Mortgage Loan Rate Locks

One of the most true sayings in the mortgage business is, "If you can't lock it right now, it's not real."

But many mortgage providers will play a game of wait and hope. They tell you they have a certain loan when they in fact do not, hoping the rates go down to where they do. Or they'll tell you about a rate they actually have, but wait to lock it hoping the rates will go down so they can make more money because when the rates go down, the rebate for a given rate goes up or the cost goes down, and they can make more money.

Sometimes the rate/cost trade-off does go down, and they can deliver. But sometimes the rates go up, too. When this happens, the mortgage provider playing the "wait and hope" game has three choices. They can make less money, charge more for the loan, or punt by playing for time. I shouldn't have to draw adults a picture as their relative likelihoods.

Many times one side effect is a delayed loan. This is probably the number one reason for delayed loans, and one of the strongest reasons I keep telling you that if a provider can't do it in thirty days, they probably can't do it on the terms indicated. Many times they bet on rates going down, when rates actually go up, so they end up with a loan that they can't make any money by doing, so they delay it day by day, week by week hoping the market will move. Note, please, that they usually have zero intention of finishing your loan if the market doesn't move downwards enough. Whether it's National Megabank with a million offices, or Joe Anonymous working out of their home, their motivation is to do what it takes so they make money, and they will keep sweet talking you as long as they possibly can. They're certainly not going to work for free, and many of them will not do it at all rather than compromise their usual loan margin. If you allow them to play this game, when you finally give up in disgust, they still have several weeks after you apply with someone else where they're the only ones that can possibly have the loan done, and if the market moves down during those weeks, they're covered. If you could have gotten a better loan during that period, you likely would. But because you were quoted a price that didn't exist and believed it, they've got what looks to a consumer to be a competitive advantage. And if they call after you've "canceled" their loan and say that they can close the loan now when the new provider you just contracted with isn't ready yet, most people will go ahead and sign the papers because This Loan Is Ready Now.

There are honest mortgage providers who lock every loan at the time you tell them you want it. But there is no way for a consumer to verify that any given loan provider is among them. All of the paper I can put in front of you as regards a loan rate lock can be easily faked. Which brings us back to one of the standard refrains of the site: Apply for a back up loan.

At this update, there have been changes to the loan market. No loan officer can lock a loan quite so nonchalantly any longer. The penalties to the loan officer and all of their future clients for failing to deliver a locked loan to the lender have become too severe. As I said in Shopping For The Best Loan In The Changed Lending Environment, this is bad for consumers but it is a fact of life we have to deal with. If I lock a loan that doesn't close, all of my future loans get hit with additional charges, making my loans less competitive and hurting those clients who want me to do their loans in the future. I would very much like to go back to the other way, but it's not under my control.

Another change is that loans take longer now. This is due to regulatory changes and the need for CYA on the part of the lenders. Before the rules got changed in 2008, my average time between application and being ready to fund a loan was about 16 calendar days. Since then, that average has gone up to the low forties. Just a fact of life. There are a minimum of 3 weeks in new regulatory delays built into the new procedure. Oh, the government doesn't call them regulatory delays but they penalize the hell out of anyone who doesn't meet them and saddle that lender with large potential fines and unlimited liability for "misleading consumers". Net result: 3 weeks in new regulatory delays.

There is another issue with regard to rate locks. They are all for a certain set period in calendar (not working!) days, usually measured from the time you say you want it to the time the loan actually funds (not until you sign documents). Assuming your loan is actually locked when you say you want it, this means that there is a DEADLINE. Due to regulatory changes, loans are taking about 30 days longer than they used to. Also a fact.

This means that once you tell someone you want the loan, give the loan provider every scrap of documentation they ask for right away, not a week later. The loan provider is not going to pay for the delay, you are. Many banks will not even look at an incomplete loan package, so it is crucial to have the paperwork organized quickly. If that loan goes beyond the initial lock period, you can pretty much count on paying an extension. Some banks charge one tenth of a point for up to five days, some a quarter of a point for up to fifteen days of extension, some even more, but it's always charged in full from the first day of an extension. Occasionally the lender will give an extension for free if it was obviously their fault, but not very often. More likely, whether it was your fault, their fault or nobody's fault, the extension will be charged. Lenders have no sympathy for going over the lock period, and neither do most brokers. The lenders have set a large sum of money aside for your use, and they aren't earning interest on it. They want some kind of compensation, and when you think about it, this is not unreasonable.

