A best-effort mortgage lock occurs when a mortgage is sold in the secondary mortgage market and the seller (usually the originator) has to do their best to deliver the loan to the buyer.

Mortgage lenders are companies that work with customers to complete loan transactions. A mortgage lender is the original mortgage lender, often referred to as a mortgage banker or mortgage broker.

Best Efforts Collateral Lockup allows originators to transfer the risk of unclosed loans to the secondary market. If the loan cannot be completed due to such a hold, the second owner of the mortgage, not the original lender, is responsible for the cost.

Best Effort Mortgage locks are similar to mandatory mortgage locks, requiring mortgage sellers to deliver goods to customers or pay a matching fee by a specific date.

How does a best-effort mortgage work?

A best-effort freeze mortgage is a mortgage transaction in the secondary mortgage market. Mortgage aggregators, mortgage lenders and investors buy and trade servicing rights and mortgages on the secondary mortgage market where mortgage foreclosures occur.

Due to the size and liquidity of the secondary mortgage market, lending is open to all borrowers, regardless of their geographic location. The vast majority of new mortgages are sold on the secondary market, where they are bundled into mortgage-backed financial products and sold to investors such as pension funds, hedge funds and insurance companies.

When a person takes out a home loan, the bank guarantees, finances and services the home loan. Since banks use cash to create loans, it must be sold on the secondary market to raise funds for further lending. Loans are usually sold to large aggregators like Fannie Mae. The aggregator then funnels thousands of comparable loans into mortgage-backed securities.

Mortgage locks, including mandatory mortgage locks and best-effort mortgage locks, determine the penalty incurred when a mortgage is not repaid to the buyer. Best-effort mortgage holding means that the lender, in this case the bank, must make a reasonable attempt to repay the loan to the buyer - in this case an aggregator like Fannie Mae. If the seller fails to make this payment, no fee will be charged.

Mortgage Blocking: Force or Best Effort?

Mandatory mortgage freezes are another aftermarket mortgage sale. Mandatory mortgage holding requires the seller of the mortgage to deliver the mortgage to the buyer or to close the transaction by a specific date.

Forced mortgage locks or transactions are more expensive than best-effort locks in the secondary mortgage market because forced mortgage locks have lower hedging costs. The buyer does not have to make any effort to limit the possibility of default as he can (almost) guarantee that the financing will be returned.