Best Efforts Mortgage Lock

What Is a Best Efforts Mortgage Lock?

A best efforts mortgage lock happens when the sale of a mortgage in the secondary mortgage market requires that the seller — usually a mortgage originator — makes their best-effort attempt to deliver the mortgage to the buyer. A mortgage originator can be either an institution or an individual that works with a borrower to complete a mortgage transaction. A mortgage originator is the original mortgage lender and can be either 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.

How a Best Efforts Mortgage Lock Works

A best efforts mortgage lock is a type of sale of a mortgage into the secondary mortgage 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.

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 secondary mortgage’s extremely large and liquid 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 and sold to investors, including pension funds, insurance companies, and hedge funds.

When a person 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, they then 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.

Mandatory Mortgage Lock vs. Best Efforts Mortgage Lock

Another kind of mortgage sale on the secondary market is the mandatory mortgage lock. With a mandatory mortgage lock, the seller of the mortgage is required to make the delivery to the buyer by a certain date or pair-out of the trade. A mandatory mortgage lock carries more risk for the seller of the mortgage than the best efforts mortgage lock. Also, whereas the mandatory mortgage requires that the mortgage be delivered or paired off of the trade, the best efforts mortgage lock does not.