Common rate locks are done for 15, 30, 45 and now 60 days, but they are available in 15 day increments for almost any length of time out to about nine months. However, there is a cost. The longer the lock period, the costlier the loan - as in the tradeoff between rate and cost gets shifted upwards. "Par rate" becomes higher with a longer lock period. You pay more in points, or get less in rebate for the same type of loan at the same rate. The reason for this is simple. The bank is setting all of this money aside for your use, and not getting any interest in compensation. They are doing you the favor, and they will charge you extension fees if you go past the lock period. I'm looking at a rate sheet right now that was valid a couple of days ago from a medium size lender. For a thirty year fixed rate loan, the discount points go up one eighth of a point between the fifteen and the thirty day lock, and another quarter of a point for a forty-five day lock.

The problem with 15 and (now) 30-day locks is that they are useless as an "upfront" lock, when the application is initially made. Especially with refinancing, where you lose a week by law between signing documents and funding the loan, there just is no way to reliably get it done within this time frame. Even purchases are chancy with the best of cooperation from everybody involved. 15-day locks are primarily a tool of those providers who play the "wait and hope" game mentioned above, and they lock just before printing final loan documents. The fact that they are planning a shorter lock period allows them the illusion of quoting something lower, but even if they tell you what the rates are today, they are quoting you a rate that may or may not exist when the loan is actually ready. On the other hand with regulatory changes that "helped" consumers changing things, I've become a lot more willing to wait to lock until just before I order final loan documents - provided the client agrees with my reasoning. I never did these while I had a realistic upfront lock option, but now that things have changed, they've become a lot more common for me. Unless there's a preponderance of evidence that rates are likely to go up, there's a lot less reason to pay for a longer lock. But since at least a week of the new regulatory delays happen after the loan is locked, everything has to be perfect for a 15 day lock to work without extensions.

A 30-day lock was most common lock period for those loan originators who lock the loan immediately. Until the regulatory changes "helping" consumers, if both you and the provider are organized, it was enough to reliably do all the paperwork and miscellaneous other projects, get final approval, and get the loan funded. It sounds like a lot of time, but it wasn't. On refinances, you lose a week due to legal and system requirements. Let's say you sign the final paperwork on a Monday. By federal law, you have three days to change your mind, and they're not going to fund the loan before that period expires. Monday doesn't count, so Tuesday, Wednesday, and Thursday go by before anything can be done. Good escrow officers don't usually request funds on Friday, because when they request funding is when the new loan starts accruing interest. Monday they fund the loan, and the bank has up to two days to provide the funds, then the escrow officer has up to two days to pay off the old loan before the documents record and the transaction is essentially complete. This takes us to potentially to Thursday or Friday of the following week, and that's just the time between you signing the actual Note and Trust Deed and actual consummation of the loan, when the Trust Deed is recorded. Now, with "helpful" regulations delaying loans, 30 days has become the standard "lock when you're ready to draw final documents" period.

If you want an upfront lock now (assuming you can even get one, which has become increasingly unlikely) you need a minimum of 60 days thanks to a clueless Congress in 2008. The 30 day purchase escrow is not reliably doable if there's a loan involved. A buyer's agent should not allow less than a 45 day purchase escrow at an absolute minimum if there's a loan involved, and 60 is much better.

On purchases, there is no three day Right of Rescission, but if the escrow officer begins funding a loan on Tuesday you are still talking about potentially hanging over until Monday of the next week. Funding doesn't usually take this long, but it does happen.

75, 90 day and longer locks are primarily useful for purchases where there is something external holding the loan back. Only rarely do the market conditions become such that longer locks than 60 days become necessary on refinances. Otherwise, they are most often used only when the actual purchase contract says that the purchase can't close until further out. There is a tradeoff here, and I may occasionally counsel people to wait if the construction on the house isn't scheduled to be complete for ninety days or longer. This makes for a risk that rates may move in the meantime, but rates generally don't go up in huge jumps, but rather incrementally higher from day to day, and past ninety days you may be risking less by waiting than by locking. There's no reason to pay more for a lock than you have to.

Many things have changed in the mortgage business in the last few years, but this hasn't: Even a legitimate and complete quote is fairy gold until it is actually locked. A bank can withdraw its loan pricing at any time. Sometimes this happens right when I'm in the middle of the locking process, and when this happens, the client gets the new pricing. Period. End of story (some banks will give you 30 minutes to complete locks already in process, but this is subject to limitations). Some lenders and loan providers attempt to hide this - and they call it "Consumer transparency." You may hoot in derision if you so desire. A better name would be something like their "Consumer Ignorance is Bliss" policy. "Don't you go worrying your poor little head about that, ma'am!". Until the lock process is complete, you don't have a right to those rates, and you won't get them if the lender changes the rates first.

Caveat Emptor

Original here