Is the Borrower Committed by a Mortgage Lock?

July 22, 2002, Reviewed September 22, 2010, January 22, 2011

When I retrieved my email today (July 12, 2002), I found three items that provoked this column. One was from announcing the results of their weekly mortgage interest rate survey.

"Fixed mortgage rates fell for the sixth straight week in the national survey of large lenders, reaching a new low point for the year…"

A second and closely related item came from a mortgage broker bulletin board, where brokers go to exchange views and information with other brokers.

"Had a refi set to close yesterday, which had been locked at the end of June at 6.5%. The borrower, who follows the stock and bond market, called me up 3 hours before closing and said rates had dropped and he wants a rate of 6.375% or he walks. I reminded him that the lock works both ways, but I would check with the wholesale lender. The lender said I could have 6.375% but it would cost me $773 in lost commission. I told the lender that if I don't go to 6.375%, the borrower would walk, whereupon the lender reminded me that if I cancelled a locked loan that had been underwritten, I would incur a penalty of $1085. I was backed into a corner and had no choice but to go ahead and eat the lost commission. How is a broker supposed to protect himself against this?"

This incident reminded me that on several occasions I have criticized "lock jumping" borrowers, such as the one described by this broker. In one column, I even went so far as to compare them to shoplifters. By coincidence, the third item I received in today’s mail took issue with my position on lock-jumping.

"Why would a "lock-jumper" be considered a shoplifter? It seems to me that most lenders and brokers don't tell the borrower that a lock is binding on them if rates go down, and generally the borrower doesn’t sign anything indicating such a commitment. If they had wanted a commitment, they should have asked for one.

You can’t hold the borrower to a commitment that they never actually make. My perception is that the lender or broker is offering to lock the rate at the lender's risk to get the borrower's business. The cost of lock-jumping is just another cost of doing business."

This reader makes a very good point. The prevailing practice of brokers and lenders is to leave the borrower’s commitment under a rate lock unstated. They do this for the same reason that they do not charge a lock fee that the borrower would lose if he walked from a lock. Brokers and lenders fear that if they charge a lock fee, or ask the borrower for a written acknowledgement of their commitment under the lock, the borrower would be frightened into the arms of another loan provider who required neither.

I have changed my position on this issue. My preaching to borrowers about their obligation under a lock was misguided. What matters is not what I say but what the broker and lender say – or don’t say. If a broker or lender allows ambiguity regarding the borrower’s commitment under a rate lock, then the borrower is entitled to interpret that ambiguity as she pleases. Lock-jumping is OK, in other words, unless the borrower acknowledges in writing that it is not OK.

Ambiguity in the process creates inequities and raises costs. Brokers could remove ambiguity by offering borrowers a clear set of choices and conditions, in writing, something like the following:

Option 1: A 45-day lock at 6.25% and 1 point. If you accept the lock, you and the lender are both committed, regardless of changes in interest rates in the period until closing.

Option 2: A 45-day float-down at 6.25% and 1.5 points. If you accept the float-down, the rate can’t go up with a rise in market rates, but it can go down if the market rate declines. You are allowed one rate reduction within the week prior to closing. The new market rate at that time will be taken from the locking lender’s price sheet.

Required Fee: The fee for a lock or float-down is 1% of the loan paid on the lock day. The fee will be credited to you at closing, or returned if you are not approved for the loan. However, if you are approved and you don’t close, you lose it.

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