Most retail mortgage originators work under best efforts delivery contracts with their investors and may not be aware of the secondary market mechanics that determine their lock pricing. Understanding commitment versus best efforts delivery explains why some pricing is better from certain investors at certain times.
Best Efforts Delivery
Under a best efforts lock, the lender commits to deliver the loan to the investor if it closes. If the loan does not close (the borrower backs out, the deal falls through, or the loan is declined), the lender has no obligation to the investor. The investor prices in an expected fallout rate and charges a slightly higher rate to the borrower than they would under a mandatory delivery contract. Best efforts is the standard retail originator model.
Mandatory Delivery (Commitment)
- ✦Under mandatory delivery, the lender promises to deliver a loan of a specific note rate and loan amount to the investor on a specific date
- ✦If the loan does not close, the lender must either deliver a substitute loan or pay a pair-off fee (typically 0.25 to 1.0% of the commitment amount)
- ✦Mandatory pricing is typically better than best efforts pricing by 5 to 15 basis points in the rate because the investor bears less fallout risk
- ✦Larger lenders with high lock volume use mandatory delivery programs to capture the pricing advantage on their expected production
Why This Matters for Retail MLOs
Retail MLOs at most depository and mortgage company employers do not personally manage delivery obligations -- the secondary market desk handles that. But MLOs who work at correspondent lenders or who move to a broker model encounter delivery optionality directly. A loan that falls through under a mandatory commitment creates a real financial exposure that must be hedged or paid off, and the pricing difference reflects that risk transfer.
Float-Down Options and Extension Fees
Both best efforts and mandatory locks can include float-down provisions that allow the borrower to capture rate improvements while the lock is in effect, typically for a fee. Lock extensions are also charged when closing is delayed beyond the original lock period. Extension fees vary by investor and market conditions -- in volatile rate environments, extensions can cost 0.15 to 0.375% per 7-day extension.
Aria can explain best efforts versus mandatory delivery pricing and how lock extension and float-down fees are typically structured. Ask at vicariointel.com.
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