December 3, 2001, Reviewed January 23, 2011, January 17, 2012

"We were told by the broker that our 30-year fixed-rate mortgage was locked with the lender at 6 5/8% and 1 point, but the lender says that the loan was not locked and since interest rates have risen the best they can do is 7% and 1.5 points. The lender refuses to intercede with the broker. What recourse do we have?"

None, I’m afraid. You could sue, but it probably would be a "he said, she said" contest that would only leave you frustrated.

If it is any consolation, your letter is typical of many I received following the spike in interest rates that occurred during the first 3 weeks of November, 2001. The common thread was that they all thought they had locked the price (rate and points) of their mortgage, because the broker told them they had, only to find that they hadn’t.

Where did these borrowers go wrong? They ignored some important fundamentals of this market.

Market Fundamentals

*The market is volatile: Prices are reset every day, and during periods of rapid change, they may change during the day as well.

*Mortgage brokers cannot lock the price: A lock is a commitment to lend a specified amount at a specified price. Only a lender can make such a commitment. A broker is an intermediary through which the lender’s commitment, if there is one, may be transmitted to the borrower.

*There is a lag between a request for a lock and its issuance: During a refinance boom, lenders require a completed application and perhaps other documents that evidence some degree of commitment by the borrower. This typically results in a delay of several days or more before a lock request is granted.

How Locks Can Get Lost in the Shuffle

The market hit bottom on November 4. Lets suppose that borrower Smith shops broker Jones on that day for a 30-year fixed-rate loan of $250,000 with a 45-day lock period. The best wholesale price Jones has from a lender that day is 6.25% and 0.5 points (0.5% of the loan amount). Jones adds a 1.5 point markup and quotes 6.25% and 2 points to Smith.

Smith then asks Jones, "can you lock this price", or words to that effect. Jones knows that he cannot get a lock from the lender whose price he quoted for at least two days, and in those two days the price may change. So what does Jones say?

What Jones should say is "No, that isn’t possible because it will take 2 days to lock. However, I will keep my markup fixed and give you the best wholesale price available in two days. It may be higher or lower than it is today."

A few brokers will do this, but most won’t. They fear that they will lose the customer to another broker who will provide the desired assurances without complicated explanations that sound like excuses.

A more common response by the broker is "Yes, you’re locked", combined with a lock request to the lender as quickly as possible. The broker who does this is taking market risk -- if rates increase, the broker’s markup will fall, and vice versa. This usually works because the period of exposure is short. But occasionally the market will jump during the exposure period, which is what happened in the case at hand.

  Locks Can Be Lost Through Broker Deceit

Some brokers will say "Yes, you’re locked", and not lock with the lender at all. They allow the price to float with the market until shortly before closing. Generally this increases the broker’s markup because the price quoted by lenders declines as the lock period shortens. The lender who quotes 6.25% and .5 points for a 45-day lock, for example, might quote 6.25% and .25 points for a 15-day lock. If the market did not change, therefore, the broker would make an additional .25 points. Read Did You Pay For Insurance You Didn't Get?

However, brokers who play this game also take much more risk. Rates can change much more in 60 days than in 2. Most brokers who take this risk will accept the loss when the market goes against them, provided the loss isn’t too large. However, if rates increase by enough to wipe out their entire markup, some of them will leave borrowers in the lurch. This is evidently what happened to many borrowers who thought they had locked in early November.

Preventing Lost Locks When Dealing With a Broker

If I was locking through a broker, I would tell the broker:

     * I want to lock ASAP.
     * I am prepared to take the market risk until we lock, meaning I will take the loss or enjoy the gain.
     * I expect to see the wholesale prices, today and on the day we lock.
     * I expect to see the lock confirmation from the lender as soon as it is received. 

An Easier and Safer Way

Lock through a Certified Network Lender (CNL) on this site. You can monitor your price until you lock, and you will receive a complete lock confirmation. See Why Shop Here: Certified Network Lenders.