who offers the best rate and how does a bank with bad rate stay competitive?

I am a rate shopper for the past three months. I have observed something interesting and want to create a discussion with fellow rate shoppers or mortgage market experts. When I started the process (pre-approval) in early July, I shopped around among various banks and identified a TARP recipient providing about 1/8 better rate. I went into contract late July and kept shopping around for rates.... [more]

I am a rate shopper for the past three months. I have observed something interesting and want to create a discussion with fellow rate shoppers or mortgage market experts. When I started the process (pre-approval) in early July, I shopped around among various banks and identified a TARP recipient providing about 1/8 better rate. I went into contract late July and kept shopping around for rates. This TARP bank still offers 1/8 or the same price as others (meaning it's still competitive). I eventually decided to go with this TARP bank since they have most of my papers and offer no application fee. Most importantly, the communication is smooth and their rate is at par or better than others. (I got the commitment letter in early August, and locked it on Sep 2nd). Right around August/September, news about loan modification record came out. This TARP bank is not doing well in modification. Then I started to notice that it advertised less on Bankrate, and it's rate is no loger better, basically just the same as most others. And for the past two weeks or so, mortgage rate kept coming down. It's generally about 1/8 lower than my lock, and in some cases, 1/4 lower. My loan does have a float down option; however, its published rate simply does not move as others; which means that it's not competitive. I went on the bank's site and Bankrate...confirmed that rate from this bank is not moving. (just in case my banker is not keeping an eye on it, or cheat... I am paranoid about people's competency.) I am not in the mortgage business so I don't know how the system works. I do have access to daily Fannie Mae commitment rate and it's definitely going in the same direction as prevailing published rates. Bottom line is, for the past few weeks, my bank's published rate did not adjust to reflect either the market (FNMA commitment going down) nor the local environment (all other banks are offering lower rates now). I have the feeling that this says something about their growing reluctance to lend, and perhaps due to pressure for loan modification? Does anyone experience anything similar? and what do you think about my theory? I have decided to relax over rate moves and accepted that my rate is not the best. Just very curious about the situation. How come two months ago this TARP bank outperform in rate offering, and now totally lagging????? ... and I am not closed yet... there is a chance my lock will expire anyway. [less]