Archive for the ‘Bad Bank Behavior’ Category

What is really wrong with mortgage lending or why is it so hard to close on a mortgage?

[Note, this Blog post is my answer today to an actual client’s email regarding a nearly 10 day delay on confirming the client’s identity.  In answering it, I detail the real problems in the mortgage industry.  The email trail (with identifying information removed) is attached below for context.]

Dear Borrower (“B”):

 The name of the lender is _______   Here is the Wikepedia link about them.  They are a huge financial institution headquartered in the Midwest with over $100B in deposits.  We have done many loans with them and once they close have not had any complaints from clients. 

 There should not be any problem with the closing or the documents.  There will be a bank attorney who attends who will go over all the documents with you.  He is someone we have selected and worked with many times.   I understand your frustration. But, it is endemic throughout the entire mortgage lending system right now and is not specific to this bank.  We have the same or worse issues with every lender we work with including, but not limited to [names of 3 of the largest banks in the country.].

 The origination system [in the US}is broken due to all the failures of the past few years and the federal government’s response to these failures.  The Federal government, and Congress specifically, has created a “solution which is looking for a problem” in attacking the origination end of the mortgage business.  They have done this because (i) it is the “lowest hanging fruit” with the least resistance, sympathy or money to defend and (ii) it is the “face” of the mortgage brokerage industry and what the public believes is the cause of the collapse (e.g. “my mortgage broker put me into a  loan that I could not afford”).  

 What they have not dealt with are (i) the real estate brokerage industry which promoted and, often “puffed” up prices for properties (especially new developments in the coastal areas ) without regard for a purchasers needs or ability to pay (ii) the securitization of the mortgages in the secondary market which (unkown to most people) is the driving force behind the mortgage industry where the loan products are created and where the profits dwarf those made by mortgage brokers and bankers and (iii) the need to stimulate the purchase market by making it (a) easier to obtain financing and (b) incentizing the banks to lend and the purchasers to borrow not the other way around . 

 As a result of all of the above, the banks are afraid of the federal regulators so they are engaged in an excessive amount of caution. They are also unsure of how to even deal with all these new rules and regulations which are increasing every day and not allowing the mortgage market to absorb the blows, heal and move on.   Think of a fighter who is knocked out and lying on the canvas.  He will not heal from his wounds if he is continually punched and kicked.  He must be allowed to get up, patch himself and regroup before fighting again. 

 Finally, banks are concerned about their buyback obligations to the investors in the secondary market in defaulted loans (which are still increasing due to the poor economy) where the real power and money is concentrated in the industry.  So, all of this results in a culture from the top down of overly cautious lending.   In addition, employees of these institutions either become paralyzed by fear or are unable or unwilling to use “common sense” to resolve issues.   They understand (and properly so) that nobody will get in trouble for “not” making a loan.  While they will have a big problem if they approve a loan or waive a condition that later is either re-purchased or is a cause for a government violation.  In this tight job market, nobody wants to risk their job by putting themselves”on the line” (like they would have in the past).  And, this is a perfectly rational decision!

 So, all that said, your exasperation is real but your outlet is not.  The banks are doing what they can do deal with the new lending environment.  They certainly could be doing better,  a lot better, but they are taking 100% of the blame for the failures in the mortgage market while bearing maybe 30% of the fault.   This is not to excuse them, just to give you a better understanding of the current environment.

 Let me know if you have any questions.

 Daniel M. Shlufman, FCMC Mortgage Corp.

EMAIL TRAIL BELOW:

From: Borrower (“B”)

Sent: Thursday, February 02, 2012 9:26 AM
To: Dan Shlufman
Subject: Re: your loan
Dan,

 I am very concerned about professionalism of this lender. What is their legal name, address and state they operate in? What is its standing with state banking authorities? How is it rated?

 May I ask you to review all contractual documents that we are supposed to sign at closing to make sure there are no inconsistencies, deviation from standard agreements, like the one we currently have with ____ Bank, etc.  We do not want to be in position of discovering any surprises after closing.

 As experience teaches, the stupid hurt others before they hurt themselves.

Thanks,

B

On Feb 2, 2012, at 12:06 AM, the FCMC loan processor, LP (“LP”) wrote:

B,
I have sent a request again to contact you directly tomorrow. Please let me know when they contact you and I will follow up with them.

LP

On Feb 1, 2012 8:24 PM, B wrote:

 LP,

This is ridiculous and the lender obviously wasn’t behaving professional. If they wanted to verify my identity why they called my wife, not me?  While calling my wife’s cell number they didn’t tell her this call was about the refinancing. Of course, my wife thought this is a sales call from another lender (like what already happened with Quicken Loan’s calls) who monitors our credit inquiries. So, she said she wasn’t interested, of course.

