Why Won't My Mortgage Broker Relock?

March 27, 1999

"We are buying a new home and working with a mortgage broker. In light of the recent rate jump, I wanted to lock in the rate now, and if rates went down, switch to another loan and lock in the lower rate. Our broker has been very reluctant, even saying he may not work with us if we do this. However, some friends of ours did make the switch to another loan with their broker when rates went down. Why is our broker reluctant to allow us to do this?"

Probably because your broker is honest, and actually intends to lock the rate. Your friend’s broker who offered to relock without argument probably never locked in the first place! Hence, your friend was unprotected if rates had gone up instead of down.

I have written several columns warning consumers to beware of fly-by-night mortgage brokers who seek a quick bundle in a booming refinance market by telling customers their rates are locked when in fact they aren’t. If lenders charge 1% to guarantee the rate for 60 days, for example, these brokers pocket the 1%. They get away with it so long as interest rates decline or remain stable. When rates reverse themselves and the refinance boom ends, they just go out of business.

The best rule for avoiding these sharpsters is to deal only with mortgage brokers who were in business prior to 1994. I hasten to add that not all new brokers charge for locks and don't lock, only that the brokers who engage in this practice are probably new brokers.

But the issue of rate protection is more complicated, and in some circumstances consumers bear some responsibility for their own misfortune. The letter cited above illustrates this point.

Locks come from the lender, with the broker acting as the intermediary-messenger. When lenders lock a rate for, say, 45 days, they are committed to providing that rate within the 45 days. If market rates rise during the 45 days, the lender must accept a loan carrying a rate below the current market, and if rates go down they expect to acquire a loan above the current market.

If a mortgage broker locks a loan with lender A, and then when rates decline relocks with lender B, lender A is not going to be happy with that broker. If it happens too often, A may stop doing business with the broker. But the broker who doesn’t agree to a relock arrangement may lose customers like the writer of the letter above who expect it.

Caught in the middle, some brokers resolve this dilemma by agreeing to a relock arrangement with the customer, and then not locking. They can get away with it because 99% of the time the customer is willing to take the broker’s word that a lock commitment has been issued by the lender.

In some cases, mortgage brokers lock a loan for a customer, with no relock understanding. Nevertheless, when market rates decline the customer insists on a relock at a lower rate or they will go elsewhere. In this situation, the mortgage broker may agree to the relock, but doesn’t. Having been burned once, the broker sees no reason to chance it again.

The upshot is that many consumers waiting for their deal to close are unprotected against a rate increase and they don’t know it. In the second week of October, thousands of home purchasers expecting to close shortly discovered this the hard way. They received an unexpected phone call from their mortgage broker informing them that the market had suddenly taken a turn for the worst, with rates up as much as ½%, and "sorry about that but you aren’t locked." The 15-year loan they thought had been guaranteed at 6 1/8% was now 6 ½%, or the 30-year loan they had been promised at 6 ½% was now 7%.

With a closing staring them in the face, most of them swallowed this bitter pill. Those who wouldn’t or couldn’t swallow it were forced to cancel their purchase and probably lost their deposit. Many cursed their brokers for good reason. Some consumers share culpability, however, because they unreasonably demanded a rate lock that committed the lender but didn’t commit them.

When I lock a loan through a mortgage broker, I inform the broker that 1) I view the lock as binding on me as well as on the lender; but 2) I expect to see the rate lock commitment letter from the lender, or equivalent documentation that a lock has actually been granted.

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