Not everything is a by-product of COVID-19, although that may be how it feels right now!
When a Borrower opts to lock in their interest rate during the mortgage loan process, they do so for a defined period of time. Should they not be able to fund on their loan by the lock expiration date, they will need to extend the lock period typically at a cost even if rates have improved. That’s a hard concept for most consumers to comprehend so I’m hoping the following explanation will shed some light.
An interest rate lock commitment (IRLC) is an agreement where a Lender agrees to extend credit to a Borrower under certain defined terms and conditions in which the interest rate and the loan amount are set prior to funding the loan. Under this agreement, the Lender commits to lend funds to an approved Borrower for a specified rate, regardless of rate changes between the time the rate is locked and the lock expiration date.
The initial value of the loan to the originating Lender is comprised of many components which include:
- The loan amount
- The interest rate
- The price at which the loan can be sold
- Discount points and fees to be collected from the Borrower
- Direct fees and costs associated with the origination of the loan such as the processing, underwriting, commissions paid, etc.
- The value of the servicing to be retained by the Lender or the servicing released premium to be received should the loan be sold
The fair value of an IRLC is conceptually related to the fair value that can be generated when the underlying loan is sold in the secondary market.
Changes in interest rates can affect the value of the servicing asset as well as the value of the loan for the Lender. In addition, the pull-through rate, meaning the number of locked loans that actually close and don’t fall out for one reason or another also have an impact on Lenders.
At the time a loan is locked, the gap between when the Lender locks a loan and when it is closed and subsequently sold can vary from a couple of weeks to months. Regardless, the Borrower is protected by their lock.
This is a whole bunch to the back-end of how a lock works and even the above may seem to technical, but the point is that this is not a new phenomenon. The bigger issue is the ability to close on time if the lock is not done for a long enough period of time and with the amount of issues that are coming up from the availability of employers to verify employment at closing to the lack of availability of notaries to meet to sign your closing documents to Counties with limited access for recordings, plan ahead and don’t short your lock time.
Questions? Give me a call, 360-459-1200!