Banking World Doesn’t Always Act Rationally
Originally appeared in Bay Area News Group publications on January 15, 2010
This is the tale of a young couple who was highly qualified to buy, yet was unreasonably turned down for their purchase by one of the banking giants. They have allowed me to tell their story in the hopes of informing other would-be buyers of the ridiculous hurdles some lenders are placing on today’s home purchasers.
The right house
After a long search, we finally found “The House.” As soon as I saw it, I knew it would be right for them. They did not hesitate to write an offer and I promptly presented it to the listing agent.
Initially, there were no other offers; however, two others came in on the heels of ours and my buyers were presented with a counteroffer. They quickly agreed and we were in contract.
Given the quality and size of the house, and the desirability of the neighborhood, the accepted offer was a good value for the buyers. Numerous, smaller properties had sold for up to $25,000 more within the previous 90 days. After acceptance, another buyer put in a backup offer that was actually higher than ours.
Processing the loan
Prior to writing the offer, the buyers and I carefully reviewed disclosures about the home. An important detail was that the seller had owned it only five weeks. He had bought it at auction on the courthouse steps for $124,000 less than his asking price.
I discussed this with the buyers and they understood that, although the seller was going to make a substantial profit, he had paid all cash and had taken a risk when he purchased. They also factored in that, five years earlier, the house had sold for $65,000 more than they were now paying. In addition, they would be getting a record-low, 4.5 per cent, 30-year, fixed-rate mortgage.
Before she placed the loan, the mortgage broker had emphasized this “flipping” scenario to the lender, i.e., that the seller had just bought the house and was selling it for much more than he paid. At that time, it did not appear to be a major issue, especially because the buyers were putting down 20 per cent.
The appraisal came in at full price and the buyers removed their appraisal contingency. Just when things looked good, troubles began.
Lender balks
Several days after the satisfactory appraisal, I received a call that the lender had “discovered” how recently the seller had purchased and they asked for additional information regarding improvements done by the seller and their costs. They also sent two pages of questions to the appraiser.
The lender’s representative told the mortgage broker we could send him input to assist the appraiser. After much time and effort, my comments were forwarded to the bank representative.
My key point was that the amount of the seller’s short-term profit had nothing to do with current market value. Comparable sales, plus the fact that there were three offers, including a backup, were a strong indication that the price was appropriate.
Note that we were dealing with bank people in Southern California. We believe they should have focused on whether the value of this particular house was equal to or greater than recently sold comparable properties. And, it was.
When the appraiser called to ask me some questions, he said he had not received my write-up and asked me to email it to him, which I did. He agreed with my arguments, responded to all of the lenders questions and substantiated the contract price a second time.
After a full week of foot-dragging, the lender, once again, turned down the loan. We were told that the “investors” wouldn’t accept it because it had been purchased and sold in a five-week period.
They said they could not do it at that price because of the large gap between the accepted offer and how much the seller paid. If the seller had put the difference between what he paid and then sold it for into upgrading the home, they would have made the loan.
Only one problem – this would have meant a loss for the seller. Why would any investor do this? Our logic did not convince the lender even though it was based on common sense.
After several more days of discussions and imploring, we were at the end of the road. The mortgage broker asked the bank representative why they put the buyers through an additional week of agony. If they were not going to make the loan, why not say so earlier? His response: “It slipped thorough the cracks.”
Fortunately, the listing agent was very professional and he suggested the seller give us an extension to apply with another lender.
Quick success
The mortgage broker was able to find a different bank which, with the same set of circumstances, agreed to make the loan. Not only that, they accepted the first lender’s appraisal, something rarely done nowadays.
The entire process with the new bank went swiftly and smoothly. In less than three weeks, the loan was funded, the escrow closed and the buyers were happy.
Final Thoughts
Interestingly, this couple has been long-time customers of the bank that scorned them. As soon as they were turned down for the loan, they vowed to cancel their charge cards and checking account. They plan to do so with a very pointed letter to the firm’s president.