Mandatory Mortgage Lock

Alexandra Twin has over 15 years of experience as an editor and writer, covering financial news for public and private companies.

What Is a Mandatory Mortgage Lock?

A mandatory mortgage lock is the sale of a mortgage in the secondary mortgage market with terms that require the seller to deliver the mortgage by a certain date or incur a pair-off fee. This makes it different from a best efforts mortgage lock where the seller is not at risk of paying a pair-off fee. The seller of the mortgage also faces more risk with a mandatory mortgage lock.

A pair-off fee is charged if the loan fails to close, and it is based on current market prices.

Key Takeaways

• A mandatory mortgage lock is a type of mortgage sale on the secondary market.
• It requires the seller to either deliver the product by a specific date or incur a pair-off fee.
• A mandatory mortgage lock compares with a best efforts mortgage lock, where the seller makes a "best efforts" attempt to deliver the mortgage.
• Mandatory mortgage locks carry higher risk because the seller must pay a fee if they fail to deliver the mortgage, unlike a best efforts mortgage lock.
• Since mandatory mortgage locks are riskier, they command higher pricing on the secondary market.

Understanding a Mandatory Mortgage Lock

A mandatory mortgage lock generally commands a higher price in the secondary mortgage market than best efforts locks due to fewer hedge costs.

The secondary mortgage market is where mortgage loans and servicing rights are bought and sold between mortgage originators, aggregators, and investors. It helps make credit equally available to all borrowers across geographical locations. Originators sell a large portion of their mortgages into this market, where they are packaged into mortgage-backed securities and sold to investors.

When a borrower takes out a home loan, it is underwritten, funded, and serviced by a bank. The bank can sell the loan into the secondary market to make more funds available for issuing loans. The loan is often sold to aggregators like Fannie Mae, who distribute thousands of similar loans in mortgage-backed securities.

The Best Efforts Mortgage Lock

Another type of mortgage lock in the secondary market is the best efforts mortgage lock. It requires the seller, usually a mortgage originator, to make a best-effort attempt to deliver the mortgage to the buyer. A mortgage originator can be an institution or an individual who works with a borrower to complete a mortgage transaction.

Mortgage originators who assume fallout risk usually sell their mortgages through mandatory mortgage locks or assignment of trade transactions. These options do not transfer hedge risks to the buyer and generally command better pricing on the secondary market than best efforts mortgage locks.

Mortgage originators who assume fallout risk usually sell their mortgages through mandatory mortgage locks or assignment of trade transactions. These options do not transfer hedge risks to the buyer and generally command better pricing on the secondary market than best efforts mortgage locks.