Recent months have seen a flurry of lock failures – refusals by lenders to honor mortgage prices that borrowers had believed were guaranteed. Last week I discussed some reasons why this happens. That discussion assumed, however, that the borrower dealt directly with the lender. Usually, a mortgage broker is involved.

“Does working with a mortgage broker, as opposed to dealing directly with a lender, increase or decrease the probability of a lock failure?”

It can go either way.

One advantage of dealing with a broker is that brokers have the same interest as borrowers in avoiding lenders who dishonor locks. Brokers won’t use wholesale lenders whose lock commitments include escape clauses that let them off the hook in a rising rate market. Were this to happen, the borrower might well blame the broker.

However, brokers cannot monitor how well lenders manage their finances. The single worst episode of dishonored locks in 2003 resulted from failure of a wholesale lender. The brokers caught up in this failure were forced to find new lenders and structure new deals for borrowers who could afford the higher rates; in many cases they shaved their commissions, sometimes to zero, to make the new terms less onerous for the borrower.

While borrowers who deal with brokers have some protection against gamesmanship by lenders, they are vulnerable to gamesmanship by brokers. Having a third player in the picture, furthermore, can obscure the chain of responsibility, to the borrower’s disadvantage. Brokers and lenders can and do blame each other for failed locks.

Whether on balance the broker increases or decreases the chances of a failed lock depends very much on the individual broker.

The efficient/honest broker guides the borrower in selecting a lock period long enough to process the loan, but no longer, since longer lock periods cost more. (A lock for 30 days will cost about 1/8 of a point more than a lock for 15 days, or $125 on a $100,000 loan; a lock for 60 days might cost $375 more).

This broker knows how long each lender is taking to move loans through its pipeline, and performs his part of the loan processing in a timely manner. He submits complete and accurate files that minimize the time it takes the lender to approve the application, and keeps tabs on the lender’s progress. The prices this broker locks will almost certainly be honored, unless the lender fails, a contingency no broker can control.

The sloppy broker doesn’t properly inform the borrower how much time is needed, and/or fails to process the loan in a timely manner, perhaps because he is over-committed. If interest rates are rising and the lender is looking for an excuse for not closing within the lock period, this broker will provide it.

The deceitful broker doesn’t lock the loan with the lender, but tells the borrower he has. The lock is a fake. The broker’s intent is to pocket the price premium for a longer lock period. If the 60-day lock price is 3/8 of a point higher than the 15-day price, for example, and if the market is stable over the 60 days, the extra 3/8 of a point goes to the broker rather than to the lender.

True, if rates increase just a little, the broker might take the loss himself – that’s how they rationalize what they do. But if rates increase a lot, the broker runs for cover, and the borrower is left holding the bag.

When this happens, as it did earlier this year, the deceitful brokers run in all directions looking for excuses. The most common excuse is that the lock lapsed because of the lender’s failure to process the loan within the lock period. Divided responsibility provides a cloak for the deceitful broker to hide behind.

“Do borrowers have any recourse for failed locks?”

Very little. Proving the culpability of lenders who deliberately allow locks to expire, is extremely difficult. Lenders can claim that the borrower should have selected a longer lock period; that the borrower was slow in meeting the lender’s reasonable requests for information; that the broker submitted an incomplete file; and on and on.

Obtaining recourse against brokers may be even more difficult. How do you prove that failure to close within the lock period was due to the broker’s carelessness rather than to a deliberate slow-down by the lender? If a deceitful broker puts a lock in writing, you can take him to Small Claims Court, but if all you have is oral assurances, forget it.

The trick is to prevent lock failures; stay tuned.

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