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July 22, 2002
When I retrieved my email today (July 12), I
found three items that provoked this column. One was from bankrate.com
announcing the results of their weekly mortgage interest rate survey.
"Fixed mortgage rates fell for the sixth
straight week in the Bankrate.com national survey of large lenders, reaching a
new low point for the year�"
A second and closely related item came from a
mortgage broker bulletin board, where brokers go to exchange views and
information with other brokers.
"Had a refi set to close yesterday,
which had been locked at the end of June at 6.5%. The borrower, who follows the
stock and bond market, called me up 3 hours before closing and said rates had
dropped and he wants a rate of 6.375% or he walks. I reminded him that the lock
works both ways, but I would check with the wholesale lender. The lender said I
could have 6.375% but it would cost me $773 in lost commission. I told the
lender that if I don't go to 6.375%, the borrower would walk, whereupon the
lender reminded me that if I cancelled a locked loan that had been underwritten,
I would incur a penalty of $1085. I was backed into a corner and had no choice
but to go ahead and eat the lost commission. How is a broker supposed to protect
himself against this?"
This incident reminded me that on several
occasions I have criticized "lock jumping" borrowers, such as the one
described by this broker. In one column, I even went so far as to compare them
to shoplifters. By coincidence, the third item I received in today�s mail took
issue with my position on lock-jumping.
"Why would a "lock-jumper" be
considered a shoplifter? It seems to me that most lenders and brokers don't tell
the borrower that a lock is binding on them if rates go down, and generally the
borrower doesn�t sign anything indicating such a commitment. If they had
wanted a commitment, they should have asked for one.
You can�t hold the borrower to a commitment
that they never actually make. My perception is that the lender or broker is
offering to lock the rate at the lender's risk to get the borrower's
business. The cost of lock-jumping is just another cost of doing business."
This reader makes a very good point. The
prevailing practice of brokers and lenders is to leave the borrower�s
commitment under a rate lock unstated. They do this for the same reason that
they do not charge a lock fee that the borrower would lose if he walked from a
lock. Brokers and lenders fear that if they charge a lock fee, or ask the
borrower for a written acknowledgement of their commitment under the lock, the
borrower would be frightened into the arms of another loan provider who required
neither.
I have changed my position on this issue. My
preaching to borrowers about their obligation under a lock was misguided. What
matters is not what I say but what the broker and lender say � or don�t say.
If a broker or lender allows ambiguity regarding the borrower�s commitment
under a rate lock, then the borrower is entitled to interpret that ambiguity as
she pleases. Lock-jumping is OK, in other words, unless the borrower
acknowledges in writing that it is not OK.
Ambiguity in the process creates inequities
and raises costs. Brokers could remove ambiguity by offering borrowers a clear
set of choices and conditions, in writing, something like the following:
Option 1: A 45-day lock at 6.25% and 1 point.
If you accept the lock, you and the lender are both committed, regardless of
changes in interest rates in the period until closing.
Option 2: A 45-day float-down at 6.25% and
1.5 points. If you accept the float-down, the rate can�t go up with a rise in
market rates, but it can go down if the market rate declines. You are allowed
one rate reduction within the week prior to closing. The new market rate at that
time will be taken from the locking lender�s price sheet.
Required Fee: The fee for a lock or
float-down is 1% of the loan paid on the lock day. The fee will be credited to
you at closing, or returned if you are not approved for the loan. However, if
you are approved and you don�t close, you lose it.
Copyright Jack Guttentag 2002
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