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Honor Among Thieves
Locking in the interest rate on a mortgage loan is usually such a routine matter that borrowers rarely get the benefit of all the potential excitement.
The standard exchange of question and answer goes like this. "When can I lock in?" (as soon as you are under contract). "How long is it good for?" (out to 60 days with no up front fee). "Somebody told me it would be cheaper to lock in for less time, like 45 days?" (it is cheaper, but normal market bouncing around over the 15 day difference is four times the amount of the price break).
Conversations about longer term locks are more entertaining. The terms of 90-day and longer locks are a matrix which defy borrower (and lender) analysis: the up front fee may be high or low, and refundable, creditable, forfeitable, or gone when paid; the locked rate may be at or above the current market; and the rate may sometimes be reset (expensive!) once, anytime, or shortly before closing. If one of these components matters a lot to you, you can have it on great terms, but the other two will be terrible. Or two lousy and one pretty good, or all three ordinary.
If you set out to shop for all known types of long term locks, by the time you get done, the terms will have changed on the one you liked best.
The real entertainment (and shock, misunderstanding, resentment, angerÉ) starts with the question, "If rates fall, can I change my lock?" The general response is "No." Followed by, "Really?" and "Yup, we mean it."
"Well, if rates fell a lot, you would let me transfer my file to another lender, right?" Some client relationships die on the spot with the answer, "Nope, not even the appraisal. You'll have to fire me and start over somewhere else." (Loan files are generally transferable only if the lender has failed to get you approved, or committed some other horrible bungle.)
"What if my lock expires?" Then the locked rate becomes a floor with no ceiling. Lenders figured out a long time ago that buyers could delay a closing in a falling rate environment, so locks are permanent. This provision seems especially unfair to most borrowers.
Once in a long while, a lender may be able to renegotiate a lock, but don't count on it.
Locks can also be reset by unethical behaviour by lenders. Most mortgage companies sell loans to a variety of giant wholesalers ("investors"). When you lock a rate with a local, retail lender, that lender locks the loan with a specific wholesaler, and creates the obligation to sell the loan to that investor. The unethical act is to pull the file and relock with another wholesaler.
In the incestuous world of modern mortgages (where many local lenders share the same wholesaler-buyers), and faster computers, the old pull-the-file trick may not work. If the wholesaler's computer recognizes the loan file (by borrower name, social security number, or property address), it may not be able to be relocked.
Few borrowers ask, but many are thinking, "Why is this lock-in business such a big deal for these people? Why is it so elaborate? Why are some of these lenders so touchy about the whole thing?"
When a loan is locked, somebody has to bear the risk of being wrong. If rates rise before closing, somebody has to keep the buyer covered. (And, no, if rates fall before closing, the lender doesn't keep the difference -- a falling rate market can create big losses for wholesalers.)
Each day at a big wholesaler, a finance whiz totes up the dollar amount and number of locked loans. Then the whiz estimates the percentage of those locked loans in process that are going to close -- normally, about 70%. The whiz then hedges the "pipeline" of lock commitments in the financial futures markets.
If rates suddenly soar, 100% of the locked pipeline may close, some of it at a loss. If rates drop, only 40% may close, leaving the whiz short of loans. If the whiz has committed to sell loans she doesn't have, she has to go buy them, and sell them for less than she just paid for them.
Believe it or not, this system has worked well for decades. The glue that holds it together is the commitment from lender to wholesaler that if a locked loan closes, it will be sold where it was locked.
Think of it as honor among thieves.
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