When Lenders Get Greedy
Why don't I follow my own advice? Last summer, I said, in this post:
I often advise new borrowers to get a signed mortgage loan commitment, showing the expiration date of the lock. That "commitment" now has to be analyzed for the financial solvency of the funding/purchasing lender. I'll be practicing a strategy of dual submissions until this liquidity crunch clears.
Diane Cipa, a title agent, said, in a comment:
Please don't. It's going to be hard enough for responsible secondary market managers to feel their way through these rough waters without mortgage brokers double or triple locking product.
A more prudent position might be to educate borrowers so that they take some of the risk and understand that the lock is tied to a particular mortgage banker and not you as mortgage broker.
Frankly the lack of liquidity will encourage mortgage bankers to consider shutting off wholesale/correspondent divisions in favor of supporting their retail operations. If mortgage brokers en masses decide to start doing multiple submissions and locks, the shut off may come sooner rather than later. Retail originators can't do multiple locks or submissions and so are a more predictable or reliable source of pipeline data.
Diane is a smart lady. The problem is that she doesn't live with the pack of thieves that populate my industry; I do. I'm a retail loan originator for a mortgage banking and brokerage firm. Since the liquidity crunch, I've taken to broking loans exclusively so that I have the ability to submit a file to competing lenders. After all, my REALTOR partners rely upon me to execute good loan terms that fund for their buyers. About 3-4 months ago, I disbanded the practice of double submissions for the very reasons that Diane illustrates; I didn't think it was fair to the wholesale mortgage bankers funding my loans. Boy was THAT a dumb idea.
REALTORS, pay very close attention to what I'm about to tell you.
First, some background about mortgage banking:
Mortgage bankers fund loans and sell them off to investors. Forget portfolio lending; it's all but dead. Even Bank of America, Wachovia, and Wells Fargo sell their loans. They may service them but they often "pre-sell" loans, to a specific investor, before it funds. They agree to a 6.5% rate, then pre-sell that loan at 101% of the loan value, fund it, and fulfill the loan sale- that's how banks and mortgage lenders make money.
Smaller lenders (who are kicking ass in this market) are referred to as correspondent lenders. They have a stable of lenders who buy funded loans from them. Mortgage brokers use these smaller mortgage bankers because of superior pricing and better service. They do a great job...UNTIL...
...they decide to get greedy.
I had a loan closing that met the "perfect storm" for stupid mortgage banker tricks. It was scheduled to fund on August 27. I held the lock off until August 15 (I thought rates might improve). My borrower had to sign before August 22, so I was out of time. I locked the loan, securing a great rate for the borrower, and ordered loan documents. On August 18, 2008, the mortgage-backed securities market started a 12 day rally. MBS prices skyrocketed some 1% in a few days. That means that the mortgage lender, who pre-sold the $500,000 loan to Bank A, at $505,000, could now sell the same loan to Bank B, for $510,000. My customer was stuck- he had to sign in seven days. The loan was already approved so it should not have been an issue.
Why did I start getting "re-conditioned" after the loan documents were drawn? My loan already had "final approval status"; why ask for more documentation?
Greed- the answer was greed. The mortgage lender decided to harvest that market gain by re-selling the loan at a higher price. The new investor required a pre-approval before the sale. My funding was delayed until August 29, even though the borrower had satisfied the "re-conditions". Why? The lender was waiting for those conditions to be signed off by the new investor.
What recourse did I have? Absolutely none. I had disbanded the practice of "double-submissions" because I had a "cherry" borrower; I didn't want to "confuse the market" as Diane Cipa suggested the practice of double submissions might do.
MORAL: Originators should serve our borrowers' best interests first. Even the best borrower isn't immune to the crap lenders pull, especially when there's more money to be made off of them.
I KNOW better. Imagine if you were dealing with a loan hack that didn't; that loan still might not be funded today. Never again.
