Probably because your broker
is honest, and actually intends to lock the rate. Your friend�s broker
who offered to relock without argument probably never locked in the first
place! Hence, your friend was unprotected if rates had gone up instead of
down.
I have written several
columns warning consumers to beware of fly-by-night mortgage brokers who
seek a quick bundle in a booming refinance market by telling customers
their rates are locked when in fact they aren�t. If lenders charge 1% to
guarantee the rate for 60 days, for example, these brokers pocket the 1%.
They get away with it so long as interest rates decline or remain stable.
When rates reverse themselves and the refinance boom ends, they just go
out of business.
The best rule for avoiding
these sharpsters is to deal only with mortgage brokers who were in
business prior to 1994. I hasten to add that not all new brokers
charge for locks and don't lock, only that the brokers who engage in this
practice are probably new brokers.
But the issue of rate
protection is more complicated, and in some circumstances consumers bear
some responsibility for their own misfortune. The letter cited above
illustrates this point.
Locks come from the lender,
with the broker acting as the intermediary-messenger. When lenders lock a
rate for, say, 45 days, they are committed to providing that rate within
the 45 days. If market rates rise during the 45 days, the lender must
accept a loan carrying a rate below the current market, and if rates go
down they expect to acquire a loan above the current market.
If a mortgage broker locks a
loan with lender A, and then when rates decline relocks with lender B,
lender A is not going to be happy with that broker. If it happens too
often, A may stop doing business with the broker. But the broker who
doesn�t agree to a relock arrangement may lose customers like the writer
of the letter above who expect it.
Caught in the middle, some
brokers resolve this dilemma by agreeing to a relock arrangement with the
customer, and then not locking. They can get away with it because 99% of
the time the customer is willing to take the broker�s word that a lock
commitment has been issued by the lender.
In some cases, mortgage
brokers lock a loan for a customer, with no relock understanding.
Nevertheless, when market rates decline the customer insists on a relock
at a lower rate or they will go elsewhere. In this situation, the mortgage
broker may agree to the relock, but doesn�t. Having been burned once,
the broker sees no reason to chance it again.
The upshot is that many
consumers waiting for their deal to close are unprotected against a rate
increase and they don�t know it. In the second week of October,
thousands of home purchasers expecting to close shortly discovered this
the hard way. They received an unexpected phone call from their mortgage
broker informing them that the market had suddenly taken a turn for the
worst, with rates up as much as �%, and "sorry about that but you
aren�t locked." The 15-year loan they thought had been guaranteed
at 6 1/8% was now 6 �%, or the 30-year loan they had been promised at 6
�% was now 7%.
With a closing staring them
in the face, most of them swallowed this bitter pill. Those who wouldn�t
or couldn�t swallow it were forced to cancel their purchase and probably
lost their deposit. Many cursed their brokers for good reason. Some
consumers share culpability, however, because they unreasonably demanded a
rate lock that committed the lender but didn�t commit them.
When I lock a loan through a
mortgage broker, I inform the broker that 1) I view the lock as binding on
me as well as on the lender; but 2) I expect to see the rate lock
commitment letter from the lender, or equivalent documentation that a lock
has actually been granted.
Copyright
Jack Guttentag
2002
