Your Mortgage : Rate Locks Can Expire If Lenders Delay

With mortgage rates significantly higher than they were 45 to 60 days ago, loan applicants across the country need to be on guard against a strategy that mortgage industry experts themselves concede is sometimes used against consumers:

Deliberate delays that push settlement dates beyond the expiration of rate locks.

Rather than delivering on a 7 1/4% 30-day rate lock in an 8 1/2% market, the mortgage company finds reasons to slow down the processing--discovering sudden problems with the property appraisal, income or credit data. The net effect: Settlement is pushed back beyond the 30-day lock period. The lender is under no obligation to deliver the money-losing 7 1/4% loan the consumer applied for, but may offer a replacement deal at current market rates or slightly below.

Although few mortgage executives are willing to discuss it on the record, others readily confirm what one representative of a large, nationally active lender said: When rate jumps mean thousands of dollars of red ink if a loan goes to closing, “there can be tremendous pressure to look extra hard at problems with the (borrower’s) application that you otherwise might have ignored.”

One industry veteran, mortgage consultant and broker Allen Hardester of Columbia, Md., said that although the vast majority of mortgage bankers and other lenders honor their commitments--rising rates or not--”it’s an open secret that plenty (of firms) do not.”

Hardester cited for example a recent $130,000 application he submitted to a large Baltimore bank on behalf of a customer. The application was made in February--before rates shot up by over a percentage point--and should have been closed in late March. The bank had the applicant’s full income and asset data for weeks and was moving ahead. But only when rates jumped--and the rate-lock deadline loomed--did the bank raise what Hardester calls “ridiculous, absolutely transparent questions” about the borrower’s assets.

When Hardester protested, he says the bank told him, “tough--if you don’t like it, sue us.” The applicant didn’t want the time hassles or costs of a lawsuit and walked away--despite a written rate lock that cost the borrower $650. The bank ultimately refunded that fee, minus appraisal charges.

Hardester listed what he called the three most common escape strategies for lenders or investors who don’t want to deliver a loan on the rate-locked terms:

--Challenge the appraisal. “Anybody can demand a review appraisal (a second, follow-up evaluation of the property and the assumptions used in the first),” said Hardester. “It’s fully within their rights (before funding a loan), and an appraisal is easy to find fault with if you need to.”

The comparable properties used as benchmarks for the applicant’s home, for example, can be challenged as the wrong choices. Follow-up appraisals can add days to processing time, and may well come back with valuations below the original. That, in turn, can force the applicant to settle for a lower loan amount and bigger down payment, or to back out of the whole deal.

--”Herk and jerk them to death” on documentation. Mortgage application packages submitted for funding frequently contain relatively minor, technical problems--omissions of employment verification letters, incomplete bank statements, lack of one co-borrower’s signature on a form, etc. When rates are headed down and application volume is up, according to Hardester, lenders routinely overlook these glitches.

But when rates are rising and the lender stands to lose money on the loan in the secondary market, even the smallest discrepancies and omissions are ripe for challenge. For example, he says he’s seen loan packages knocked off track because a single, small late payment to a department store in the credit file wasn’t documented as having been cleared up.

--Challenge income and debt data--particularly for self-employed borrowers or applicants with complex financial situations. Hardester says flatly: “If you are self-employed (and the lender doesn’t want to deliver at the locked rate), you’re history.”

Even under the best of circumstances, underwriters pepper self-employed borrowers with extensive requests for federal and state tax returns, corporate documents, accountants’ statements and the like. But when the rate-lock clock is ticking and rates are moving up, the requests can go off the charts.

Hardester emphasized that borrowers whose applications are subjected to heavy documentation requests or challenges this spring shouldn’t automatically assume that their lenders are trying to wriggle out of a rate commitment. After all, he says, many applications contain legitimate, serious grounds for review or challenge that are in no way the fault of the lender.

But to be safe in a volatile market, Hardester recommends borrowers with locked rates follow these rules: First, stay in regular, close contact with the individual in charge of processing your loan.

“You need to be in touch at every stage,” he says. Has the appraisal been scheduled? Completed? Does it support the loan amount? Have all the income, employment and credit data come in? Are there any questions?

Second, create a paper trail if you’re worried about your lock expiring. Send immediate follow-up letters after your conversations with loan officers. “Create a paper trail a mile long,” Hardester advises. “That way you can always document that (the lender) was telling you, hey, no problems, you’re ready to go.”

Distributed by the Washington Post Writers Group.