Table of Contents

Mandatory Mortgage Lock: What It Is, How It Works

By

Alexandra Twin

Updated April 13, 2024

Reviewed by

Doretha Clemon

Fact checked by Marcus Reeves

Two homeowner clients looking at a folder with a salesman on the street in a residential block. — What’s the difference between homeowners insurance and PMI?.
kali9/Getty Images

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 of the mortgage to make the delivery to the buyer by a certain date or incur a pair-off fee.

The requirement to make delivery of the mortgage or incur a pair-off fee makes a mandatory mortgage lock different from a best efforts mortgage lock, in which the seller is not at risk of having to pay a pair-off fee. A mandatory mortgage lock also carries more risk for the seller of the mortgage.

A pair-off fee is charged if the loan fails to close. The investor typically charges the pair-off fee based on current market prices, so as to be fairly compensated.

Key Takeaways

A mandatory mortgage lock is a type of mortgage sale made on the secondary market.
It requires that the seller either deliver the product to the buyer by a specific date or incur a fee, called a pair-off fee.
A mandatory mortgage lock is similar to the best efforts mortgage lock, in which the seller makes a "best efforts" attempt to deliver the mortgage to the buyer.
Mandatory mortgage locks carry higher risk because a pair-off fee is due if the seller fails to deliver the mortgage, whereas there is no fee with a best efforts mortgage.
Since mandatory mortgage locks are riskier than best efforts mortgages, they command a higher price in the secondary market.

Understanding a Mandatory Mortgage Lock

A mandatory mortgage lock or trade generally commands a higher price in the secondary mortgage market than best efforts locks because there are fewer hedge costs associated with mandatory mortgage locks.

The secondary mortgage market, where mortgage locks take place, is the market where mortgage loans and servicing rights are bought and sold between mortgage originators, mortgage aggregators, and investors.

The large and liquid secondary mortgage market helps make credit equally available to all borrowers across geographical locations. Mortgage originators sell a large percentage of their new mortgages into the secondary market, where they are packaged into mortgage-backed securities (MBSs) and sold to investors, such as pension funds, insurance companies, and hedge funds.

When a borrower takes out a home loan, the loan is underwritten, funded, and serviced by a bank. Because the bank has used its own funds to make the loan, it can sell the loan into the secondary market to make more money available to continue issuing loans. The loan is often sold to large aggregators, such as Fannie Mae. The aggregator then distributes thousands of similar loans in a mortgage-backed security (MBS).

Mandatory Lock vs. Best Efforts Lock

The best efforts mortgage lock 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 either an institution or an individual who works with a borrower to complete a mortgage transaction.

A mortgage originator is the original mortgage lender and can be a mortgage broker or a mortgage banker. Best efforts mortgage locks exist to transfer the risk that a loan will not close from the originator to the secondary market.

Mortgage originators who hedge their own mortgage pipelines and assume fallout risk usually sell their mortgages into the secondary mortgage market through mandatory mortgage locks or assignment of trade transactions.

Because mandatory mortgage locks and assignment of trade transactions do not transfer hedge risks to the buyer, they generally command better pricing on the secondary market than best efforts mortgage locks.

What Is the Secondary Mortgage Market?

The secondary mortgage market is where mortgages are bought and sold between investors and originators. Many mortgage originators, mainly banks, sell their loans in the secondary mortgage market to mortgage aggregators who repackage them into mortgage-backed securities (MBSs) to sell to other investors.

What Is the Difference Between Best Efforts Lock and Mandatory Lock?

Mandatory locks carry a higher degree of risk because if the seller isn't able to deliver the mortgage, then they incur a pair-off fee to be paid to the investor. A best efforts lock does not carry a pair-off fee, and the seller does not incur any cost if they are not able to deliver.

What Is Locking in a Mortgage Rate?

When you lock in a mortgage rate, it means the rate on your mortgage won't change from the time the offer is made to the time the property is closed. For example, the time between the offer and closing might be two months, at which time interest rates could go up. Locking in the mortgage rate means your rate won't change during that period, which is usually done to protect the buyer from incurring a higher rate.

The Bottom Line

Investors in the secondary mortgage market seek to protect themselves in deals with mandatory mortgage locks. If the seller doesn't deliver, then the investor is owed a pair-off fee at current market prices.

Compare Mortgage Lenders

×

The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.