Loan rates may prove dangerous

I heard two stories recently that illustrate some of the dangers of today's turbulent mortgage market.
One left a reader fuming about loan papers that were supposedly lost and about the semi-mythical beast -- the 5 percent, 30-year, fixed-rate mortgage -- that vanished along with them.
The other left a friend hoping that she'd chosen the right strategy to prevent any disasters with her 5.75 percent loan. Only time will tell -- she doesn't close until later this summer.
Each offers useful lessons in the biggest deal most consumers will ever make: buying or refinancing a house.
Failed commitment
The frustrated borrower is Chris Milano of Sicklerville, N.J. He was due to close July 27 on a loan that, in hindsight, sounded almost too good to be true.
Maybe it was. Two days before the closing, Milano says, Home Finance of America told him it wouldn't be able to honor that commitment because the paperwork had somehow gotten off track.
He says he was told: "'We can't honor it. The rate's not available to us.'"
Milano didn't walk away from the deal. He needed cash from the loan to pay for an addition to his home and didn't want that project to fall through.
So instead, he accepted an offer aimed at easing his pain: a reduced fee for an adjustable-rate mortgage that day and a promise of a fee-free refinancing later on.
An official at the Plymouth Meeting mortgage-banking firm agreed that Milano had been offered a compromise, but insisted that the firm never reneged.
"We're not operating in the Stone Age here," sales manager Pat Finley says. "If papers are lost, there's always a computer backup."
Let down
Finley and Milano part ways completely on one point:
"If he had wanted to insist on the 5 percent, 30-year, fixed-rate mortgage, we would have given it to him," Finley says.
Even over the phone, I could just about hear Milano's jaw drop when I related that statement.
"I absolutely begged them for it," says Milano, who expects to pay about $37,000 in extra interest.
Not that there's much solace in it, but Milano is hardly alone in his misery. The recent downs and ups of the mortgage market have clearly left some borrowers feeling jilted, says Keith Gumbinger, vice president of HSH Associates, a financial research firm in Butler, N.J., that closely tracks the mortgage market.
HSH's Web site (www.hsh.com) recently invited borrowers to report about deals "going down in flames because rates are rising." So far, the firm has collected several dozen horror stories.
Market conditions
Gumbinger says market conditions make such stories almost inevitable.
In late May and early June, mortgage rates hit 41-year lows, bottoming out June 11 at an average of 5.31 percent for a 30-year, fixed-rate loan, with 0.39 points, according to HSH's daily survey of 2,000 lenders.
Part of the problem, to be fair, is that low rates spur extra volume, making it harder for lenders to meet lock-in deadlines. But part is simple economics: When rates rise quickly, somebody will be left holding the bag -- either the lender, losing money by going through with a 5 percent loan when the market's already above 6 percent, or you, losing money when the 5 percent loan you expected mysteriously falls through.
Gumbinger says similar problems occurred in 1994, the last time there was a sudden run-up in rates.
Protect yourself
So are there ways to protect yourself?
The basics count most. Deal with a reputable company. Get your lock-in in writing. Don't give a lender any easy excuses to miss your closing date.
And consider the strategy of my friend, who didn't go for the rock-bottom best rate. Instead, she chose a lender who had a long-term relationship with -- and is a source of business for -- her real estate agent.
XJeff Gelles is a columnist for The Philadelphia Inquirer. Write to him at: The Philadelphia Inquirer, P.O. Box 8263, Philadelphia, PA 19101 or e-mail consumerwatchphillynews.com.