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Can Someone Explain Why a Lender Would Do This?

This had me scratching my head (and reaching for the Maalox) so I wrote a blog [hotlink deleted by Zillow moderator. Please see our Good Neighbor Policy for posting guidelines]
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August 29 2013 - US
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Replies (23)

Looks like veiled SPAM to me. Why not just post the question here without the hotlink to your page? 
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August 29 2013
Post the question here, please.
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August 29 2013
But Barb, that would defeat the purpose! He posted a link to his own blog to drive traffic, not to get an answer :-)
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August 29 2013
Yep, well I guess you have to start somewhere. 4 contributions and zero reviews. Might have better luck over on the real estate forum :)
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August 29 2013
Which is easier, a link or retyping the whole thing? How about drawing on your expertise to help this man out rather than criticizing?
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August 29 2013
Neither.... Copy and paste ;-)
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August 29 2013
Let me help!

"I have a client, let's call him "Mike". Mike's story is being used with his permission. Mike and his family are what I call "dream clients". They do their homework, weeding out most homes that won't suit their needs by doing online research and thereby saving themselves a lot of time. Mike works hard, has a good job and excellent credit. Recently we had a Salisbury MD area home under contract for him. Inspections were done with minimal repairs needed and we had a very cooperative seller. In the world of Salisbury MD real estate, this should have been a "slam dunk" of a deal. (although cash is the only real slam dunk).

The contract had been sent to Mike's lender and set to close 60 days later. The lender told us time frame wouldn't be an issue. A short time prior to closing, a "small challenge" presented itself, which could "possibly" delay the closing. This delay was blamed on Mike, saying he had not submitted necessary documents in a timely fashion when in fact he had done so. Mike's rate lock was nearing expiration and I asked the lender if they were going to extend the rate lock at no expense to the borrower. I was assured it would be "taken care of".

Another "small challenge" revealed itself at that time as well. Even though the property appraised for higher than the purchase price, Mike's lender wanted to see additional comparable sales within a given criteria ASAP for review by "committee". Yours truly sent the additional comps within the hour. Eight days later, the appraisal was rejected for lack of relevant comparables and we were informed that by their grace a second appraisal would be ordered and performed at no cost to Mike. During that time, Mike asked me if it was customary for a borrower to be charged for a rate lock extension when a loan did not close on time at no fault of the borrower, which was something I had never heard of. When pressed on this, the lender explained it away by saying rates had gone up considerably and Mike was fortunate to only be paying an additional half point or around $1400 to fix their screw up!

Fast forward two weeks and the second appraisal comes in, this time with a valuation a thousand dollars higher than the first. During this time, Mike's loan officer takes a week's vacation without informing either of us that he would be unavailable. Another week goes by and we are a full 90 days into the process and 30 days past the original closing date, when we were informed the second appraisal had been rejected for no specific reason and the loan had been denied!

This ordeal cost Mike his new home, three months of time and over $1000 in appraisal and inspection fees. In my nearly ten years  of  working in this business, I've never seen anything even remotely close to this from a lender.

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August 29 2013
Oh Russell, I cannot resist! Thank you for being brave enough to click into the link. I'll pick through this in a.m. but I'm sure you also see the holes in the story.
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August 29 2013
Profile picture for wetdawgs
@Dale:

This is the part of the Good Neighbor Policy that concerns many posters.

"Spam, advertising, or self-promotional content is not allowed in Zillow Advice. This includes, but is not limited to, any contact information such as phone numbers, email addresses, or website URLs"

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August 29 2013
Well I read the entire thing. So, the question is why would a lender do this? Good question; you tell me. In my experience, 2 appraisals don't get torched without a good reason. Is the property unique? What was the reason for the denial? What did the letter say? You should provide more information if you truly want an answer, because you know as well as I do that what you have provided is not enough for anyone to answer the question.
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August 29 2013
Fair enough wetdawgs.

The reasons given in the denial letter were-

Unacceptable appraisal.
Value or type of collateral not sufficient.

The only thing unique about the subject property is it one of the largest in the neighborhood. Comparing smaller homes in similar condition recently sold nearby using price per square foot would easily support valuation. Do any of you as a matter of practice even have a second appraisal performed if the first is deemed unacceptable?
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August 30 2013
"The contract had been sent to Mike's lender and set to close 60 days later. The lender told us time frame wouldn't be an issue. A short time prior to closing [INSERT HERE AS TO WHAT WAS GOING ON DURING THIS LONG PERIOD OF TIME. NO STATUS UPDATES, APPROVAL, NOTHING? DID YOU OR MIKE INQUIRE?] , a "small challenge" presented itself, which could "possibly" delay the closing."

You can't go from 0 to 60 days with nothing going on with the file. When was the appraisal ordered in the timeline? Was the financing contingency date met?

"This delay was blamed on Mike, saying he had not submitted necessary documents in a timely fashion when in fact he had done so." - How do you know it wasn't Mike's fault?

