Refinancers' anger rises along with mortgage rates

By Chris Reidy, Globe Staff, 9/3/2003

Many homeowners who thought they had refinanced fast enough to beat the recent rise in mortgage rates have little to show for their efforts except horror stories, costlier loans, and complaints they are filing against their mortgage companies.

Earlier this summer, the sudden increase in rates after a period of historic lows flooded mortgage companies with homeowner applications, and the pace of refinancings slowed to a crawl. But Macy Kelly, an assistant vice president at a financial company, wasn't worried; she thought she was safe from rising rates. In early June, she said, she paid a $500 fee to lock in a 5 percent rate on a new mortgage that would lower the payment on her Quincy house by nearly $90 a month. As Kelly understood it, she had a guarantee that the 5 percent rate was locked in until mid-July.

But because of a processing backlog, the rate lock expired without warning when her loan did not close on time. If she still wanted to refinance, her mortgage company told her, she would have to pay the current market rate, then about 6 percent.

"It felt like a bait and switch," Kelly said. "It felt like a scam."

Web designer Andrew Mahoney, 33, of Melrose, thought he had been promised a 5.5 percent rate, but shortly before closing, his mortgage company gave him a "take-it-or-leave-it" ultimatum on a 5.75 percent rate, he said. Like Kelly, Mahoney believes he was enticed with a low rate so he wouldn't take his business to another mortgage company. Unlike Kelly, he said his problem had nothing to do with a backlog; rather he said the mortgage company simply "forgot" to process his lock-in fee after he gave his credit card number over the phone.

"If they had been honest and upfront with us, we could have looked elsewhere," he said. "They led us on."

Massachusetts Secretary of State William F. Galvin said the recent crush of business is no excuse for mortgage companies that failed to close on a loan fast enough to provide a homeowner with an initially agreed upon rate.

"If they didn't have enough staff, that's their problem," Galvin said of mortgage companies. "The consumer shouldn't be left holding the bag.

"This is definitely an area that needs scrutiny," he added.

When mortgage rates fall or hold steady, as they have mostly done over the past decade, state regulators hear few such complaints. But when rates rise quickly, sharply, and unexpectedly -- they've risen a bit more than a full percentage point since June -- it's a different story. As they sort through a growing number of complaints about who should get stuck with the tab for costlier loans, regulators may have to decide whether homeowners are victims of unethical practices by some mortgage companies or whether they are simply victims of bad luck and bad timing.

Over the past two months, the Massachusetts Division of Banks, which has jurisdiction over licensed mortgage brokers and lenders, has received about 50 written complaints from consumers over refinancing issues, commissioner Thomas J. Curry said.

"Fifty is a significant number," said Curry, whose office is reviewing the complaints to determine what action should be taken.

On July 31, the double whammy of a sudden rate rise and an intense burst of refinancing activity prompted Curry to issue a formal statement on "rate-lock commitments," agreements that protect a homeowner, typically for 30 or 60 days, against a rate increase. If there is a delay in closing that is not the fault of the borrower, all banks, credit unions, and licensed mortgage lenders must honor the rate-lock commitment, Curry said in his statement.

Kelly is now considering filing a written complaint with the Division of Banks seeking the 5 percent rate.

There may be a larger problem, though. According to president James Dougherty of the Massachusetts Mortgage Association, there is a lot of "confusion" in the minds of consumers over what constitutes a valid rate lock. A rate lock occurs only if a mortgage lender gives it to a consumer in writing, he said. An advertised rate or a verbally quoted rate is not the same as a rate lock.

"Consumers sometimes think they have a rate lock when they really don't," Dougherty said.

Not everyone can give a rate lock commitment. Licensed mortgage brokers, which match homeowners with third-party lenders, are prohibited from issuing mortgage rate-lock commitments. Brokers who violate this prohibition "may face claims of restitution and enforcement activity," Curry noted in his July 31 statement.

Galvin had some advice for homeowners who are refinancing: Get a rate lock in writing and keep good records.

One homeowner who plans to complain to regulators is Mahoney, the Melrose web designer. In May, he and his wife, Anne, who works in investment marketing, started shopping for a lower mortgage rate. By refinancing, the couple planned to cash out some equity in their 130-year-old house to pay for a $45,000 remodeling project. Contractors were lined up for August. A dumpster was moved into their driveway. Then the Mahoneys got bad news.

Their company, East-West Mortgage Co. of Peabody, which bills itself as "New England's leading mortgage lender," informed them over the phone that it "forgot" to lock in the 5.5 percent rate that Mahoney thought he had negotiated, Mahoney said. The best East-West could now do was a 5.625 percent rate; then two days before the loan's July 18 closing date, East-West again raised the rate, this time to 5.75 percent, he said. The couple was faced with a dilemma: Cancel their remodeling or refinance at the higher rate. The Mahoneys reluctantly agreed to the higher rate.

"I was furious," said Mahoney, who described East-West's actions this way: "It would be like Home Depot doubling the price of snow blowers in a winter storm."

East-West chief executive John F. Gallagher said there must have been a misunderstanding.

"Everyone who locks in their rate and qualifies [for a loan] got their rate -- no exceptions," he said of company policy.

Senior vice president Mark Olsen added that the Mahoneys applied for a loan at a 5.75 percent rate and that's what they got.

Told that Mahoney believed he was initially applying for a 5.5 percent rate, Olsen responded: "That's not the case. The facts are in ink and pen. And he never paid for a rate lock." The company would not provide the documents, citing privacy issues.

Mahoney said that he asked for a rate lock and gave a company representative a credit card number, but no funds were ever drawn. East-West's response, Mahoney said, is "a feeble attempt to cover their unethical practices."

Speaking generally, Gallagher said the decision to pay a rate-lock fee is something of a bet on the consumer's part. When rates were falling this year, many homeowners caught a break by deciding not to lock in a rate. Rates were hovering just under 6 percent when they began the refinancing process. Rates fell even lower by the time those loans closed, and many homeowners wound up with the lower rate.

"The pendulum swings both ways," Gallagher said. "We could give you a couple of thousand names of homeowners who closed in April and May and who were pleasantly surprised."

One person who was unpleasantly surprised is Kelly, the Quincy homeowner who believed she had a rate lock with a mortgage company called Amerisave, whose website includes links that allow applicants to "lock your rate" and "lock online 24/7."

"You pay the lock-in fee, and you expect you're going to get that rate when the loan closes," said Kelly, who added that she got a refund on her rate lock after she decided not to accept the company's offer to refinance at a market rate.

James Holland, a spokesman for Amerisave, which says on its site that it's a licensed mortgage broker in Massachusetts, said there were delays on some loans caused by problems at third parties such as appraisers and lenders who were swamped with business.

"Delays affected less than 10 percent of those who applied at Amerisave during a two-month period of record activity," Holland wrote in an e-mail. "In the case of Macy Kelly, there was a delay from the lender underwriting the loan. Amerisave worked diligently to get the loan processed in a timely manner. But because we must rely on third parties we have no control over, this particular loan missed the deadline."

Kelly said she is consulting with an attorney to explore her options.

"Somebody is at fault here, and it's not me," she said.

Chris Reidy can be reached at reidy@globe.com.