To help the underwriter assess the quality of the loan, banks and lenders create guidelines and even computer models that analyze the various aspects of the mortgage and provide recommendations regarding the risks involved.
However, it is always up to the underwriter to make the final decision on whether to approve or decline a loan.
If this is not matched by correlated decreases in rates on the lender's liabilities, profits will suffer.
In addition, the lender faces the risk that the value of the property underlying the mortgage could drop in value to below the outstanding balance on the mortgage; if this event induces the borrower to default due to moral hazard, the lender must not only incur the costs of implementing a foreclosure but also must sell the property at a price that fails to recoup the lender's investment.
This risk can be mitigated by various sorts of prepayment penalties that will make it unprofitable to refinance even if the rates of other lenders decrease.