Today’s Lending Game – Really?
Filed under Blog · Tagged: Fannie Mae, FHA, Freddie Mac, Intero, REO
Every so often, I run across a great post that helps frame a current issue in Real Estate. This week, I have chosen to include a post written by Gino Blefari, Intero CEO, and John Thompson, Intero Co-founder. Two great guys that I enjoy serving with on the Intero Foundation Board of Directors (subject of a future post).
Are you a fan of Saturday Night Live? I love a segment they call “Really” on Weekend Update…I am submitting this story for them.
Yesterday one of our buyers was turned down for a loan being processed by one of the “big four” – direct lenders that are still standing. Not news in today’s world of stricter financing standards, until you hear “the rest of the story,” as Paul Harvey might say.
The property being purchased appraised without a problem, and the buyer had qualified with formal loan approval. They signed all of their loan documents in escrow, brought in their down payment, and the move was scheduled for the following day. The champagne was on ice until…the lender called the day prior to close to announce they are not going to fund the loan.
Seems a copy of the termite report landed in the hands of the underwriter at the last minute (literally), and the bank refused to fund. Now claiming the loan is “un-sellable” to Fannie Mae since there are bugs in the wood to the tune of $6,000.
I should probably tell you that the buyer had a $600,000 down payment on a $1,000,000 home purchase, asking only for a $400,000 loan.
After going “up the ladder” all day at this bank to find out who could make sense of this, I was shocked by the question I kept getting asked by high level bank personnel…”How did this report get to the underwriter? This would not have been a problem otherwise.”
Interesting, isn’t that how we got into this mortgage mess? Keeping information from the lenders? The point is – given the new information what the underwriter should be asking is – is this still a good loan? Let’s see $600,000 down with $6,000 worth of work on a lending program that has a minimum down payment requirement of 20%, or for this loan $200,000. It’s a no brainer right?
The loan was now denied because Fannie Mae (FNMA) won’t buy this asset now that they are aware of this report. Huh? The truth is, banks really aren’t the lender anymore, and the government is, since the majority of today’s loan’s are either purchased or insured by Uncle Sam via FNMA and Freddie Mac (FHLMC.) Another way to think of it is taxpayers now own Fannie Mae through Uncle Sam’s bailout. So we taxpayers turned down a $400,000 investment secured by a $1,000,000 property over $6,000 in bugs from a well qualified buyer.
I want that investment in my portfolio Fannie Mae – are you listening?
Don’t worry, we the taxpayer made up for it later in the day by purchasing a different loan. A $410,000 FHA loan (taxpayer supported as well as own them too) funded for a different buyer we represented secured by a $425,000 property with the buyer putting 3.5% down. I feel your nervousness. You can rest assured the bugs were removed from this investment. We taxpayers were fine with putting this highly leveraged loan in our portfolio vs. a buyer putting 60% down.
Yes really. This is today’s lending game.
Doctors must be making us sick since they explain what’s wrong with us after reading our charts and reports when WE get ‘inspected.’ So we think – as long as I don’t go to a doctor, and there are NO reports, I must be healthy. This same logic is used today while making many lending decisions based on bank guidelines.
If banks, or Fannie Mae, are so concerned about a home’s condition before they fund, I am curious how termites got to the top of the ‘home repair food chain.’ The chimney could be falling in on a property, and my loan will fund as long as I have a termite clearance.
Here is the coup de grâce -
Bank owned properties (REO‘s) make up almost half of the properties for sale in many markets across the country. It is a “buyers beware” purchase. Banks demand buyers to sign a complicated “as-is” addendum drawn up by their attorney. Yet today, the bank denied a perfectly good loan for their own borrower because they were buying the property “as-is.”
Am I the only one that sees the irony?
Would you like to know the “rest of the story?”
There is a happy ending. The buyer did close escrow and get to move in. This “unqualified buyer,” according to “Mr. Big Four” lender, ended up paying all cash for property.