Have you heard this one? A guy walks into a bar and says, “Lock in my interest rate” and the bartender says “Sure.” Later on, the lock expires. Sound funny? I didn’t think so, but that’s going on all too often these days. Loan locks expire before the loans close. What’s the deal, anyway?

The “deal” is that the loan volume is too much for the system to handle. At least from a process standpoint. This recent refinance boom lasted longer than any other, much longer than the first big one in 1992. Give or take, this interest rate cycle lasted for over two years. That’s a long time. Not only that, but the way rates fell was a benefit to both the consumer and the lender. What way? There seemed to be no volatility in rates. Interest rates gradually went down. Calmly. Over an extended period. This allowed for the system to methodically and predictably originate, close and fund mortgage loans with no one screaming at you.

In late June, when fixed mortgage rates hit bottom, things began to get a little scary. Applications, while always strong, began to literally pour in. Many in the industry scratched their heads thinking, “Why all of a sudden are we getting this downpour of loan applications?” I don’t know but I have a theory. When 30 yr fixed rates began to dip below 5.00% and 15 yr rates approached 4.00% that could have been the psychological barrier many consumers were waiting for.

“Nah, honey, I’ll wait until rates get below 5.00% before I do anything.” Marketing gurus will tell you that 4.875% sounds a lot lower than 5.00% for the very same reason that $2.99 sounds a lot lower than $3.00. What happened next?

The system got clogged. And not just from the lender’s point of view. Appraisals that were taking 7 days to get were taking three weeks or more. Title insurance companies were backlogged with order requests. Then voicemails, then emails, then no return phone calls. Suddenly, that 30-day lock didn’t look very attractive. Suddenly, that 30 yr lock expired. And rates weren’t being gradual any longer. Rates shot through the roof.

So whose fault is it? I’m not sure it’s anyone’s fault. Should loan officers have locked in rates longer than 30 days? In hindsight, sure. But why make the consumer pay more money to lock longer when for the past three years a 30-day lock was all that was needed? Lenders across the country were scrambling trying to get deals closed before rates expired. And many consumers as well as lenders lost out.

Think of it this way: Let’s say a new restaurant opened in your town and received the highest rating of any restaurant. Ever. Not only that, but the food was not only tasty but also cheap. Even the wine list wasn’t a rip-off. Everyone, absolutely everyone wanted to eat there. The problem? The restaurant had only 10 tables. And even though you had a reservation, the line outside was over 100 people deep. The restaurant couldn’t handle all the business. That’s a rough analogy, but you get the idea.

Do you think the restaurant wanted to serve each and every one of these people standing in line? Of course, that’s why they’re in business, to make money. Do you think lenders want to make every loan they take? Of course. But they have no control over interest rates, only the market has.

If you’re one of the unfortunate souls who can relate to this story, I hope it helped ease some of the pain. I know that you did everything you were asked to do but everybody else in the process dropped the ball. But they didn’t drop the ball so much as they couldn’t catch all the balls that were being thrown to them.

Published: August 12, 2003

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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.