As mortgage rates continue to hike up, some lenders are bringing back ‘lock and shop’ programs to assist borrowers in purchasing a home.
Privately owned Premier Nationwide Lending is the latest to join the ranks of those offering the ‘lock and shop’ program to homeowners.
The company will credit approve a homebuyer and then lock in their interest rate before they find the property they want to buy.
The process is quite simple, if mortgage rates goes up, the borrower still gets the lower, locked rate. And if the rates decline, the homebuyer will have an option to float down to lower rates, explained Premier Nationwide Lending CEO Brad Sullivan.
The ‘lock and shop’ program isn’t a new tool to the market. In fact, most lenders removed their programs when volatility hit the market, argued 360 Mortgage Group chief operating officer Andrew Weiss-Malik.
The sudden attraction back to a program that seemed to provide more liability than advantages is the lending environment's increased need for competition.
By lenders staying at the cutting edge of trends within the space by trying new products to beat out the competition, mortgage professionals could use the program to increase their business growth as well as demonstrate the use of the product.
"Many lenders are scrambling for loans and looking for any competitive edge they can find," Weiss-Malik said.
He added, "In addition, as the lending market becomes more competitive, some lenders are exploring riskier products to replenish declining loan volumes."
Some are returning to products traditionally thought of as riskier to lenders than, say, a 30-year fixed rate mortgage. It's a demand driven concept whereby even housing advocates are asking for more homebuying finance options. Quicken Loans recently, as an example, extolled the virtues of the adjustable-rate mortgage.
The biggest challenge of the ‘lock and shop’ program is that during the property search process, homebuyers are seeking the lowest rate, which implies that borrowers may prolong the search to get the best rates possible. The 'lock and shop' programs historically lower pull-through rate and guaranteed float down rate negatively impacts a hedge position, exposing lenders to increased risk, Weiss-Malik explained.
Put simply, the company offering the program must hedge against the interest rate risk because the potential borrower may take up to a year to find a home since no time frame is given within the program.
Consequently, given the new Consumer Financial Protection Bureau’s involvement in the market to monitor fair lending practices, “it is crucial that both borrowers and lenders document the programs functionality and fees thoroughly or they may expose themselves to legal and regulatory liability,” stated Weiss-Malik.
"The threat of increasing interest rates stripping away a borrower’s loan approval is removed from the equation," stated Premier Nationwide Lending vice president of regulatory affairs John Hudson.
He concluded, "This means less fallout and a greater opportunity to deliver excellent service to our borrowers and referral partners. In addition, loan professionals want to work for a company that offers these types of innovative programs. Prospective employees are drawn to the ability to offer the ‘Lock and Shop’ program."