- The Washington Times - Wednesday, March 1, 2006

Q:I locked in a 5.875 percent fixed-rate loan with one of these large Internet mortgage

companies to refinance my $275,000 loan. Everything was fine. My credit and income are excellent.

I received an e-mail from the loan officer who said that my appraisal came in at $430,000 and all was well with the application process. A week later, I received another e-mail that said the underwriter said that the appraisal report isn’t supported by the comparable sales that were used and that the value needs to be lowered to $400,000. I reminded him that my rate lock expires in 10 days and rates have gone up since the lock.

I would like to see the appraisal at $430,000, but I’m more worried about the lock expiring. I’m beginning to think that the lender is dragging its feet on purpose to delay settlement until after the rate expires. Do you have any advice?

A: I hate to say this, but my advice would be to scream bloody murder until the loan is fully approved and clear to close. It’s possible, but unlikely that the lender is purposely dragging its feet in order to jack up your interest rate.

The method in which a mortgage company operates inherently makes such actions improbable. Loan officers are paid on commission, so it is in their interest to close the loan as soon as possible. Underwriters are salaried employees whose job is to ensure loan quality control. They have no incentive to delay the process until the rate lock expires.

From a business perspective, using delay tactics in order to avoid rate lock commitments may result in a bigger fee on one deal, but the consequences are severe. Not only will the company earn a tarnished reputation, it is likely to be the subject of regulatory action. Besides, such practices are illegal.

However, it’s certainly possible that the loan officer misquoted an interest rate or failed to secure the funds with the investor. If he signed a rate lock form that promises a rate that was well below market, he could not only lose his commission, but the closing could cost him money.

A loan officer worked for me a few years ago who took an application and signed a lock form promising a certain rate to his client. Whether the originating company is a bank or a mortgage broker, the terms of the loan must be secured with the ultimate investor. The loan officer didn’t secure the funds at the promised rate with the investor until the next day, when interest rates edged higher.

In other words, he locked the rate with the customer but failed to lock with the investor.

The result? We obviously honored the original rate with the client, but my loan officer had to settle for a lower commission. Your lender is obligated to honor the terms that were agreed upon, regardless of whether a mistake was made.

Rates have, indeed, edged up during the last couple of weeks, but not significantly. I don’t know the fees you were quoted, but I can tell you that 5.875 percent for a $275,000 loan is not significantly under market. Your lender is not going to go bankrupt by honoring that rate.

If there was, indeed, no mistake, I can only speculate that the loan is caught up in bureaucratic red tape. Some of these Internet companies are huge and inefficient.

Whether the house is ultimately valued at $400,000, $430,000, or somewhere in between is irrelevant. With a loan amount of only $275,000, the loan-to-value ratio is low enough that $400,000 appraised value wouldn’t change the terms or the underwriting criteria.

Here are my three guesses as to what’s happened:

• Your loan officer misquoted or forgot to secure the funds with the investor and stands to lose his commission if the rate is honored. As I said, this practice is not only unethical, but illegal.

• The underwriter is too myopic to simply mark down the appraised value to $400,000 and sign off on the loan.

• The underwriter is caught up in corporate red tape and is powerless to sign off on the loan, requiring the appraisal report to be modified by the appraiser.

Experience leads me to believe the last two scenarios are more likely. Either way, my advice is to take the offensive and insist that the loan close under the agreed-upon terms.

Henry Savage is president of PMC Mortgage in Alexandria. Reach him by e-mail (henrysavage@

pmcmortgage.com).

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