As the struggling recovery inches along, many of us on the ground know residential real estate's dirty little secret: getting to the closing table has become increasingly more difficult and sometimes doesn't happen. The main cause of deal extremis is obvious: the underwriting process for many banks is now geometrically more complicated.
Lender Lunacy: Underwriting as Theatre of the Absurd
After two years of battling with banks, I've concluded that lenders are suffering from PCLD: Post Crash Lending Disorder. On the one hand, banks appear to have the necessary accoutrements of lending: loan officers, underwriting departments, closing attorneys, and of course, money. At the same time, as a result of over-regulation, financial crisis pendulum swing and heightened concern over collateral, banks only make residential loans if they really, really have to.
A Loan Commitment Letter Isn't What it Used to Be
Before the world of residential lending got turned upside down, once a loan commitment was issued, the parties knew that the transaction was on its way to the closing table. Unfortunately, that simply is no longer the case. To compensate for the bad old days, the bank's underwriting department now piles on "conditions" to the loan commitment letter that can be difficult, if not impossible, for the borrower to satisfy. Although a commitment may technically have been issued, the parties may not be able to close because the conditions can't be satisfied. This Catch 22 can and does happen with unpleasant logistical complications for both sides. Both buyer and seller should understand that until the underwriting process is completed in all respects and has been "cleared to close," all bets are off as to whether the transaction will actually be consummated. Buyers and sellers must factor this reality into every transaction, no matter how large or small.
When the Buyer is Qualified but the Building Isn't
And it's not just the borrower who has hurdles to jump over. As detailed on my blog recently, Fannie Mae lending guidelines, that impose various financial requirements and underwriting thresholds on co-ops and condos, are causing transaction delays and deal terminations. Even if the loan exceeds Fannie Mae's lending limits (currently a loan in excess of $729,750.00, but soon to be reduced to $625,500.00), many lending institutions are still requiring compliance with the restrictive policies. Although banks always insisted on reviewing the most recent financial statement of the co-op or condo and required a relatively standard form of "questionnaire" to be completed by the managing agent, the financial metrics of the co-op or condo were more of a "check the box" item and rarely caused a closing not to happen. Over the past year, however, the regulatory landscape has changed dramatically and co-ops and condos have to be qualified for underwriting, just like the borrower. As pointed out in the Times by Lynnley Browning earlier this year, Fannie Mae usually grants a waiver for a co-op or condo that doesn't meet the current lending guidelines. That being said, a borrower should not assume that a particular lender will be willing to seek the waiver, if required.
Make Sure Your Building Qualifies for Financing
Banks have a bad habit of underwriting the co-op or condo late in the loan application process, so addressing this issue after application can have disastrous results. Borrowers are well advised, therefore, to determine before the loan is applied for, whether the co-op or condo is already on the bank's "approved list." If not already qualified, before going forward with the proposed lender, a borrower should be confident that the building will pass scrutiny under all applicable lending guidelines that the particular bank seeks to impose. Even if the borrower is a slam dunk to get a loan approval, the building may come up short.
There's More to Shop Than Interest Rates
In addition to shopping interest rates and loan programs, borrowers should also seek out banks that have already made loans in the co-op or condo in question or who are willing to work with the borrower to get a Fannie Mae waiver in order to complete the loan. Consideration should also be given to specifically addressing this issue in the contract of sale by adding a funding contingency, so the borrower doesn't wind up with a commitment for a loan that will never close.
Residential Reality: Beware of Regulation Creep that Can Kill Your Deal
The wild west environment that pervaded residential lending a few years back has irrevocably changed the way that residential loans are now processed, underwritten and closed. To keep transaction anxiety in check, make sure to pre-qualify your bank, just like the bank pre-qualifies you...