Have they call me directly and we will straighten things out. Thanks,
B

On Feb 1, 2012, at 6:51 PM, LP wrote:

> Borrower (“B”)
> J called you from the Bank today to verify your identity. Your wife told her you weren’t interested in a mortgage loan. She is going to call you back tomorrow. Can you please verify the information she needs to finish your loan? Thanks.
> Sincerely,
>FCMC Loan Processor (“LP”)
> >

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Thanks, Hurricane Irene-As If Closing A Mortgage Loan Was Not Tough Enough….

….it has just gotten tougher!  Due to the severity of the storm, a lot of properties suffered flood damage.  As a result, the lenders want to make sure that the property, which is their collateral for the loans, is still worth what it was before the storm.   So, they are requesting two items to confirm this.  As is the case nowadays with lender’s underwriting requirements, one is perfectly reasonable and understandable while the other is unnecessary and will continue the cycle of loan closing delays.

The first requirement (i.e the reasonable one) for any properties which are located in the storm areas (which encompasses most of the East Coast), will require an updated inspection from the appraiser to certify that the property has not been damaged and that its value is still the same.  This will involve a site visit by the appraiser, a certification from the appraiser and a review of the certification by the underwriter.  As such, it will likely delay all closings  by 1-2 weeks.   This is a fairly standard process and one that is undertaken frequently when a national disaster is declared.  An unfortunate delay, but one that cannot be avoided.

However, in the category of either (i) abundance of caution or (ii) overkill by the lenders (choose your “fill in” here), some lenders are also requiring a letter from the borrower’s insurance company indicating that no insurance claim has been filed.   Besides the additional delay this will cause to a closing, as I imagine insurance companies have a lot more important things to do right now than write letter to lenders, it is a completely excessive and onerous requirement when applied across the board! 

In the first place, the appraiser’s inspection of the premises (which I assume will include some new photos showing the structure is still standing) will indicate any and all significant damage.   At that point, based on the inspection, certification and photos, the lender can decide if any additional documentation is needed.  But, to require an insurance letter on every loan as a standard condition is a waste of time and resources (i.e. EVERYONE’s time and resources).   This is even more so when most of the damage, if at all, will be to BASEMENTS.   The most incredulous part of that, is that based on current underwriting guidelines, no value is even allocated to a basement!  So, even if that basement is unusable or destroyed it cannot have an affect on the appraised value of the house!

As a final commentary on this, why does the filing of an insurance claim have a bearing on the loan in most cases?  If someone has some minor damage and has filed a claim, then they will repair the damage.   And if there is major damage, the extent of the damage will be shown on the appraisal inspection (as noted above).   The point here is that the mere filing of the insurance claim,  is not proof of anything that will affect the collateral.   The collateral itself and the state of the collateral as evidenced by the appraiser’s inspection is that proof!  In cases where damage is indicated by the inspection, a letter from the insurance company is certainly warranted. However, as a purely prophylactic measure on EVERY loan, it is outrageous.  The fact that this will cause additional delays in most closings, is inexcusable. Or, as John Stossel would say, “Give Me A Break!”

Underwriting Times Are Increasing! Start Your Refinance Now!

If you are considering refinancing your mortgage, you should submit an application to your mortgage broker or mortgage banker as soon as you can.  By this, I mean, this week or, certainly by some time next week.  The low interest rates are causing a mini-boom in refinance business that the banks are not prepared to underwrite and close “efficiently!” 

Over the past year, the banks have shed mortgage staff in droves due to the slowdown in business.  They are not likely to ramp up now (or at least not too quickly) to account for a few weeks’ worth of refinance business.  And, when they do, there will be a tremendous learning curve for new hires (think Mt. Everest-size curve) to account for the new “mountain” of new regulations recently passed.  This will result in delays in loan closings; further frustrations by borrowers; and, in the extreme, increased costs to extend interest rate when the rate lock periods expire due to bank delays. 

As of now, most banks are taking approximately 5 days to underwrite (i.e. approve) loans after they receive a full loan package.  This is up from 1-3 days at the beginning of August.  I anticipate that these times will increase to 10-14 days by the end of the month (assuming that rates stay this low or get lower) and, possibly 21 days, by some time in mid-to-late September.  Back in November 2010, when we had the last refinance boom, 21 days was the average underwriting time for most lenders.  And this was before Dodd-Frank went into affect on April 1, 2011 creating a wave of new disclosure and compliance requirements!  In addition, as noted above, the banks now have many less people working there than they did then.  And, finally, throw in the fact that it is the last few weeks in August when many people are away on vacation, and you have a recipe for massively slow underwriting times coming up!

Job Description for Lenders: Must have brain. But, prefer a new one that has seldom been used!

I have a lender who has suspended 2 files in the past 2 days because they did not contain paystubs.  On both of those files, the borrower was not a salaried borrower (where paystubs are the proper income verification documentation).  One was a partner at a large accounting firm and provided K1s (along with federal tax returns) and the other was self-employed as a small business owner (who supplied tax returns and  aP&L statement). 

