Let’s set the scene:

You call a loan officer about a refinance; you got their name from a friend. 

The loan officer quotes a rate.

It’s 2.75% for a 30-year fixed.

You almost can’t believe your ears. 

Your inner Jack Nicholson speaks to you. “You want that rate. You need that rate.” 

It’s a no-brainer. LOCK IT UP!

Hold on a second… Not so fast…

“We can’t lock your rate just yet.” 

That’s an answer you might get from 7 or 8 out of 10 lenders right now. 

They might tell you:

  • We can’t lock until your loan is approved.
  • We can only lock your rate for 30 days, but we won’t be finished processing your application in that timeframe, so we have to wait until we’re closer to a closing date.
  • If I lock you into a rate today, I’d have to lock you in for at least 90 days, and the rates for a 90-day lock aren’t nearly as good as the 30-day rate lock.

Why?

Volume.

With rates so low, the volume of mortgage applications is at an all-time high mostly due to homeowners refinancing. During “Refi Booms” lenders take special measures to effectively manage a swollen pipeline of loan applications they aren’t equipped to handle from a personnel standpoint.

Early in my career, one of the banks I worked for contracted with a processing center in Oklahoma to underwrite and process overflow mortgage applications. At another bank, my employer went on a massive hiring spree during a period of ultra-high volume. Then they laid off virtually every one of the new employees less than six months later when volume slowed. 

Sometime around 2010, I was on an employee conference call for the national bank I was employed by. A regional director outlined their plan for handling the volume. It was too expensive and too cold-blooded to hire, train, and then then lay off the new employees when the downturn came. Instead, the executive told over 500 loan officers that we might as well go on vacation for two weeks because they were “turning off the faucet” by significantly raising mortgage rates to discourage new applications. They needed to play “catch-up” with the workload they were already committed to. It wasn’t the news a loan officer wanted to hear considering none of us had base salaries. We were paid 100% by commission, reliant upon taking new applications to earn income — and refi booms only come along every now and then. The loan officers didn’t want to “miss the boat.”

If managed properly, more applications equates to higher revenues. But lenders can lose money and suffer reputational damage if they take on more than they can handle. They must defend against costly decisions. One of the more common protocols that I’ve seen implemented in this most recent refinance cycle is the implementation of 30-day rate locks that can only be executed after an application is officially approved – which in some instances can take more than a month.

If the loan officer waits until a loan is approved to lock into a rate, the time-consuming portion of the process is out of the way, and there is a clear path to the finish line. This safeguard protects the bank from paying massive extension fees or passing them along to their customers, but it leaves the applicant exposed to the possibility that rates will be higher by the time the lender lets them lock into a rate. 

In a typical rate environment, it’s fairly customary for a borrower to lock into a mortgage rate for about 60 days at the beginning of their loan process. Normally, that two-month window provides ample time to process, underwrite and close the loan. But when the applications keep coming, 60 days might not be enough. 

*By the way, It’s not just a lender’s own inability to handle volume that creates a backlog. For instance, many New Yorkers would want their loan officer to facilitate a CEMA (Consolidation, Extension & Modification Agreement – a fancy title for a bookkeeping maneuver that helps a refinancer avoid paying mortgage tax to the state of New York). The legal firms that process CEMA requests are almost as inundated as the banks are, and they likely have even less manpower. 

Real Life Example

As Mortgage Finance Director for The Espinal Adler Team, it’s part of my job to know which lenders have the lowest rates at any given time. 

In late July, my friend Jesse called me to ask questions about refinancing his mortgage. He had a friend in the mortgage business who was trustworthy and offered a rate of 3.125%. I told Jesse it wasn’t the lowest rate I’d seen, and I gave him contact information for a loan officer who quoted a rate of 2.875%. Understanding the risks, Jesse rolled the dice and opted to apply with a lender who wouldn’t let him lock immediately. 

Meanwhile, in a separate refinance, Jesse’s sister immediately locked into the 3.125% rate with the family friend. About four weeks later, her loan was already approved and even cleared for a closing. At the same time in late August, Jesse’s application wasn’t close to being approved. In fact, it hadn’t even been submitted to underwriting because my contact’s processing team was so backed-up. 

Jesse’s rate wasn’t locked, and along the way there were some anxious moments when it looked like the market could have moved against him. Fortunately, the approval came the first week of September and Jesse locked in at 2.75%, even lower than where they started at. 

Just last week, I called my friend Tim who is a loan officer in Massachusetts. I asked him how his company handles rate locks. Their policy was nearly identical to the 30-day policy I just described. He said a client could lock for 60 or 90 days if they wanted, but by design, those rates were significantly higher. 

My friend Tim also happens to have a PhD in conflict resolution, which comes in handy in today’s crazy rate environment. In lieu of resolving conflict, Tim said he aims to avoid it through crystal clear communication, especially in the early stages of the application process. 

Up front he explains the risk his clients are taking.

  • You are investing the time and energy it takes to gather and provide documentation.
  • You are likely required to pay an appraisal fee, usually at least $500. 
  • Your rate is NOT locked, and it won’t be locked until your loan is approved, which could take several weeks. The rate I’ve quoted today could change for the better or for the worse between now and the time we can lock. 

“If they understand the risk, and they acknowledge it, and they still want to move forward, I’ve done my job,” Tim said, adding that rates are so low, most clients elect to move forward. 

Recommendation

Ask questions and do NOT make assumptions. Ask your loan officer specifics about their rate lock policy, and expect them to lay out the risks the way Tim does for his clients. 

I would also point out that not every lender’s policies are identical, even though they all talk to each other behind the scenes (See last week’s article on Socialized Mortgage Finance). There are lenders that will let you lock into a rate in the moment you apply for a mortgage, and, depending on its current circumstances, that lender’s rate might be just as aggressive as the lender’s who make you share in the risk. Call around and get specifics.

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