Do you ever wonder what happens after you lock in your mortgage loan? Do you think time stands still while your loan officer dutifully locks in your interest rate? It's not a matter of calling and placing an order. Sure, that's what you actually do, you tell your lender or loan officer that you in fact want to lock in your interest rate. But what happens after that is a little known secret in the mortgage business; market gains.

Fixed mortgage rates aren't set by anything Greenspan does. Nor are these rates tied to any 10-year Treasury or 30-yr Bond. They're tied directly to something called a mortgage bond. And depending upon which program, be it conventional or government, rates can even vary to a particular type of mortgage bond, such as Fannie Mae and Ginnie Mae mortgage bonds.

These bonds are traded each and every business day. Each morning, as trading begins, lenders will watch the price of the mortgage bond, say the current Fannie Mae 5.0 percent coupon, and set their rates accordingly. If bond prices are up, rates will drop and vice versa. By the time new rate sheets are distributed throughout a mortgage company, or to their legion of mortgage brokers, these mortgage bonds have typically been traded on for a couple of hours. Lenders like to both see a bit of stability in the morning price while at the same time, wait for any economic data to be released.

Prices of these bonds can move in such tiny increments of 1/1000th of one percent, but are usually tracked in "basis points" or 1/100th of a percent. As the price of a bond increases by 100 basis points, you'll see a typical drop in interest rate by somewhere in the ¼ percent range. If the 5.0 percent coupon begins trading at 101.00 but then ends the day up at 102.00, then a rate drop is in store.

The rates moves by only a few basis points and don't do anything as far as changing published interest rates. When a lender sets rates for the day, it's no simple effort. Yeah, there are software programs that do this for them, but the data still has to be input and those rates still have to be distributed to their loan officers. This takes time and overhead. Slight changes in bond prices will rarely make for a rate change in the retail sector. These slight changes still mean money. Who gets it?

When you lock in your loan, your loan officer has to pull up your loan information on their computer, perhaps complete a "lock registration form," then fax or email the form to their lender. At that point, the loan officer needs to make sure the lender locked in their loan by receipt of a "lock confirmation." All of this takes a little time, some are more efficient than others, but it's rarely a "flick of the wrist." During this time, bond prices are always moving.

On a $200,000 mortgage, 25 basis points yields $500. 12 basis points is equal to $250. Don't worry about trying to make a direct correlation here, that's another column. The point is that for 12 basis points, it means another $250 on a $200,000 deal. That's rarely enough move to make a lender "re-price" their mortgage loans in the middle of the day. Instead, a lender will wait and see if rates move by, say 25 or 30 basis points. Even if a mortgage bond hits that price, a lender will wait and see if that price stays there or if it simply bounces back to its original level. As I said, it takes a lot of effort to re-price mortgage rates during the middle of a business day. Most lenders will wait until the following day to make the change.

If you locked in your rate with your loan officer at say, 6.00 percent for a 30-yr fixed, there may have been some movement between what you locked in at and where the current mortgage bond is priced. There's lots of money in these tiny spreads. $250 to $500 per loan is a lot of money to a loan officer, especially if he or she is closing twenty deals a month. These spreads are sometimes called "Market Gains" or the difference between what you, the consumer locked in, and what your loan officer finally locked in.

If you lock in at 6.00 percent for 30 days, your loan officer may be watching the prices of mortgage bonds and sees that by waiting "internally" or "floating" your lock. You think you're officially locked, but your loan officer is trying to squeeze a little more income from your deal. You get what you wanted, your rate, and the loan officer gets a little more pocket change for their trouble.

But what if the loan officer "floats" your "lock" and the markets turn against the loan officer? What if your rate you "locked" actually begins to turn sour and begins to increase? Your loan officer begins to lose money on your deal. Instead of making $2,000 on your deal, the loan officer will only make $1,000, or $500. Some can't sleep at night or are slavishly watch the business news, just to get a glimpse of what rates might do the next day. Some get so deep that they have to bring a check to their customers closing -- figuratively speaking.

Many lenders have strict policies forbidding the practice of market gains. When a customer requests a lock, the loan officer is expected to use his or her due diligence to lock that customer as soon as possible. On the other hand, some loan officers feel it's they who take the risk and if they want to "float" someone, at their own discretion, then that's fine with them.

Market gains can get people in trouble. It can cause headaches, blown lock guarantees, and loss of reputation. Does the customer get any of the market gains? No, they don't. They get what they locked in at. Does every loan officer "play the spread" on all his or her deals. I hope not. But it happens. Protect yourself by getting your rate lock in writing. Demand it. And if your loan officer appears to drag their feet about getting your written lock guarantee, call them on it. Ask them if you are in fact really locked in or, is the loan office trying to make a little extra money? You'll hear the phone drop on the other end.

Published: April 1, 2005

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, a veteran Mortgage Banker, successful Real Estate Consultant and author of Your Guide to VA Loans, Mortgages 101: Quick Answers to Over 250 Critical Questions About Your Home Loan, Who Says You Can't Buy a Home!, and Mortgage Confidential: What You Need to Know That Your Lender Won't Tell You, is a former columnist and Contributing Editor with San Diego-based Mortgage Originator Magazine. Reed is President of CD Reed Mortgage Bankers, Austin, TX and is a Past President of the Austin Mortgage Bankers Association.