The One that Got Away: Bait and Switch?

I don't mind losing a prospect (someone who's shopping rates) to a fellow Mortgage  Professional, I do have an issue when I feel the shopper is being fooled or mislead by a loan originator.  Late last week, a "prospect" who had been asking for various scenarios kindly informed me that they decided to go to another lender who was offering a better rate.   Not a problem.   I do like to find out why and what was better than my Good Faith Estimate. 

The scenario:

• 30 Year fixed rate/cash out refi
• $417,000 loan amount with a home valued at 1 mil
• No points (typically a point/1% of the loan amount equals 0.25% to rate).
• No reserve account (this cost 0.25% in fee).
• Full doc for a self employed borrower with excellent credit
• No prepayment penalties

My Good Faith Estimate dated January 17, 2008 factoring in all of the above provided a note rate of 5.750% with an APR of 5.800% with total closing costs just shy of $2750 (title, escrow appraisal, etc).   Note:  I pride myself on having my GFE being as close to the final HUD as possible.  In fact if anything, I'd rather my estimate be higher to start with and have my client pleasantly surprised with lower costs at closing (instead of the alternative).

The prospect selected another lender who's quoting 5.25% with a total of $4,000 in closing costs.  I have searched all the lenders I work with and I have also checked out local credit unions.  I can't find this anywhere!   5.25% may be available at a minimum of 1% discount/origination fee.  1% in fee would place the cost on this loan at $4170.  Then factor another 0.25% in fee ($1042) if the client opted to pay their taxes and insurance on their own.  How is the title, escrow and appraisal going to be paid?  This just does not pencil out. 

It smells a bit fishy to me and this type of volatile market may be tempting for some LO's to "gamble" the market...betting (and praying, or should I say preying) that rates will improve to match what they have told a client they are locked in at.   It's a pricey game that some LO's make their keep playing.  As long as the LO honors the lock commitment to the prospect at what ever cost to the LO (in the event they lose big and rates don't match what they've told the prospect they have), I have no issues.   If the LO begins to squirm should rates rise when they really have no lock at the promised rate...it's foul play. 

Borrower beware.  I hope I'm wrong.