interest rate. However, it can impact the Net Present Value (NPV) of the loan over its term. Sophisticated commercial borrowers often negotiate the spread or seek "direct-to-lens" opportunities to minimize these overrides, though doing so requires direct relationships with institutional capital providers and often entails higher internal administrative costs.