There are plenty of borrowers who think that trickling in documents over a period of weeks is no problem - delaying the process themselves. There are an equal # of loan officers that feel no need to prod for documents endlessly after the first request.

Sure sounds like the lender gave it a good shot by getting a second appraisal. And no, it's not very common that lenders order a second appraisal.
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August 30 2013
The first appraisal was done within 30 days. Early in the process I emailed the loan officer to make sure he had all buyers docs, which he confirmed. My theory is through their incompetence they knew we weren't going to close on time, would lose money to extend the rate lock after rates jumped and looked to cover their backsides. It almost seemed they were looking for a reason to deny the loan, especially after 2 independent appraisers said that valuation wasn't an issue.
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August 30 2013
Yeah, that's how they get paid. Turning down perfectly good loans is hugely profitable. Who was this crafty loan source?
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August 30 2013
Yes, that's very helpful. In spite of your sarcasm, it is a relevant question. Perhaps in this situation they weren't going to make enough money and denied the loan for that reason?
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August 30 2013
Ok then.

The reasons given in the denial letter were-

Unacceptable appraisal.
Value or type of collateral not sufficient.


Comparing smaller homes in similar condition recently sold nearby using price per square foot would easily support valuation.

Sarcasm is allowed. The comps stunk.
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August 30 2013
The comps I sent them (using their guidelines) suggested a much higher valuation. Nothing was cherry picked. I sent them everything. Do you have anything constructive to add?
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August 30 2013
Profile picture for Pasadenan
"why a lender would do this"? -

Yes, I'll be happy to answer you, since many Realtors® don't have the education background to understand things on their own...

Loan officers are forced to be ethical by legal mandate, as compared to Realtors® that adopt a NAR "code of ethics" that specifically and intentionally encourages them to be unethical.

It was 100% the Realtor's fault for providing a faulty CMA and encouraging an unrealistic offer amount.

But you state that two independent appraisers both appraised it higher than the contract amount?  Both selected by the loan officer than knows the Underwriter requirements for the specific loan and the given area?  But the underwriter still rejected both appraisals as "inadequate"?  It appears that the appraisers were just as easily deceived about the value of the property as the buyer and Realtor® were.

No, everyone knows that larger houses are not linearly proportional to smaller homes just based on square footage.  It is much more expensive to build tiny homes per square foot than larger homes.

What is that saying that many Realtors® are so fond of saying?  "Never buy the largest house on the block"?  The Realtor®  already knew it wouldn't appraise properly based on linear extrapolation of the sold prices of smaller homes.

Yes, the entire reason the Zillow forum exists is for consumers to answer Realtor's® questions.
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August 30 2013
Profile picture for Pasadenan
By the way, one other important detail was "missing" from the question...  how much down payment was the buyer providing, and was the buyer providing all their own closing costs, or trying to roll them into the loan, such as having a "seller concession" for closing costs?

If the borrower had just come up with 20% down and all closing costs, the loan likely would have funded with no problems.  Of course, that is assuming that the down-payment could be verified as "seasoned" (and not from an illegal source nor borrowed), and that the IRS income tax records and the bank statements verified that the borrower could make the loan payments.
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August 30 2013
"The reasons given in the denial letter were- "Unacceptable appraisal. "Value or type of collateral not sufficient." The appraisal side has been addressed, but the collateral side, not so much. Verification/proof of funds is an issue of obvious importance. When doing underwriting for, loans and for loan modifications, any introduction of funds/up front funds had to be checked, and rechecked, for obvious money laundering reasons. If the funds were in their account for a short period of time,that would trigger a warning flare or two. It sounds like there were some questions about the funds, as well as,the appraisal. In this situation, I would typically order our own appraisal which would be used in comparison to the comps/appraisals that were sent in to us. Funny thing there were more than a few times where the appraisals didn't agree with each other, some were light years apart from each other. What is a lender to do in these circumstances then?
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August 30 2013
""The reasons given in the denial letter were- "Unacceptable appraisal. "Value or type of collateral not sufficient." The appraisal side has been addressed, but the collateral side, not so much."
-------------
FYI Mr agent, the "collateral" being referred to in the denial is the property in question. Collateral has nothing whatsoever to so with seasoning of funds. 

Wow!
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August 30 2013
You got me "Brookstone"! Thanks for the correction, even if it was a little on the tactless side of things. "Wow!" I obviously had collateral confused with the verification of funds side. It happens to us mortals from time to time. {:-)
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September 01 2013
Profile picture for Pasadenan
Certainly, when I posted that funds had to be verifiable and seasoned, I had no intention to imply that was why the loan was declined; I only mentioned that in relationship to the fact that if one reduced the amount they borrow sufficiently, the collateral could easily have been adequate.

That's what happens when one leverages too heavily... they may not qualify, and there may be other consequences.  Don't leverage so heavily, and a lot more opportunities and flexibility opens up.
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September 01 2013
 
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