GEORGE DOWNEY
‘Major events’

As they come to terms with the end of the prolonged refinance boom and struggle with a large volume of pending loans, mortgage brokers and lenders are seeking to solidify continued business by offering mortgage rate locks to anxious borrowers and homebuyers. However, industry regulators are quick to remind mortgage professionals that they must be cognizant of the many rules surrounding the rate-locking process.

According to the Mortgage Bankers Association of America’s Weekly Mortgage Applications Survey released last week, the Market Composite Index of mortgage loan applications – a measure of mortgage loan applications for purchases and refinancings – for the week ending July 25 decreased by 24.3 percent to 972.4 on a seasonally adjusted basis from 1,284.3 one week earlier. The dropping loan volume is putting pressure on many mortgage brokers and lenders to use any tool available, including rate locks, to bring in new business.

However, as rates first began to rise, many borrowers rushed to secure a low rate, creating a mini-boom and a backup of applications.

This past week saw mortgage applications indexes dropping by significant degrees, according to the MBAA, and a major contributing factor was the fall of refinancings by 33 percent.

But as many mortgage experts acknowledge, the eventual end of the refinancing boom was nearly inevitable. Most lenders have continued to seek a balance between purchase mortgages and refinance business, but any mortgage professionals who relied almost exclusively on a steady stream of refinancing customers for the past year are now scrambling as rates, which hit historic lows only weeks ago, quickly rise.

“The rates that we have experienced have been [increasing] at a fairly rapid rate – [interest rates] hit the wall and these rates have just skyrocketed,” said George Downey, president of Harbor Mortgage Solutions in Braintree.

As rates rise rapidly, questions about the handling of mortgages in mid-process – “in the pipeline” is the phrase used in the industry – often arise. Once locked, the interest rate offered to a borrowers must be honored even if the lender’s cost to secure the funding rises before the loan closes.

On July 31, the state Division of Banks sent out an industry-wide advisory reminding all banks, credit unions and licensees engaged in mortgage lending activity of certain requirements and expectations regarding mortgage rate-lock commitments.

“The rate-lock issue is kind of like the perfect storm,” said Downey. “We’ve had some major events converging in our industry, including the declining [interest] rates and the avalanche of refinance business, that has put enormous strains on the industry.”

In a stable or declining rate environment, Downey said a lender might typically “lock in” a borrower’s rate for 30 days, reflecting the time it takes to process and close a loan.

“Now, with pipelines backed up due to volume … 30-day rate locks are expiring and investors are unable or unwilling to give an extension of the same rate,” said Downey. “The different forces have kind of converged and you add to that the regulations that impose the responsibility that [require] mortgage broker or lender to honor rate locks, and you create a dilemma.”

‘On Their Toes’

The difficulty of honoring rate locks after rates have increased dramatically and potentially losing vast amounts money is not new. A similar low-rate environment that spurred significant refinancing activity in 1993 and 1994, followed by rapid interest rate increases, caught some mortgage practitioners off guard, according to industry officials.

Rates increased quickly, catching consumers, banks, mortgage lenders and brokers by surprise. Consumer outcry escalated as more and more people found out that they were not going to receive the rate they were promised even though they had paid a rate-lock fee.

The rate-lock problem exploded later in 1994 when Boston-based lender Abbey Financial, which at the time was one of the state’s largest lenders, reneged on rate-lock commitments. As a result, loans were closed but not at the promised rate. The debacle put Abbey out of business and left many borrowers in the lurch.

“Abbey Financial didn’t secure their rate locks and then they defaulted on them. The consumer loses out on the money. There was a rapid change in the rates that produced a problem,” said Downey. “Today we have a similar problem because of the glut of business that remains in the system and in the pipelines.”

The DOB acted quickly in 1994 and added regulations that address rate locks. The additional regulations stipulated that mortgage brokers were prohibited from issuing rate locks, although they could pass a rate lock through from a lender, and any fee collected was to be made payable to the entity issuing the rate lock.

