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Points to Pursue: Locking In, Deed of Trust

The Washington Post November 21, 1998 | Benny L. Kass Q: We have signed a contract to buy our first house and are both excited and concerned. Our broker gave us the names of three potential mortgage lenders and we have been advised to shop around. We have heard that rates are moving up and several people have suggested that we now lock in a rate.

What is a “lock-in” and do you recommend it? And what is a deed of trust?

A: Your second question is easier to answer. Oversimplified, a deed of trust is the same as a mortgage. Both are written documents that are recorded in the land records in the jurisdiction where your property is located. Both are designed to put the world on notice that your house is not owned free and clear. The purpose of recording is to ensure that you can’t sell the house without paying off the outstanding loan to your lender. “Mortgage” is generally defined as a conveyance of property to a creditor as security. When the loan is paid in full, the mortgage is released from the land records. Many years ago, to simplify mortgage lending, the concept of the deed of trust was developed. When a homeowner borrows money to buy or refinance a home, the owner deeds the property in trust to a third party. That party, which can be an institution or an individual, holds the property in trust for the lender’s benefit. If the loan is paid in full, the trust is released from the land records. If the loan goes into default, the trustees have the legal authority to sell the property at a foreclosure sale. The successful buyer at such a sale obtains a “trustee deed” to the property, which conveys clear title to that buyer. In my experience over many years, I have seen very few mortgage documents. The deed of trust is the common form of legal instrument used in the Washington area. Now let’s turn to the lock-in question. Mortgage lenders often complain that their potential borrowers never object when rates are falling, but are constantly upset when rates are on the upswing. Unfortunately, although rates still are quite low, they have begun a slow rise. Many borrowers are now faced with the possibility that the interest rate they applied for and were supposedly locked in to no longer will be available. Oversimplified, a “lock-in” rate means you have a binding commitment from a mortgage lender that for a fixed period of time, usually 30 or 60 days from the time of application, you are going to obtain the rate that was locked in by the lender. In my opinion, the primary cause of consumer concern stems from lenders’ lack of communication with their borrowers. A few years ago, the Federal Reserve Board prepared a very helpful publication, “A Consumers Guide to Mortgage Lock-ins.” (FRB 3-50000-0691-C). The Fed’s definition of a mortgage lock-in is worth quoting: “A lock-in, also called a rate-lock or rate commitment, is a lender’s promise to hold a certain interest rate and a certain number of points for you, usually for a specified period of time, while your loan application is processed. A lock-in that is given when you apply for a loan may be useful because it’s likely to take your lender several weeks or longer to prepare, document and evaluate your loan application. During that time, the cost of mortgages may change. But if your interest rate and points are locked in, you should be protected against increases while your application is processed. It is important to recognize that a lock-in is not the same as a loan commitment, although some loan commitments may contain a lock-in.” The Fed points out that there are many different kinds of lock-ins. Options include a locked-in interest rate and locked-in points, a locked-in interest rate with floating points, or a floating interest rate with floating points, where the lender gives the borrower the option to lock in any time before settlement. Unfortunately, too many lock-ins are verbal commitments, which are not reduced to writing. It is important that you get a written document spelling out the terms and conditions of your lock-in commitment. At the very least, if the lender refuses to confirm in writing the terms of your lock-in, send a letter to the lender by certified mail, return receipt requested, confirming the lock-in commitment. In my opinion, the lender who locks in a rate, and then is unable to meet that deadline, may be in breach of contract. 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. The third element is consideration. Usually, consideration is in the form of money. The borrower has given the lender money for the appraisal, the credit report and often one or more of the points that will have to be paid at settlement. Even if the borrower does not give money as consideration, law books also define consideration as something of value other than dollars. In your case, if you refrain from looking for another lender and rely on the lender’s representations, that also constitutes valid consideration so as to make a contract between the parties. It should be noted that the offer and the acceptance need not be in writing. While a written document is needed for a realty sale, in this case we are not dealing with real estate–but rather the financing of that real estate–and oral representations are binding, assuming of course that they can be proven. In the mid-1980s, when interest rates were fluctuating, the Maryland Court of Appeals issued an opinion stating: “The inducement of a guaranteed rate of interest . . . especially in a time of fluctuating interest rates, clearly is intended to entice the customer to deal with the offering bank, rather than with some other lender. “Although the customer does not covenant that he will refrain from simultaneously making application with other lenders, we think the practicalities of the home loan market, and particularly the expense of each application, have the effect of at least temporarily taking the customer out of the market. As a greater number of loan applications may be expected to result in a greater number of loans, and thus, a greater profit, business advantage to the bank is real, even though every application will not lead to a profit.” Now that rates are starting to go up, we will start to see more lock-in problems. Lenders can avoid this situation by disclosing to the borrower in writing the terms of the lock-in commitment. Usually, these lock-ins run for only 60 days. The borrower should be advised of this time limitation. The lender then has an obligation to process the loan promptly and I recommend that borrowers contact their lender weekly to ensure that the loan process is moving forward. Kass is a Washington lawyer. For a free copy of the booklet “A Guide to Settlement on Your New Home,” send a self-addressed stamped envelope to Benny L. Kass, Suite 1100, 1050 17th St. NW, Washington, D.C. 20036. Readers may also send questions to him at that address. website deed of trust in our site deed of trust

Benny L. Kass