Locking the rate on a mortgage means obtaining a lender’s commitment that it will make the specified loan at the specified rate, points and other fees within a specified future period. It used to be quite easy. In 2005, I guided a friend through the entire process at an online site and we locked his refinance within an hour.
No more. My e-mail register is clogged with complaints about the rate-locking process. Most complaints arise out of lock delays — the borrower requests a lock today but it isn’t provided until days or weeks later. Such delays involve risk to the borrower that the market rate will increase, or that the lender will claim that it has.
Delays are more frequent today than before the financial crisis, and the delay periods are longer. Before the crisis, income and asset documentation as well as appraisal requirements were often waived, facilitating the locking process. There are no waivers today.
Underwriting requirements also tightened significantly after the crisis. More time is spent in assuring that the requirements are met, and more loans are being rejected. Lenders don’t want to incur the costs of locking loans that they subsequently are forced to reject. To minimize the likelihood of this happening, they require more information before they lock, which takes time. In addition, lenders impose more conditions that must be satisfied for a lock to be valid.
For example, the value of the property has a major bearing on the terms of a loan. Before the crisis, they would lock based on the borrower’s or broker’s estimate of value if it was a refinance, or the sale price if it was a purchase, confident that in the great majority of cases the appraisal would confirm the value. Appraisals in buoyant markets generally did.
Today, lenders cannot have this confidence because appraisals are very conservative, and they also take longer. So lenders do one of two things. Either they require an appraisal before they lock, or they lock without it but require that the appraisal, when it materializes, show a value above some level for the lock to remain valid.
The problem is that borrowers don’t know beforehand what a lender will want to check before locking, or how long it will take. Policies differ between lenders, and at any one lender the rules may differ for different categories of customers.
For example, a lender may not require that a borrower reporting W-2 income document it before they will lock, but they will almost always require it for a self-employed borrower for whom documentation is more likely to be problematic.
The following may or may not be required before a borrower can lock: application completed and submitted; required disclosures such as Truth in Lending signed and returned; required income documentation provided; required asset documentation provided; required information about homeowners insurance, homeowners association and existing lender on a refinance, provided; appraisal completed; and title report completed indicating no title issues.
A lender may lock without a particular requirement being fulfilled but make that requirement a condition for the lock being retained. Hence, the list of conditions for retaining a lock is the same as the list of requirements to lock enumerated above.
Lenders are not very good at disclosing their requirements to lock, and there are no mandatory disclosures. The problem is compounded by an ambiguity in the Good Faith Estimate (GFE), which is a required disclosure of rates, fees and other loan characteristics that must be provided to the borrower within three business days of the submission of a loan application.
At the time the GFE is issued, the loan may or may not be locked. If it is not locked, the rates and fees shown on the GFE are of value only as a history of what might have been. But not all borrowers understand this because nowhere on the GFE does it say: "The rate on your loan is not locked."
One such borrower wrote me recently, attaching two GFEs to illustrate how the lender had tried to swindle him. The second revised GFE had a higher rate than the first GFE. The borrower did not understand that the rate on the first GFE was not locked.
Instead of saying that, the GFE states that "the interest rate for this GFE is available through (a specified date)," and if the loan is not locked the lender indicates that by entering the date the GFE was prepared rather than some future date. It is understandable why a borrower may not grasp this roundabout way of stating that a loan is not locked.
The fact is, it eluded me. When I wrote an article earlier this year praising the new GFE as a marked improvement over the old one, I had not caught on to this problem. That article will be updated. At least one lender I know has its own lock disclosure form that clarifies what the GFE obscures.
What is a borrower to do? Step one is to get the lender to clarify its ground rules for locking, preferably in writing They should provide a set of general rules upfront, which might become more precise after you have submitted an application.
Step two is to take charge. All of the requirements to lock listed above except the appraisal and title report apply to documents that you provide. If the lender is willing to make the two exceptions conditions for retaining the lock rather than requirements to lock, which most of them will, you have control over when you can lock. Alert borrowers will submit the required documentation with the application.
Step three is to protect yourself. The prices you lock are those quoted by your lender after you have been cleared to lock, not the prices quoted to you when you selected him. The initial price quotes probably compared favorably to the prices quoted by other lenders, but the lock prices may be a different story. If you have no way to verify that they are competitive, given your investment in the transaction, your lender may be tempted to game you.
The lock price should be the same as the price the lender would quote to your twin brother initiating the exact same deal on the lock day. If you can price your deal on the lender’s website, you can’t be gamed.
As a fallback, you can use my daily series on wholesale rates to measure the change in market rates between the day you received your initial quote and the lock day for the same type of mortgage. It is not exact so don’t quibble about a small difference, but if the lender says that the rate has gone up by 0.25 percent over a period during which the wholesale rate did not change, you know you are being gamed.