Contra Costa, California Real Estate

There have been a number of blogs about non-performing lenders, incompetent loan officers, bad loan programs (or at least a derth of buyer education regarding the pros and cons of those programs) and useless approval letters with the end result being a call for LEGISLATIVE ACTION.  Are you kidding me? You want the same people who created Truth-In-Lending, - a flawed piece of consumer-protectionism - to fix the problem?

I am going boldly as to suggest a more immediate and proactive approach.  EVALUATE YOUR BUYER'S LENDER AS A VALUE-ADDED SERVICE.  Before I throw out the concept in its entirety, let's review what we know to be generally true about buyers:

Buyers believe that all loan officers are created equal; they are all ethical, professional and dedicated to serving the buyer's best interests.  If they believed otherwise, they would definitely be shopping for something other than rate.  The few buyers that don't share this belief are stymied as to the best way to find and interview the "good" loan officers.

Buyers rate shop for two reasons:  to assure themselves they have conducted due diligence and to pay the lowest cost for their largest single debt.  But regardless of their best efforts, they have absolutely no idea about the games that can be legally played with rate quotes, much less the illegal ones.

Buyers confidently report they are pre-approved from the loan officer chosen as a result of their rate shopping but don't realize that the pre-approval may be worth less than the paper on which it is written. Please read George Tallabas' blog entitled "Loan approval means a done deal, right?, Wrong!" and the comments for more than a few harrowing examples.

Buyers are not aware of their potential monetary risk (loss of earnest money) if their chosen lender doesn't perform under the terms of their purchase contract. 

While you, the realtor, fully understand the ramifications of working with a poor loan officer, it is too early in the process for the buyer to grasp the potential personal ramifications.  I will share buyer responses (they have admitted these!) when presented with three common strategies used by realtors to get them to call the preferred lender:

Realtor:  passionately regales the buyer with lending horror stories and suggests that "a back-up approval is always a good idea".

     Buyer thinks, "Those people didn't due their due diligence and I did."  This is the "I am smarter" defense.

Realtor: "Give her a call, she may be able to improve your rate".    (What if the buyer's chosen lender intentionally or unintentionally understated the rate, fees or third party charges? No one does that, do they?).

      Buyer thinks, "The realtor's lender is more expensive so the realtor must be getting something."

  Realtor:  "[My lender] will help you find the most appropriate mortgage program."

     Buyer thinks, "I already know the mortgage I want and I found the lowest cost provider."

 

The problem with each referral strategy is that the buyer is being told of potential problems without a shred of proof that they might actually happen to them.  My bold, but ridiculously simple strategy involves evaluating your buyer's lender as a value-added service.  Best case, you discover another professional, competent lender while looking out for your buyer's best interests.  Worse case, the lender's answers instill enough doubt in your buyer's mind that they are willing to speak with your preferred lender without thinking that you have a vested interest in the referral beyond superior service.  Worse, worse case, the buyer has doubts but still doesn't want to immediately start an application with a new lender, they will see the gap between promises and execution more quickly than without this process.

My suggested Lender Evaluation:

Sit in your office or a conference room with your buyer and call the lender on speaker phone

Introduce yourself and explain the reason for your call is to establish a solid working relationship to better serve the buyer.

Tell the lender you are with the buyer and tell the lender they are on speaker phone

Ask the following questions:

Is the buyer approved?

What are the loan program(s), loan amount(s) and interest rates have you used to approve the buyer?  Unless the buyer is in contract, how much wiggle room have they allowed for a potential increase in rates?

Has the file been underwritten by an actual underwriter?  (Automated approvals commonly used by loan officers are only as good as the data accuracy - garbage in, garbage out.  The decision of the underwriter will always overrule the automated approval).

Has the income been verified?

Have the assets been verified? 

Note:  if the loan officer says the buyer is approved, but hasn't verified income and/or assets, you have a very large red flag.  A realtor in my market was told by a loan officer when calling to update an existing loan approval, "We all know this is make-believe, so let's make believe together." 

Have you sent a Good Faith Estimate to the buyer? 

If they say "yes", immediately ask the buyer if they received it

If they say "no", ask the date of the application and when they intend to send it.  Are they within the 3 business days as required by law?  If the lender isn't careful about following federal lending law, how careful will they be with other details and the deadlines on your purchase contract?

 Ask for a copy of the GFE to be faxed or emailed to you - the buyer is sitting with you authorize it.  Before the buyer leaves your office, review the GFE together!  Although the lender charges may be difficult to verify, you can definitely check the third party fees such as title, escrow, notary, recording, etc. to determine if they have been understated to derive an artificially low cost to close.

When you receive an executed purchase contract, what specific steps do you follow?  (hopefully they say, "read the contract, write down the contingency and COE dates, update the GFE if there are seller credits, order the appraisal and preliminary title" etc.)

Hasn't everyone had a loan officer tell them at one time or another that they "are not party to the contract"?  While technically true (they didn't sign it), by accepting the contract and the transaction, they have implicitly agreed to support the buyer's obligations under that contract.  It would be reassuring to know that the loan officer actually reads the contract.

What is the default contract timeframe for [choose your contingency]? (Double check their knowledge of the contracts in your market)

How many purchase transactions have you closed in [name your market] in the last two months?  (If none, red flag!)

Could you please provide the names and contact phone numbers for the realtors on two of those transactions?  (If they stumble, the claim they made in the previous answer may not be accurate.  If they do provide references, check them!)

What days/hours do you work?  Nights / Weekends? 

What is your timeframe for returning phone calls?

How do you provide transaction status information to the realtors?

What is your manager's name and phone number in case I can't reach you and need immediate assistance?  (Why wait until there is a problem to try and get this information?)

What are your required timeframes for:

- Formal underwriting (if the approval was based on automated underwriting)?
- Appraisal?
- Doc draw?
- Funding review?

Do you provide an Estimated HUD-1 for my buyer's review at least 48 hours prior to signing?

Thank you for your time.  Before we end our call, let me provide my contact information.

Don't forget to review the GFE together before the buyer leaves the office.  It is important for both you and the buyer to know if the costs prepared by the lender are realistic.

I cannot think of a professional loan officer that would object to this line of questioning (although I am sure I will hear about it if they do!).  In fact, it would be a darn relief to have the opportunity to demonstrate experience and competence rather than continually battle the unlevel playing field of the pricing game.

What do you think if this idea? I would love your comments and suggestions for additional questions.