Recently, with the current interest-rate environment rising at a fast pace, the DOB issued a “reminder” to members of the mortgage industry on what constitutes good rate-lock practices and what is unacceptable in the industry.

“If you get mortgage rates moving up, even a little bit, what occurs is an incentive for people to not honor rate commitments,” said James Dougherty, chief operating officer and president of the Massachusetts Mortgage Association. “However, it is not merely the industry that is culpable in this respect. The manner in which consumers currently shop for mortgages on the Internet or on the phone shopping for the lowest rate [adds new difficulties]. They get actual verbal rate locks that are very dangerous, or they are getting a perceived mortgage rate lock, when it was actually the rate at the time and not an official rate lock. The DOB’s advisory was intended to put everyone [consumers and lenders] on their toes … and it did. I sent out a notice and the phone was ringing off the hook.”

According to Steve Antonakes, deputy commissioner at the DOB, the interest-rate environment is unpredictable and the DOB wanted to remind mortgage professionals about good business practices during such turbulent times.

“[The interest rate environment] is what it is, and we provided some guidance because … it’s been a long time since we’ve really seen a rising rate environment. Consider it a gentle reminder,” said Antonakes. “We don’t know if the rates are going to continue [rising] or not. Most people have worked in the industry for a while, but there are some new players so we thought it was important to get [the advisory] out.”

Antonakes acknowledged that the hike in interest rates has undoubtedly added stress among mortgage professionals, but said regulations are in place to protect members of the industry and consumers.

“As for refinancing, there are certainly a lot more players today and they have been fortunate so far, but the volume of refinancing is going to diminish and that will impact companies,” said Antonakes. “The fact of the matter is that there are always going to be purchase money mortgages but, sooner or later, the refinancing boom will end and when that happens there will be less business.”

The DOB’s advisory reminded all licensed mortgage brokers that they are prohibited from issuing mortgage rate-lock commitments, and such activity is the exclusive domain of authorized mortgage lending institutions. Mortgage brokers who engage in any form of unauthorized mortgage rate-lock commitment activity may face claims for restitution and enforcement action.

Licensed mortgage lenders were reminded that the division’s regulations prohibit a lender from issuing rate-lock commitments unless the lender maintains a net worth of at least $500,000. Lenders also were reminded that they must notify the division within one business day of any change or fluctuation in market values that cause their net worth to drop below the minimum threshold for issuing rate locks.

All banks, credit unions and licensed mortgage lenders are reminded that it has been the division’s clear and consistent position for over 15 years that mortgage rate-lock commitments entered into between a borrower and a lending institution which, through no fault of the borrower, expire before the closing takes place must be honored at any closing subsequent to the expiration of the rate-lock commitment.

“In a market in which mortgage origination, whether refinancing or purchase agreements, declines because of an increase in rates … competition would naturally increase. In a more competitive market, you are more likely to have, I would assume, some pressure to use every available tool to lock in business, including rate locks,” said Dougherty. “That is not to say that you necessarily get more violations, but you probably get rate locks more frequently used as a tool to hold onto more business. However, a rate lock is more a consumer device to hold the lender to the commitment, not the other way around.”

The MMA and the Massachusetts Mortgage Bankers Association sent the DOB advisory to their members and have fielded calls from members and consumers who are unsure of the logistics of the situation. In some cases, mortgage lenders and brokers are issuing their own advisory to colleagues and clients.

“We’re having a legislative meeting with the MMA, and one of the topics will be rate locks, and we’ll be issuing our own advisory,” said Downey.

While mortgage association leaders aim to advise and guide their members, Dougherty said he generally refers consumers directly to the DOB, and the DOB should look at making the language on mortgage rate locks less confusing.

“I haven’t really heard from an awful lot of consumers; my members had already been discussing this issue. This is the kind of problem that tends to crop up as rates rise and it needs to be addressed. Generally speaking, I refer to the consumer to the DOB,” said Dougherty. “If anything, the DOB needs to be looking at a way to make sure that all this information is firmly clarified – we have adequate safeguards now, but invariably there is going to be some consumer confusion.