A price quote means nothing until it is properly locked with the lender. A rate lock, as it is commonly called, is the lender's commitment that it will make the specified loan at the specified price within a specified future period. The price includes not only the interest rate but also points, which are upfront charges expressed as a percent of the loan; fixed-dollar charges; and (if the loan is adjustable-rate) the margin and maximum rate.
If market price changes, lock should be based on 'twin sibling rule'
A price quote means nothing until it is properly locked with the lender. A rate lock, as it is commonly called, is the lender’s commitment that it will make the specified loan at the specified price within a specified future period.
The price includes not only the interest rate but also points, which are upfront charges expressed as a percent of the loan; fixed-dollar charges; and (if the loan is adjustable-rate) the margin and maximum rate.
Locking has become more difficult: Before the financial crisis, if you started early enough in the day, it was relatively easy to contact a lender and lock the price the same day. Today, it is extremely difficult, if not impossible.
Delays are more frequent today than before the financial crisis, and the delay periods are longer. Before the crisis, income and asset documentation as well as appraisal requirements were often waived, facilitating the locking process. There are few, if any, waivers today.
Determining the property value, which has a major bearing on the terms of a loan, is particularly problematic. Before the crisis, lenders would lock based on the borrower’s or broker’s estimate of value if it was a refinance, or based on the sale price if it was a purchase, confident that in the great majority of cases the appraisal would confirm the value. Appraisals in buoyant markets generally did.
Today, lenders cannot have this confidence because appraisals have become conservative, and they also take longer. So lenders do one of two things: Either they require an appraisal before they lock, or they lock without it but require that the appraisal, when it materializes, show a value above some level for the lock to remain valid.
Lock delays carry risk to borrowers: Because market prices are highly volatile, lenders reset them every morning, and often during the day as well. This makes it very likely that the price on the lock day will not be the same as the price quoted to the borrower earlier, on which the borrower’s decision to proceed was based. While prices may change in either direction, the risks to the borrower are not symmetrical. Borrowers waiting to lock will always pay more if the price has risen, but they won’t necessarily pay less if the price has declined.
Lock scamming is all too easy: A lender who locks at the current price when that price is higher than the one quoted to the borrower earlier should do the same when the current price is lower. However, few borrowers are likely to object if they are locked at the price they were quoted previously, and my soundings suggest that this is a common occurrence. The irony is that the borrowers who consider themselves victimized are the ones who pay a higher price following an increase in the market price, whereas the real victims are those who pay the same price following a market decline.
The good faith estimate (GFE) doesn’t help: The GFE is a federally required disclosure of rates, fees and other loan characteristics that must be provided to the borrower within three business days of the submission of a loan application. It is designed to protect borrowers against a variety of hazards, but it does not protect them against lock scamming.
If the loan has been locked at the time the GFE is issued, any scamming has already occurred. If the loan is not locked when the GFE is issued, the rates and fees shown on the GFE are pre-lock quotes similar to those quoted to the borrower orally, but many borrowers don’t understand this. The GFE states that "the interest rate for this GFE is available through [date]," and if the loan has not been locked, the lender enters a day that has already expired. This is a horribly roundabout and confusing way to tell the borrower that the loan is not locked.
Protecting yourself against lock scamming: When the market price changes between the time the lender quotes a price to the borrower and the time the loan is locked, the lock price should be based on the "twin sibling rule": That rule states that the price locked will be the price the lender would quote on the same day on the identical transaction to the borrower’s twin requesting a price quote. If the new market price is below the price quoted to the borrower earlier, the lender will lock the lower price. If the new market price is higher than the price quoted earlier, the lender should not lock until explicitly authorized to do so by the borrower.
How does a borrower verify that the lender has followed this rule? One way is to monitor market changes on a day-to-day basis. The best tool for this purpose is my daily series on wholesale mortgage prices.
Even better is to deal with lenders who provide access to their pricing systems through third-party multi-lender websites, where borrowers can check their price on the system when they lock. Three sites that provide this facility are mortgagemarvel.com, zillow.com and mtgprofessor.com, which is mine.
The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.
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|Letter to the Editor|
Copyright 2013 Inman News
It's always hard to predict how long it will take to find a home to buy. Given the current low-inventory environment, it may take you longer than it would in a balanced market that has enough homes for sale to satisfy the current buyer demand.
Patience needs to be a key component of your home search mentality. Even if a home you like a lot comes along quickly in your search, other buyers may have the same idea. You could end up in competition. If you aren't the winning bidder, don't let disappointment immobilize you.
Don't let disappointment immobilize you
It’s always hard to predict how long it will take to find a home to buy. Given the current low-inventory environment, it may take you longer than it would in a balanced market that has enough homes for sale to satisfy the current buyer demand.
Patience needs to be a key component of your home search mentality. Even if a home you like a lot comes along quickly in your search, other buyers may have the same idea. You could end up in competition. If you aren’t the winning bidder, don’t let disappointment immobilize you.
To prepare yourself to buy in this market, plan to look at every new listing that comes close to satisfying your wish list. Accept that you won’t find everything on your wish list. Successful buyers make sacrifices. Just make sure to make intelligent compromises.
For example, don’t get so overwhelmed by the urge to buy now that you overlook that a home you like won’t work for you for long. Buying and selling is expensive; you don’t want to do it often. Make sure that a home you buy will suit your needs for years to come.
There are benefits to seeing a new listing that’s a possibility for you in person rather than looking at it only online or having your agent describe it to you. In a low-inventory market, it’s vitally important to become an expert on local pricing. Follow up with your agent on every listing you liked and find out how much it sold for and how many offers were made.
This way you will know when a listing is underpriced, priced close to market value, or overpriced for the neighborhood. The lower-priced properties tend to attract more buyers. If you’ve educated yourself about local market pricing, you can distinguish between a listing that is underpriced and one that is fairly priced.
HOUSE HUNTING TIP: You can save yourself a lot of time and disappointment if you don’t make offers on underpriced listings that attract five or more offers, particularly if you can’t go much higher than the list price. In one instance, a Piedmont, Calif., buyer was recently enthralled with a listing priced at $895,000. When 10 offers came in, she decided not to jump into the fray because she couldn’t pay more than $1 million. The listing sold for $1.4 million.
Some real estate agents encourage their buyers to make an offer even if they haven’t a chance because they feel it gives buyers a chance to get their feet wet. The problem with this approach is that after slogging through the mud and losing out four or five times, you may feel burned out and drop out of the house hunting search altogether.
Make sure your real estate agent is in touch with the listing agent of a listing you covet so that you have a sense of how much competition there might be. Then based on your pricing expertise, your financial capabilities and how close the house matches what you want, you can make an educated decision about whether to make an offer.
Find out how much work a listing will need. Ask for a disclosure package of seller disclosures and reports, if they are available. Factor this information into the affordability equation. A listing priced at $700,000 that requires $200,000 of repairs isn’t affordable if you can pay only $750,000 at the most.
Have your agent watch for listings that aren’t well-marketed. Out-of-area agents often don’t know how local agents generate activity on their listings. The strategy used on the Piedmont house above was to price low and have more than one open house before hearing offers.
THE CLOSING: An undermarketed listing can be a buying opportunity in today’s market.
Dian Hymer, a real estate broker with more than 30 years’ experience, is a nationally syndicated real estate columnist and author of “House Hunting: The Take-Along Workbook for Home Buyers” and “Starting Out, The Complete Home Buyer’s Guide.”
Copyright 2013 Inman News