Article by Joanne Scoratow
May the REAL lenders step forward please.
The number one question I get asked by a new mortgage broker is, are you a direct lender? This is an intrinsically important question that is asked, and rightfully so in this climate, and my answer is always yes. The problem that Mortgage Brokers face in this questionable climate is that many hear the same answer from others that turn out not to be direct lenders. The intent of this article is to provide our mortgage community with a guide, if you will, as how to mitigate and truly discern if the entity you are speaking to is truly a REAL lender.
Prior to 2008 I rarely was asked this question but as time moves on, from the collapse of the Capital Markets in 2007, it is without a doubt the number one question I am faced with daily. It is quite apparent that, from the war stories I here, there are so many pretenders out there preying on brokers that are desperate to find a REAL solution with a REAL lender for their client's needs. Some brokers I can tell are at the breaking point and ready to exit the industry all together. They have run into these very predators I have just mentioned far too often and are truly sick and tired of getting the run around. The aforementioned pretenders range from simple brokers that pose as direct lenders all the way to the organized and seemingly large companies that write great looking LOI's and scam the unwary for upfront fees. We have all heard the stories and have probably known someone that has been "taken" by one of these less than moral individuals or firms. So the question remains. how does an honest, hard working broker make sure that they get their clients in the hands of a REAL and reputable lender. It's simple, follow my tips below and it should weed out who is real and who is not.
#1 If it is too good to be true then it probably is!
In today's capital markets, or should I say lack there is of, there no longer is a full spectrum or array of funding solutions for all types of borrowers, credit, collateral types, etc. IF the solution does not lie in Bank or GSE financing chances are there is only one other option. This option, that typically was the last resort in standard times, is now, in this climate (for both residential and commercial) the only other option. Seemingly it is either option A or option Z in this current climate. No longer do options B through Y exist. As discussed when option A fails you have nothing left than option Z. What you will not like what you hear, is that Option Z is private money. Rates are high, (from 9% to 15%) and the terms are short (from 6 months to 180 months). So if you are being told you can get rates in the 6% to 8% range after you just have been turned down by 3 to 5 "A" paper lenders your probably in for a bumpy ride. My Dad always told me "The person who is telling you what you don't want to hear is probably telling you the truth and the person that is telling you what you want to hear is probably lying to you". Here is where the biggest hurtle lies. As soon as you exit the Bank and GSE platform you find yourself in a muddy world where many are not true lenders. It is easy to distinguish in the A paper arena who truly is a direct lender but in the private money sector it is often not as clear. This of course begs the question then how do I truly know if the firm I am dealing with, who purports they are a direct lender, is truly a direct lender? To follow are several questions that serve as a guide on how to help vet the source as a true lender.
#2 Does the firm have a very detailed website?
Now I am not saying just because a firm has a good looking website you can feel comfortable but surely if they do not have a website, website is under construction(and has been for months), or the website looks like it was slapped together with dysfunctional links you probably should have some immediate sense of precaution! It is the content in that website that you should scrutinize. For instance if a private lender wants to earn your business they should have a page where they display deals they have "Funded" not closed. Remember you are after the entity who FUNDED the loan. The more detailed the funding placards are the better. On our site we describe the deal, tell a little bit about the transaction, show multiple pictures and if it's a rehab or finish construction deal we show every picture from every draw inspection. The less detail the more you should question the reality and truth behind the representation. IF you see words, under their representation of closed loans, such as "arranged", "partnered", "in conjunction with "Capital Partners" then you should know such words are merely a great way to skirt the issue that they brokered the loan without truly being deceptive. The more detail the more comfortable you should feel.
#3 Does their website also solicit private investors?
As previously mentioned, bank fallout is getting funded by private money either through individuals or mortgage funds/pools. If the entity you are trying to vet has no link or portal for new or existing investors to inquire or login in to view their portfolio, fund performance letters, PPMs/PPOs, etc.this is of course a variable to consider in your forensic analysis. Now this should not be a variable in your analysis that ultimately is a deciding factor as many funds may have a separate entity or website that is segregated from their originating division. Nonetheless a variable to include in your analysis.
#4 Does their website post testimonials?
If brokers and borrowers are happy with the service they will typically write a nice letter and give the lender permission to post it on their website. If the "lender" has only a few and they do not have the broker's name, number and email then it is safe to say those testimonials are worthless. Additionally the analysis of testimonials should be detailed. Does the testimonial actually address a funded loan? Or is it a testimonial simply addressing or praising an individual and a service? Any testimonial, if real, brings validity to the service one provides and professionalism of an individual or entity but that is not what you are after. You are after trying to discern if such subject your are inquiring into is a direct lender. The content of the testimonial should be scrutinized. Lenders provide funding solutions and their testimonials should often be addressing such real solution. Pretenders do not, whether or not they did a great job warranting a testimonial is a useless factor in your determination. Athas Capital's testimonials are real and include our valued client's full contact information so that such testimonial can be verified should one feel the need.
#5 Does the lender have a warehouse line?
