Locking the price of a mortgage is full
of potential problems for the unwary borrower. Locking is especially
problematic in today’s 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.
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
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 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 usually charge from $300 to $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.
Most lenders will allow such changes,
but only at the higher of the lock prices or the current prices. That
makes it important for borrowers to know exactly what they want before
they request a lock.
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.