A distinct lack of inventory, in association with rising mortgage rates, has decreased activity within the housing sector. These two indicators have ultimately cooled off the historically fast-paced rate of the entire real estate industry. However, some lenders have found a way to entice prospective buyers back into the market. As mortgage rates continue to increase, some lenders are reverting back to ‘lock and shop’ tactics of the past.
Premier Nationwide Lending, a prominent figure in the lending field, is the latest to bring back the lock and shop method. For those unfamiliar with this tactic, mortgage companies are preemptively approving buyers and then locking in their interest rates before they actually find a property that fits their needs. This way, buyers don’t have to worry about rates increasing over the course of their search.
Relatively simple in nature, the concept of lock and shop revolves around interest rates and their propensity for increase. Prospective buyers are therefore able to lock into a low interest rate before it has a chance to rise. Conversely, if rates decline after being locked in, homebuyers will have an option to “float down” to lower rates, explained Premier Nationwide Lending CEO Brad Sullivan.
The idea of a lock and shop strategy is anything but new. It was widely practiced before the housing sector decline. Around the same time as the bubble, many lenders removed it from their arsenal of options. However, recent trends are witnessing the idea make a strong comeback.
The trajectory of the housing sector appears to be sustainable, explaining why lenders are attempting riskier practices. A 30-year fixed-rate mortgage does not have the same appeal it used to. Demand has forced lenders to experiment with other methods.
According to HousingWire, “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.”
Ultimately, lenders offering this incentive are hedging their profits against unpredictable interest rates. With no time limits or restrictions on home searches, prospective borrowers may take up to a year to find a house. In the mean time, lenders are missing out on higher yields as a result of the rate increases.
“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.