Avoiding Lock Problems In a Crisis Market

July 20, 2009, Revised August 10, 2009, Reviewed September 22, 2010, January 21, 2011, January 10, 2012 Postscript

Locking the price of a mortgage is full of potential problems for the unwary borrower. Locking is especially problematic in the post-crisis market because prices can jump around from day to day, and lenders take much longer than in pre-crisis years to approve an application, and often can’t.

Locking means that the lender commits that the price at closing will be the lock price, even if the market price is higher at closing than it was on the lock date. The price commitment holds for a specified period, usually 30 to 90 days, with longer periods priced higher. Whether the borrower is equally committed if the price at closing is lower depends on the lender’s policy, see below.

Last year I wrote an article on one approach a borrower could take to avoid lock problems, which is to entrust the process to a mortgage broker who knows exactly what the problems are. The drawback is the difficulty of assuring that the broker will use his knowledge for the benefit of the borrower rather than himself.

This article is about how borrowers can protect themselves when they deal directly with lenders. The key is in knowing the lender’s locking rules and procedures beforehand. This is not easy because very few volunteer the information; the borrower must ask.

Upfront Mortgage Lenders (UMLs) are an exception because one of my requirements for certification is that they show their lock policies on their web sites. In reviewing these policies recently, however, I found wide discrepancies in completeness, which is my fault; my disclosure rules were too vague. This is being remedied, and very shortly the UMLs will have revised lock statements that are responsive to the questions listed below.

What Must Happen Before the Price Can Be Locked?

In most cases, the lender will require that a purchaser have a contract of sale, and that the loan application has been approved. Because approvals now often take longer than before the crisis, this immediately raises the two questions that follow. 

What Happens If The Market Price Rises Before The Application Can Be Approved and the Loan Locked?

Generally, the lender will be willing to lock only at the new higher price. (If there are any lenders who will lock at the price prevailing at the time of the lock request, I don’t know who they are.) This is a common occurrence, and a major source of frustration for borrowers, some of whom think they have been victimized by a “bait and switch”. Actually, they have been victimized by price volatility and delays in getting loans approved, but because lenders seldom warn borrowers that this can happen, the borrower’s misinterpretation is natural.    

What Happens If The Market Price Falls Before The Application Can Be Approved and the Loan Locked?

A lender who locks at the current price when that price is higher than the one prevailing on the lock request date should do the same when the current price is lower. My guess, however, is that in most cases, lenders lock at the higher price on the lock request date, just because they can. Borrowers are unlikely to object if they are locked at the price they requested. It is ironic that borrowers perceive themselves as victimized most often when prices rise after the lock request, whereas the reality is that they are victimized most often when prices decline. 

What Is Covered By A Mortgage Lock?

Many lenders only lock the interest rate and points. Locks should cover the rate, points, and all other lender fees, avoiding the possibility of fee escalation after the lock. This is the case with UMLs. A few lenders will not only lock all lender fees but also some third party fees.  

What Fees Must a Borrower Pay to Lock?

Lenders may charge as much as $600 to lock, which they usually will apply to settlement costs at closing, but which the borrower will lose if he walks from the deal. Lenders today increasingly charge credit and appraisal fees because they want to be sure about approval before they lock.

Under What Circumstances Are Fees Refunded?

Refund policies vary widely. If the lender is unable to lock the requested price, either because the borrower can’t be approved or because the market has changed, any fees not paid to third parties in connection with the application, should be refunded. 

What Happens If The Market Price Drops After The Loan Is Locked?

In most cases, nothing happens because the lender presumes that both parties are committed by the lock. Some lenders, recognizing that some borrowers may cancel the deal to begin again within another lender, offer a “float-down.” This allows for a drop in the rate, but not all the way to the new market rate. A float-down will cost a little more than a lock. Lenders offering float-downs should spell out in their lock policies exactly how they work. 

What Happens If The Borrower Wants To Change The Type Of Mortgage (Or the Rate/Point Combination) After The Price Is Locked?

Most lenders will allow such changes, but only at the higher of the prices prevailing on the lock date and the current prices. That makes it important for borrowers to know exactly what they want before they request a lock. 

What Happens If The Loan Cannot Be Closed Within The Lock Period?

If the delay is the lender’s fault, the lock period should be extended at no cost to the borrower. If the delay is the borrower’s fault, the lender will charge the borrower for a lock extension. These charges should be spelled out in the lender’s lock policy. 

In the Event of Delay, What Would Constitute Borrower Fault?

This would include not providing requested documentation promptly, delaying appraisal inspections, and not obtaining a subordination agreement from the second mortgage lender if there is one. Lenders can minimize this obvious source of conflict by spelling out the borrower’s obligation in detail in the lock agreement.

Readers are referred to A Lock Statement For Lenders -- And For Borrowers

January 10, 2012 Postscript

 Borrowers using the professor's Certified Lender Network are protected against lock gamesmanship by the following certification requirements.

Lock Charges: Certified Network Lenders (CNLs) charge borrowers a maximum fee of $295 to process their loans, with the charge credited back to the borrower at closing. The lender can also collect an appraisal fee of $300-$800, depending on the type of property and its size, to cover the appraisal cost. None of this fee goes to the lender, and it is not refundable.

CNLs Upon Locking a Loan Must Provide a Lock Confirmation Statement That Includes the Following:

  1. Product Type
  2. ARM detail(margin, index value, adjustment caps, max/min rate)
  3. Loan amount
  4. Interest rate
  5. Points
  6. Other lender fees
  7. Mortgage insurance premium - upfront or monthly
  8. Lock expiration date

CNLs That Do Not Lock Immediately Must Adhere to the “Twin Brother Rule”: : That rule states that the price locked will be the price the lender would quote on the same day on the identical transaction to the borrower’s twin requesting a price quote. This rule implies that if the market price decreases before the price quoted to the borrower can be locked, the CNL will lock the lower price. If the market price increases before the price quoted to the borrower can be locked, the CNL will not lock until explicitly authorized to do so by the borrower.

CNLs That Over-ride a Price Lock Because a Property Appraisal Alters the Pricing Must Play it Both Ways: If the appraised value is higher by enough to lower the price, the borrower receives the benefit of it.

CNLs That Fail to Close Within the Lock Period Will Extend the Period at No Cost to the Borrower: If the borrower is primarily responsible for the failure to fund, the CNL may charge a fee for a lock extension, but must post that fee. If the CNL and borrower disagree on who was responsible for the failure to fund, the CNL agrees to accept the judgment of the professor.

For more on the network, see Finding a Mortgage on the Professor's Certified Lender Network.

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