Interest rates on 30-year mortgages are still cheap by historical standards, averaging 4%, up slightly from a record low last month. The time it takes to process mortgage applications also is increasing as applications surged. A delay doesn't necessarily mean that consumers are getting a higher rate, but according to one expert, it may mean that your loan is more likely to be rejected.
Consumers are being urged to get their paperwork in order before submitting an application in order to minimize the potential for processing hiccups. Even then, there is no guarantee that the application will be approved, as creditworthiness standards have been ratcheted up in the wake of the housing market's collapse.
"There are no rules about this to my knowledge," Jack Guttentag, a Wharton professor who edits the Mortgage Professor blog, wrote in an email. "If the lock expires, unless the lender acknowledges responsibility for not getting it done, the lock will be extended at the higher of the lock price and the current price.
"This represents a change for consumers, who before the financial crisis were able to lock in interest rates on the spot. The bursting of the real estate bubble put an end to that practice. Now, the lock rate can differ from the final rate if market conditions change or there is a change in a borrower's credit score, Guttentag points out.
But lenders are also partly to blame. "The problem is that underwriting requirements have become tough and rigid, appraisals have deteriorated in quality and have a pronounced downward bias," Guttentag wrote. "Loans are being rejected as a result, and many loans that do go through are priced higher than the best prices available, which are the ones quoted."
Banks Were Unprepared, Understaffed
According to a Sept. 2 Bloomberg article, the surge in applications caught the industry flat-footed. It came after thousands of mortgage workers were laid off as demand for refinancing cooled. For instance, Wells Fargo (WFC) announced plans in April to cut 4,500 jobs from its mortgage business. Meanwhile, Bank of America (BAC) said it would slash 1,500 employees from its mortgage unit, along with 2,000 contractors.
There's no quick fix for this staffing problem: "Banks are experiencing capacity issues, as they are having to hire compliance staff and as a result, oftentimes are unable to hire production staff," according to a statement the Mortgage Bankers Association provided for this story.
The mortgage services industry is in the sights of the Consumer Financial Protection Bureau. Raj Date, special advisor to the secretary of the Treasury on the CFPB, said on Oct. 13 that the agency would examine reports of pervasive and profound consumer protection problems. A CFPB official could not be reached for comment on this story.
The surge in mortgage applications shows few signs of easing. Data from the Mortgage Bankers Association showed that for the week ending Nov. 2, applications increased 0.2% from the previous week. Most of that volume (77%) came from refinancings. Banks are struggling to keep up with demand, which is forcing some to "adjust rates to slow their pipelines and widen their margins," said LendingTree Chairman and CEO Doug Lebda in a press release.
Fool contributor Jonathan Berr has no position in any stock listed in this story. The Motley Fool owns shares of Wells Fargo and Bank of America.