Q. We are absolutely furious. We signed a contract to purchase our first home in late July, and settlement is scheduled for the end of next week. Before the contract was signed, we took your advice and shopped around for the best mortgage. After the real estate contract was signed, we immediately contacted the lender we had selected, and made a formal application. Rates were still very low, and the lender asked us if we want to lock it in.

Since this is our first house, and we have absolutely no understanding of the way the mortgage market works, we did not understand his question. However, he explained that if we "lock in" by signing a document called "Loan Lock-in", the rate the lender quoted would be guaranteed, so long as settlement takes place by the time specified in the sales contract.

Today, we have been advised that the lender will not be able to honor his commitment. The excuse he gave us was rather lame (in our opinion), namely that the lender was unable to complete the underwriting in time.

The lender did offer us a new rate, which is somewhat higher than the original locked in rate, but lower than the current rate for mortgages.

Is there any way that we can demand that our lender honor his commitment, or should we just accept his new offer.

A. When mortgage interest rates are low, potential borrowers do not complain. However, just as soon as interest rates begin to creep up (as they have been doing in the past few weeks), we start getting concerned. While no one can predict where interest rates are going, there is no question but that in the past few weeks they have spiked up dramatically.

Keep in mind, however, that the current mortgage interest rates are still very low. Many of us still recall the time when rates were over 12 percent per annum.

Potential homeowners are now faced with the possibility -- or the reality -- that the interest rate they were hoping to get (and indeed often promised) will no longer be available. And even if you can afford the higher rate loan, you now have a double problem: I strongly suspect that since the real estate market was on a frenzy, you probably paid too much for your house and now will have to pay more for your monthly mortgage.

Most lenders will allow you to "lock in" a rate. This means that you have a binding commitment from your 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.

The Federal Reserve Board has prepared a very helpful publication entitled "A Consumers Guide to Mortgage Lock-ins." (FRB 3-50000-0691-C), which can be obtained from the Board of Governors of the Federal Reserve System, Washington, DC 20551.

The Federal Reserve'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.

Unfortunately, many consumers have learned the hard way that what they thought was a "locked in" rate was only a verbal statement from the loan officer, who later denies making any such commitment. It is important that you get a written document spelling out the terms and conditions of your lock-in commitment. If the lender refuses to give you a written statement, you should consider looking for another lender. A verbal commitment will most likely not stand up in Court, and in any event you really do not have the time -- or the money -- to file suit against the lender. You want to go to settlement and move into your new home.

At the very least, if the lender refuses to confirm in writing the terms of your lock-in, send a letter to your lender, by certified mail, return receipt requested, stating your understanding of the lock-in commitment. If the lender does not respond, this will be more evidence of the existence of the lock-in promise.

Although some mortgage lender attorneys disagree, it is my opinion that a lender who locks-in a rate and then is unable or unwilling to meet that deadline may be in breach of contract.

Let us look at the basic elements of any contract. To have a valid, binding contractual obligation, three elements are required:

First, there has to be an offer. Here the lender has offered a "locked-in rate" to the borrower.

Second, there must be acceptance of that offer. Again, the borrower -- by telling the lender (in writing) that he or she will accept the locked-in rate -- has validly accepted the offer.

The third vital element of a contract 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, the 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 pointed out that the offer and the acceptance need not be in writing. While we need a written document for the sale of real estate, in this case we are not dealing with real estate -- but rather the financing of that real estate -- and oral representations are binding. The problem, of course, is proving that the statements were made. Thus, if you reduce everything to a written document, your proof problem will be much easier.

There is a Maryland Court of Appeals case which is helpful. That Court 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.

Lenders can avoid this situation by disclosing to the borrower in writing the terms of the lock-in commitment, or alternatively that the rate will not lock in, but will float until settlement. Usually, these lock-ins run for only 30 or 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 on a weekly basis to make sure that the loan process is moving forward.

But what can you do, now that you know that the locked-in rate will not be available?

This is really a business -- not a legal -- decision which only you can make. You obviously have to go to closing on your house. Otherwise, you may lose your earnest money deposit. You can sue your lender, but litigation is time consuming and expensive.

My suggestion: contact the lender and advise him that if he does not honor his commitment, you will be filing complaints with your local Attorney General’s office, the Federal Trade Commission, and you will retain counsel to file suit. Perhaps these threats will convince the lender to at least give you a better deal than was previously first offered you by way of settlement.

In the final analysis, if you do take the latest offer from your lender, do not sign a release. The lender may insist that you sign such a document, whereby you release the lender from all liability in connection with the lock-in. To the extent that you can get away with not signing such a document, you will at least be able to keep all your options open -- after settlement.