Being a real estate investor, finding honest lenders for my projects and responsible lenders for my end buyers has been a troublesome experience. Now that I’ve helped 2 lending oriented firms with their businesses, I embrace the opportunity into seeing what goes on from a lender’s perspective to discover areas for improvement.
You may remember my frustration in another blog post, An Open Letter to Banking Regulators , where I pointed out that bankers and underwriters can take their sweet time processing a loan without taking any responsibility of their inefficiencies, holding the borrower and the lien holder hostage without repercussion to their gross mis-management of their processing, all of the while causing extreme disruption to the lives of the others involved. To me it is an atrocity, and that hasn’t changed.
Ah, but this is ONE thing that has changed…
The financial markets are more competitive. Loans are easier to get and less documentation is required to submit to various investors to get a loan. Unfortunately the environment still holds both lien holders and borrowers hostage due to the process. It reminds me a little of the airline industry years ago. You were in their plane, you couldn’t make any changes and you were not in control of getting to your destination on time and the airlines didn’t care. You arrived safe and sound, and should be happy you got the discounted price.
Airlines have changed their tune as independent companies started tracking delayed flights and publicizing those statistics, and lenders need to take notice they could be measured in that way too. (In fact, if someone wants to collaborate on starting that kind of business, or if you know of an existing business that does this, please reach out to me.)
How We are Held Hostage
When choosing a lender as a borrower, you go through a lot of trouble to get all of your information in order, get the right documentation to the lender and make a financial investment in the process. You may have to pay for a credit report, you have to pay for an inspection and for an appraisal. So you may already be $1,000 in the process and therefore committed to that lender.
If something goes awry, you are already well into a contract and facing a violation, possibly experiencing homelessness for a few days, or some other financial deadlines (in the case of a refinance), where choosing a different lender can be costly on 2 fronts:
- A new lender will want pull your credit again, get their own inspection report and appraisal, which will cost you another $1,000 or so, and
- The time it takes to restart the process may extend beyond legal or other financial deadlines.
So there you are stuck at the mercy of the lender your chose. The best you can do is stay in communication with the lender, be proactive to make sure they are on top of YOUR loan, and pray they perform on time.
The seller and other lien holders are at the borrower’s lender’s mercy, as they have plans that depend on the completion of that transaction. I know as a real estate investor utilizing hard money, there were many times this has caused me having to pay extension fees which are usually quite high. Yet, the lender can just go to work each day without a care in the world.
The Reality
The industry is fraught with multiple personas that directly violates the concern for a “simple closing process”.
First, you have the Mortgage Broker. This is the sales person that promises their business associates have the program that will close your loan, and they are paid well when it finally closes. They are the ones most interested in seeing a successful loan close. However, there are times they find themselves making a promise they can’t fulfill. Instead of being honest, they will keep shopping your loan around until he/she can find the end lender that will fund. You don’t know this is what’s going on because he/she will just ask for some other documentation, while he/she is in the background trying to find a lender for you. Yes, they lie to you, saying the loan is in some process of underwriting when it actually isn’t. They are paid by commission, and don’t want to lose you, so they will keep shopping around. This was quite evident in one of my flips when the Realtors in the transaction caught onto him and redirected the buyer to a proven lender that ended up closing in about 10 days. In my opinion, that original broker should have his toenails pulled.
Then there is the Actual Investor. This is a company, possibly a bank, that has their own rules and procedures for granting loans. Being there is so much fraud, they are the most interested in working with already proven entities according to their already written policies and guidelines. Just like most banks, they are made up of low-wage workers who’s priorities are not a high level of production. Being efficient and processing the most loans is not in their reward structure, but being safe, and saying “no” to a loan is the safest bet to keep their jobs. One loan I’m aware of couldn’t close because the chosen title company wasn’t pre-vetted to the investor, so that would require more time for that bank/lender to approve that Title company, thus causing a lot of grief to the borrower and lien holders. Working through this red tape makes up a lot of the delays I’ve experienced.
Again, you are held hostage as they work out these issues.
Better Safe than Sorry
Yes, that’s the lending industry. This is money we are talking about and they want to make sure their money will be returned to them, with interest. Long gone are the handshake deals, but more knowing where the risk is in loaning to a borrower. What is the one bit of documented behavior that means we may not get our money back? It could be the borrower has a ding on their credit, or someone is in cahoots to default the bank and there are many different pieces of information to examine to assure the lender their investment in your borrower is safe. This part will not change, ever. But what can chance is the amount of time it takes to get to “no”.
The Market
We, as consumers, are often driven by price. We will market shop based on interest rates and points just like we do when we compare airline prices. But in the airline industry, we see the data on a flight’s late performance, and take that into account when choosing a low-priced airline. It has to be OK with us that they tend to have poor “on-time” performance as we willingly accept the discounted price. If timing is important to us, then we must look at the other airlines, being prepared to pay a little extra to get the service we must have for our current circumstances. There should be no difference when choosing a lender.
When buying any product or service, you can chose 2 of the 3 options: Timing, Quality, or Price. Understand your lenders past performance before making your final decision when choosing your next lender.