Lock and Shop Loan Strategies in Volatile Markets

Published July 8, 2022

In a volatile mortgage environment, it’s important to demonstrate a sense of confidence and control. This is true for both borrowers and lending professionals. Borrowers need to see you are working in their best interest, actively trying to make the homeownership dream possible. Lenders need to know they have programs at their disposal to be successful in competitive and unpredictable times. In this blog post we discuss “Lock and Shop” loan strategies: what to do, what to avoid, and how to do it successfully.

In one of the most volatile lending environments in the past 15 years, homebuyers are seeking rate protection however they can find it. Housing inventory is tight, so being able to react instantly with an offer they know they can afford is critical. That’s why Lock and Shop loan programs have become a popular competitive offering.

Key Considerations

Lock and Shop loan programs are attractive from a sales pipeline standpoint – no one wants to miss out or be priced out of viable deals. It’s important to find a supportive hedging advisory team to help stand it up properly with policies and rules that meet pricing considerations, regulatory requirements, and operational complexities.

Since there is exposure with a Lock and Shop program, limiting the product offering and length of the lock guarantee will mitigate risk. That means common conforming products such as Conventional, FHA, VA or USDA loans are safe solutions for your safest borrower base. Of course, none of this is done in a vacuum, so your hedge advisory team should have access to reliable, real-time data-driven analytics to optimize your loan program. With data in hand, you’ll be able to review historical hedge positions, model future scenarios, and monitor your program with on-demand reporting.

While the concept of Lock and Shop makes sense, you must also address the limitations of your LOS and other systems. For example, with property details unknown at the time the lock is granted, will your systems allow for such activity?

“Would-be loans” add complexity to operations and loan execution. In most cases, disclosures and re-disclosures are tied to a single loan file, but that file may not exist. There may be multiple applications involved, and compliance protocol may call for new disclosures once the actual property address is known.

5 Ways to Structure a Lock and Shop Policy for Trust and Success

1. Lock and Shop terms should be limited to 90 days. It’s simply too risky to offer longer periods which could result in unpredictable expenses.
2. Require borrowers to pay an upfront fee. Some lenders choose to have the fee apply to closing costs, while other make it non-refundable. This is a recommended best practice from a hedging perspective as it can improve the pull through on this type of program, but the overall structure will also depend on the compliance and/or competitive pressures in each state and region. Your account team should review common approaches and the advantages of each.
3. Build in a float-down feature during the last 30 days of the program and after the borrower finds a target property. This gives borrowers assurance of a locked rate now, and rate protection as the deal approaches closing. Tweak contract terms including interest rate, effective date, lock cost, expiration date and time, and post-lock options. You can also use other add-ons to protect margins.
4. Make the process transparent. This will likely mean providing borrowers with education to help overcome concerns, but in today’s market, that extra effort will build trust. And trust helps close deals and secure referrals.
5. Finally, hedging Lock and Shop loans might warrant an alternative hedging strategy. That’s not something we can solve in a brief blog, so work with your trusted hedge provider to review solutions to help you bring this important capability to your unique marketplace.

Work with a hedge partner to develop a Lock and Shop program that fits your unique goals – built around the way you work. Ask your hedge partner about its experience with Lock and Shop programs so you’re confident you have a partner with deep expertise and a team that’s ready to guide you. Most important, be able to base the decisions you make on historical and real-time data to ensure your hedging strategy risk is mitigated.

Properly structured, your Lock and Shop mortgage programs will help keep you competitive and relevant in turbulent times.

For more information on Lock and Shop programs, contact vik.kasparian@bkfs.com.