Shopping for the best deal on a home loan has many pitfalls, but by far the most daunting is that lenders will not commit to the prices they quote to shopping borrowers. While borrowers seldom realize it when they begin the process, the fact is that they are forced to select loan providers without knowing the exact price they will pay.
Why Quoted Prices Are
Subject to Revision
Because
locking imposes a cost on lenders, they won’t lock until a)
they have enough information about the borrower to be
reasonably sure that the borrower qualifies and that the
price quoted is the correct price; and b) there is a
significant probability that the borrower will go to
closing. If the quoted price that is locked by the lender is
wrong, the lender can realize a loss when it is sold, and if
the transaction doesn’t close, the lender has incurred the
lock cost for nothing.
The
quoted price can be wrong for two reasons. One is that the
information provided by the borrower does not check out for
the lender. For example, the borrower said that his credit
score was 740 but when checked by the lender it is 710,
which raises the price of the mortgage.
The
quoted price can also be wrong because the market changed.
Lenders reset prices every morning, based on changes in the
secondary market, and sometimes they change them during the
day.
Why the Revision of Quoted
Prices May Be a Scam
A reset
of the information used to set prices, or changes in market
prices are legitimate reasons why borrowers often don't
receive the prices they were quoted. But these same factors
provide a screen behind which less-scrupulous lenders can
execute lock scams. It is useful to distinguish three scams
that occur at different stages of the lending process.
Low-Balling Scam:
The borrower shopping for a mortgage may encounter this
scam. Low-balling lenders quote a price below the price the
lender can or has any intention of delivering. The purpose
is to be selected by the borrower who is shopping prices. It
is easy to low-ball when you are not committed to your price
quote, and it is tempting because it often is the only way
that lenders have of distinguishing themselves from other
lenders.
Low-ballers
are not deterred by the price disclosures mandated by the
Good Faith Estimate. They merely date the disclosure so that
the price has expired before the borrower receives it.
Market Volatility Scam: The borrower who has selected a lender but has not yet been locked may encounter this scam. The lender takes advantage of changes in the market between the date the lender quoted a price to the borrower and the lock date. If the market price goes down, the borrower is charged the price quoted earlier, and is probably content, since he received what he was quoted. If the price on the lock date is higher, on the other hand, the borrower will be charged the market price or higher, because “the market went against you”.
Property
Valuation Scam:
The borrower whose loan has been locked may encounter this
scam. Locks are always contingent on a specified credit
score and loan-to-value ratio. A material change in one of
these can invalidate the lock. While lenders will always
verify the credit score before locking because that only
takes minutes, in most cases they will lock based on a
property valuation that has been checked only against an
automated valuation program. An appraisal, which is the
final word on valuation, takes days and often weeks.
Nonetheless, the appraisal when it becomes available can
invalidate the lock. If the appraisal comes in lower by
enough to raise the loan-to-value ratio past a notch point
where the price increases, the lender increases the price
accordingly. But if the appraisal comes in higher by enough
to reduce the loan-to-value past a notch point where the
price should decrease, the original lock price is retained.
As with the market volatility scam, if the coin comes up
heads the borrower loses, and if it comes up tails the
lender wins.
None of the mortgage disclosures mandated by the Government would prevent the scams described above. This includes the disclosures planned by the new Consumer Financial Protection Bureau. Borrowers can protect themselves, however, if they know how to go about it.
Importance of Posted Prices
These
lock scams all involve a deviation between a lender’s posted
price and the price quoted to or charged the borrower. The
posted prices are those the lender will accept, and which
are delivered to its loan officers, telemarketers and other
employees or agents authorized to offer the lender’s
products to the public. Scams involve these employees or
agents quoting less than the posted prices when they are
attempting to corral borrowers, and more than the posted
prices when they lock.
Borrowers can avoid lock scams by obtaining direct access to
posted prices. They then can’t be low-balled by loan
officers, and they can’t be fooled about the market price
when they lock.
It
isn’t easy, however, because with some notable exceptions,
lenders do not want the public to have such access. When my
software firm many years ago developed a system for
delivering posted prices to loan officer laptops, our lender
clients insisted that critical numbers be obscured. The
purpose was to prevent a prospective borrower dealing with a
loan officer from seeing the posted prices by peeking at the
laptop screen!
The
growth of the internet has made it possible for any lender
to make its posted prices available to borrowers, but very
few do. In general, lenders view their web sites as a way to
stimulate potential borrowers to contact a loan rep. For
this reason, the prices that borrowers can access on most
individual lender sites are incomplete – meaning that they
do not take account of all the factors that affect the price
of a specific transaction.
Furthermore. in many cases the site won’t provide any prices
at all unless the borrowers identify themselves. This
guarantees that they will be contacted for a sales spiel.
Channels Through Which
Borrowers Can Access Posted Prices
A group
of lenders I certify as Upfront Mortgage Lenders (UMLs)
allow borrowers to access complete prices on their web sites
without identifying themselves. Borrowers can shop UMLs
without fear of lock scams However, this requires that they
access multiple sites, all of which are formatted
differently, and they must do it on the same day because
prices are reset every day.
Much more convenient are
third party networks on which multiple lenders post complete
prices, allowing borrowers to comparison shop at one site. A
listing of the major features of 14 multi-lender sites, one
of which is mine, will be found at my
Features of Multi-Lender Mortgage Sites. These sites are
not all created equal, by a long shot.
Make Sure the Prices You
Try to Lock Have Not Lapsed
A word of warning about
using any web site, single-lender or multi-lender, to avoid
lock scams. Mortgage prices can be locked only during normal
business hours when the lock desks of lenders are open.
Ordinarily, this is between about 10:30am and 5:30pm EST.
Within these hours, posted prices are lockable by a borrower
who has been cleared to lock.
This means that the price a
borrower sees on a site at 9am EST is the price that expired
at 5:30 pm the previous day. The price that borrower can
lock is the one that will appear about 10:30am.
Similarly, the price a borrower sees in shopping on
the weekend is the one that expired at 5:30pm on Friday.
That borrower must wait until Monday morning to see a
lockable price.
Borrowers using multi-lender
sites who have not understood these constraints have
sometimes tried to lock prices that had lapsed, and when
they were unable to do so, have complained that the lenders
on the site were not honoring their posted prices. Because
this has happened on my site, I have decided to flag lapsed
prices along with an
indication of when new lockable prices will be posted. I
recommend that other sites do the same.
Check Your Mortgage Price
if the Appraisal Comes In High
Locks that are issued before
the property is appraised usually are conditional on a
minimum appraised value. If the appraisal comes in below the
minimum, the mortgage price will be raised. But if the
appraisal comes in significantly higher, the borrower might
deserve a price reduction, yet might not get it.
To check this out, the
borrower receiving a favorable appraisal should check
current pricing on the site to see whether the higher
property value would result in a lower mortgage price than
the lower value that had been assumed when the mortgage was
originally priced. If the answer is “yes”, the borrower
should petition the lender to reduce the price accordingly.
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