Q: I am furious at my mortgage lender. I waited until rates came down to 9.7 percent and then "locked-in" the rate for 60 days. I am refinancing, and now have been told that since the appraisal and the credit report have not come in yet, the lender will increase my rate to more than 10 percent and up the points by two. This will cost me much more money at closing, and over the life of the loan, the monthly payments also will be higher. Is there anything I can do?
A. This is a very common problem -- which in my opinion, primarily stems from lenders' lack of communication with their borrowers.
When rates were dropping, many people who were refinancing, and who had locked in an earlier rate, decided to ignore that rate to take advantage of an even lower interest figure. However, within the last two weeks, rates started to climb back up, and now those who have made application at the lower rate are being told by their lender that the rate will no longer be available. The excuse given by lenders is a real one. Because of the extremely heavy volume of refinancing that has been taking place now, the support services for the lender -- such as appraisers, credit-reporting bureaus and title-search facilities -- are overworked and unable to meet their normal deadlines. As a result, too many people are finding that they are slipping by the 60-day lock-in rate, and told that their new rate will be higher.
Everyone is blaming the lender, claiming that the lender is going to make more money by loaning at a higher rate, and thus, purposely missed the earlier deadline. This charge, in my opinion, is not completely accurate. Most mortgage lenders are brokers who do not lend their own money, but rather are arrangers of the financing. The broker makes money by getting a point or two from the transaction and a small percentage of the monthly payment for servicing (collecting) the loan. If you look carefully at the numbers, it is clear that a lender does not make an awful lot more money if the rates go up.
However, the lender who locks-in a rate, and then is unable to meet that deadline, in my opinion may be in breach of contract.
Let us look at the basic elements of any contract. In order to have a valid, binding contractual obligation, three elements are required. First, there must be an offer. Here, the lender has offered a "locked-in rate" to the borrower.
Second, there must be an acceptance of that offer. Again, the borrower, by telling the lender that he will take that locked-in rate, has validly accepted the offer.
Lawyers may differ as to whether the lender makes an offer, or merely permits the borrower to make an offer to the lender. Nevertheless, there is an offer and an acceptance between the borrower and the lender.
The third vital element of a contract is consideration. Often, consideration is in the form of money. The borrower has given the lender money for the appraisal, the credit report, and indeed often for one or more of the points which will have to be paid. Even if the borrower does not give money as consideration, the law books tell us that consideration can be something of value other than dollars. In this case, if the borrower refrains from looking for another lender, and relies on the lender's representations, in my opinion, this constitutes valid consideration so as to make a contract between the parties.
Thus, if your lender locks in a rate and you have accepted that lock-in, if there is also consideration in the transaction, there probably is a binding, valid contractual obligation between the lender and the borrower. It must be pointed out that the offer and the acceptance need not necessarily be in writing. We need a written document primarily for the sale of real estate. Since we are not dealing with the sale of real estate -- but rather the financing of that real estate -- oral representations are binding -- assuming, of course, that they can be proven.
Now the lenders will say that it is not their fault that the loan cannot be processed within the 60-day lock-in. However, the elements that have delayed the loan are usually in the complete control of the lender. The appraiser and the credit reporting company were selected or designated by the lender. And the lender is in the superior position to know whether these supporting services will be able to meet the self-imposed deadlines.
Needless to say, if the appraiser cannot get into the house by delays caused by the borrower, this would change the legal picture. But in most instances, the appraiser is late merely because he or she is overworked with other lenders' jobs.
Thus, a good argument could be made that a lender is contractually bound to give the locked-in rate to the borrower. It is not an excuse to tell a borrower that you should be happy that even the higher rate will be less than your current mortgage loan. The borrower relied on the lower rate, went to that lender in good faith and the commitment should be honored.
Lenders have created this problem. Lenders also can avoid the situation by accurately disclosing to their borrowers, in writing, that the rate will only be valid for a period of 60 days, and that since the mortgage industry is extremely busy right now, no guarantee can be made that the loan will be available. I understand that some lenders in recent weeks have been offering different kinds of lock-in rates, ranging from 45 days to 75 days, depending on when the entire process can be completed. This is a more open method of communicating with borrowers and will go a long way toward avoiding the frustration, confusion and anger that most borrowers currently have.