Self-employed borrowers and partners at accounting firms do not receive paystubs since their income is not in a consistent amount.  They are paid based on the profitability of their businesses. As such, Fannie Mae and Freddie Mac require those documents and some others, but NOT paystubs or W2s which are for a salaried borrower with a set and steady income.   We now need to get back to this lender, convince the processor of this (or his/her supervisor if we can’t) and then get these loans back on track. Total wasted time, 3-5 days.   Finding someone at one of these banks who has a brain and actually uses it….priceless.

Have Loans, But, Won’t Travel!

The good news for the mortgage industry is that rates continue to be ridiculously low.  This has translated into a refinance boomlet (which is significantly less than a boom) for mortgage originators.   Loan pipelines that were drier than the lawns of the unsold houses in America this summer, suddenly have swelled up with new deals. 

Unfortunately, like a snake that eats an elephant, these loans are stuck in the middle of the vast underwriting bureaucracy of our great lending institutions.   So, until they eeck their way out the other end to the closing departments, the cash-flow positions of many of the origination shops is still tenuous. What do we expect?  That we get business and are actually able to get paid on it?  That would certainly upset the architects of the great Financial Reform Act who, despite their best efforts have been unable to yet completely destroy the mortgage brokerage/banking industy. Though, I note, it is not for lack of trying.  They may get their wish at some point next year.  But, we will need to wait and see on that.

With loan pipelines literally bursting at the seams, it is taking an eternity to close loans.  I joke, but it really is no laughing matter. The banks continue to display ineptitude in their inablity to manage this business effectively.   With the market so tenuous they are reticent to hire too many people.  However, if they hired more competent people, some of this problem would begin to fix itself.

Most lenders are taking upwards of 3 weeks to approve a loan.  And, even when they do, the conditions inserted into the commitment letters are often unnecessary and difficult to satisfy.  As a result, rate locks need to be for at least 60 days.  Even with that, it is taking almost the full lock period to get things closed.  If possible, we suggest holding off on locking until the loan has been in process for 1-2 weeks to avoid the loss of a rate lock.  Anyone considering a refinance should be prepared to wait 8-10 weeks to close.  For coops it could (and usually does) take even longer.

But, at least this is a good problem to have.  With little increase in home purchases (which I will address next week), things could be worse.  Or, at least, that’s what my wife tells me!

Condo Approvals Take Too Long

We recently closed a loan with a major NY lender.  Since the property was a condominum apartment building, the bank required that the condominium itself be approved by them.   Despite sending in all approval documents in mid July, and having all conditions cleared other than the condominium approval, the bank did not clear the condominium.  The only open item was review of the condominium insurance coverage.  Though we submitted this to them 5 or 6 times in various formats (email, fax, uploads), we could not get the bank’s condominium department to review this.  The bank even told us that we should not send this to them more than once since it “confuses” them!  Weeks passed, as did the borrower’s closing date while our processor and I had numerous phone calls and emails with the lender’s processor, our account representative, etc.  All to no avail.  Finally, 3 weeks later, when our borrower was just about in default under his contract, the bank approved the insurance with no problem, question or explanation as to the delay.  The loan then closed a few days later.  Notwithstanding this, and the fact that I was able to get the bank to lower the rate for the borrower, our 2 months of good service on this loan was washed away by the actions of this lender.  So much so that my post-closing “How did it go/good luck email” to the borrower was not responded to for the first time in recent memory!

Validate This? (IRS Form 4506 that is)

For the past year or so, it has become nearly automatic for lenders to verify that the tax returns submitted to them by brokers matched the tax returns filed with the IRS.  Tax returns are required on a file when a borrower is either self-employed or has substantial commission income (e.g. for a salesperson) or bonus income (for a professional/manager or, usually a Wall Street banker/trader). This was done by submitting a signed  IRS Form 4506  to the IRS and waiting a few days for them to provide a verification of the filed returns.   This verification was then compared to the tax returns in the lender’s file to confirm that they were the same.  

A few months ago, lenders starting submitting these 4506 forms to the IRS on ALL files whether or not tax returns were provided to them.  For a salaried borrower, all that is required for income verification are 2 paystubs and 2 years of W2 statements, not full tax returns.   As a result, now borrowers are being analyzed on documentation that is not needed or required.   This is causing needless delays and aggravations.   Recently, on a coop purchase for a perfect file being made to a federal government employee (who ironically works for the Treasury Dept.), a condition was added to the Commitment Letter based upon the 4506 verification.  This condition required an explanation for Schedule C income (not expenses I note) that were being show on the borrower’s federal tax return.  Now note, this return was neither required for the loan or submitted!   It turns out that this income belonged to the borrower’s husband (since it was a joint tax return) who was not a borrower on this loan or part of the transaction!

So, the moral here is to make sure that a borrower, even a salaried one, does not have anything on their tax returns that could cause an issue with a loan.  The lenders are checking this even when not required (since Fannie Mae/Freddie Mac are not requiring it)!  The waste and needless delays continue and expand!