Not all private lenders have a warehouse line but if they do then most likely they have the ability to give you a verifiable reference for the credit facility that provides them with the line. If the lender has significant credit extended to them for the sole purpose to fund loans then obviously this is a step in the right direction regarding your verification processes.
#6 Does the lender have a Mortgage Fund blessed by the Department of Corporations ( "DOC")
Most Mortgage Funds are registered by the DOC. Just because they have a Fund does not mean that they have the liquidity or even funds available to fund your prospective loan file. This should only be used in conjunction with #1 thru #4. If they do have money available funds they should have proof of funds and yes, it should be easy to verify that as well. IF there is much hesitation or many excuses as to why they cannot provide you with validation accordingly then probably a good indication as to the reality of their claims.
Now comes the Holy Grail of proof that the "Lender" is really a Lender!
#7 Does the Lender service their own loans?
As private lenders are getting squeezed by ever tightening government regulation it is becoming increasingly difficult for a firm to make a meaningful profit off the discount points. Because of this decrease in margins off point's alone real private lenders service their own loans so as to reap revenue and increase margins for sustainability of the servicing revenue. As to reiterate the sentiment as described in the aforementioned section #6 it should not be too much of an issue to give you a quick tour through their servicing portfolio. Now different firms have different privacy policies but any reputable and real lender should have no problem providing proof of their servicing platform. Again if there is much hesitation or excuses as to why they are unable to then again a clear sign as to their true ability. Typically lenders will utilize servicing systems and software such as ABS or outsource it to a sub servicer where you can log in and walk through their portfolio. If they are not servicing their loans then most probably they are only a broker and not the one writing the checks. Again, in the private money sector there is no secondary market for such product in this climate. So if they are not servicing their portfolio they are NOT lending.
#8 Show me proof of your fundings.
When a Lender funds a loan that is secured by a Deed of Trust or a Mortgage security instrument they leave a public information trail that is easily accessed. There is no if and or buts about this proof. This is indeed the Holy Grail of proof that you seek in your analysis. If the "lender' you are talking to is indeed a lender then that entity or firm should have not one hesitation in providing you with data that you can independently verify to validate their claims on lending.. For example, if the lender's name is "ABC Mortgage Inc." then they will have recorded security instruments, that you can see by pulling title or a property profile, showing "ABC Mortgage, Inc." as the recorded lender of record. All one has to do ask the lender for a list of addresses for last month's funding or better yet last year's fundings. IF they are not willing to comply with your request then run. IF they are willing then simply take the provided data and randomly open property profiles or title reports to validate their claims. The lender's vesting will be clear. If they are the lender they will show up as the lien holder and it should read "ABC Mortgage Inc". Most title companies will also give you a chain of recorded deeds for free and once again if "ABC Mortgage Inc" says they are a direct lender then their mortgage should show up in that chain of title
There is no escaping this one truth.
#9 Is your lender charging an upfront processing fee or due diligence fee?
Ladies and gentlemen I hate to admit it but in this environment if you are required by a "lender" to have your client deposit an upfront fee then run!! There are many reasons I do not understand why a lender that wants to deploy money would discourage business with charging up front Lender fees.
If their profit center is earned over time by borrowers that make their payments or from points charged on their transaction once closed then there should be not one reason why a deposit or upfront fee is required.
Many will try to validate the reasons for the deposit requirement, and mainly the excuse will be that they need to protect themselves from brokers and borrowers that misrepresent the deals. My response would be that they are not spending enough time looking at the deal in the beginning. If a lender is requiring upfront fees then they are not underwriting the deal in the beginning to make sure that it has a high probability of funding pursuant to their internal guidelines and needs. They are simply throwing it at the wall and if it sticks great and if does not then no loss as they have secured that possibility of a loss with an upfront fee. A real lender that has the true intent of funding and accordingly the ability to do so will bank on funding the deal. Real lenders make money by funding and not by practicing. Now of course there is the typical appraisal that the borrower has to pay and sometimes depending on the collateral and environmental fee. However if this is collected by the "lender" it is dangerous! No lender requiring a third party report or service should collect such a fee payable to the lender. The lender should be requiring that the borrower submit such funds for the services directly to the service provider. Otherwise it is safe to say the "lender" is padding a fee for their benefit. BOTTOM LINE. DO NOT EVER pay upfront lender fees.
In closing, following these rules and guides, as you try to ascertain the reality of who you are dealing with, are key to your successful placement and funding of your client's needs without wasting time and possibly determining your relationship with your valued borrowers.
-If you're being told something too good to be true, you are most likely being lied to.
-Review the "lenders" website for detailed information that should prove they are a direct lender.
-Do not be shy to ask a "lender" to show you proof that they are indeed a lender.
*Mortgage fund that is registered
*Pull chain of title on post funded deals
*Lastly if they charge upfront lender fees RUN!
Upfront fees are only lining the pockets of the fraudulent lenders, while wasting your valuable time, in essence losing money for you, your client and most importantly your credibility with your borrowers.
JS Financial, LLC
Thanks Joel for sharing Joann's article! This has been very informative, and perfectly detailed. It also makes me appreciate the scope of RE investing.
Very informative... tha.k you very much
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