Not many consumers (or mortgage originators for that matter) are familiar with how the market for interest rates actually works. That said, let me provide a brief explanation:
When a consumer decides to “lock” a rate the mortgage originator contacts the lender (aka “investor”, “bank”, “wholesale lender”) and sends a lock request. Once the lender receives the lock request they immediately “hedge” this lock. This means that they commit money to protect that interest rate in the event that mortgage rates should drastically change from that day until 30 days when the lock expires. Lenders make this investment of money under the assumption that the mortgage originator and consumer will act in good faith to actually deliver the loan they are locking. If the mortgage is not delivered then the lender loses out on the money they used to hedge this lock.
This is currently costing lenders $ millions of dollars across this country. We recently got this email from a wholesale lender we work with:
I felt it was time to let all of our customers know how very important it is to close locked loans with your lenders; especially the ones with (named firm)! I admit; I may be a little one-sided as far as (named firm) goes but please take the time to read the following.
Wholesale Lenders buy lock-in coverage every time you lock a loan with them. That coverage costs money and it costs more and more money the longer the lock is in place. Lenders don’t expect EVERY lock to come through but based on historical averages they do expect 75 – 80% of them to come through. That isn’t happening today and it’s costing wholesalers a fortune.
So, you ask, how much does it really cost? And the answer is that I can’t give you an exact answer because it changes by the minute. For example, if you locked a $200,000 loan at 6.00% and didn’t close it and we were at 5.75% in 30 days when we found that out, the cost may be around $750. But if rates went down to 5.50% during that time the cost may be four times that amount or $3,000. And the cost keeps going up exponentially the bigger the spread between your locked loan and the current market. You can see how in this environment lenders can quickly have large losses on locked loans that are not delivered.
We realize that you have customers to contend with and the news media touting lower rates. But I ask you to Please, Please, Please don’t lock your loan if you can’t deliver it and don’t swap your pipeline again and again between lenders. If these things aren’t adhered to you will soon see all lenders charging for locks or simply refusing to do business with brokers that don’t have the required pull-thru. We are looking at pull-thru more and more in making our decisions and expect to have some tougher policies starting next year for pull-thru offenders.
The bottom line is that we value our customers and want to do what’s best for them. However, we also value the sources of the money that we’re able to lend. That said, we will do our best to provide the best rates and terms available. But we do request that our customers only lock a rate if they truly intend on delivering a loan on that lock.