Bad Loan Processing, Lock Expired, What Now?

Question

I put an offer in on my first deal on May 1st this year. My rate lock at 4.25% in the GFE expired on June 17th. After months of poor communication and performance on their end, I finally got final approval to close on Friday, July 19th. Then, as per usual I heard nothing. I followed up on the 22nd and am told that Title will have the documents that day or by the 23rd at the latest. That was yesterday. Today I followed up again and was told that they were trying to get the documents, but since the market has shifted they are working on pricing and that the processor’s manager was supposed to have gotten back to me. I called him and left a voice mail.

Then I sent an email expressing how disturbing it is to be possibly charged extra for their poor performance. Intellectually I know it’s a bad idea to send such emails while emotionally charged, but I did it anyway. I’m so upset. Does anyone have any advice how to steer this so they just go with the original good faith estimate?

Then I sent an email expressing how disturbing it is to be possibly charged extra for their poor performance. Intellectually I know it’s a bad idea to send such emails while emotionally charged, but I did it anyway.  I’m so upset.  Does anyone have any advice how to steer this so they just go with the original good faith estimate?

Dion DePaoli · Answer

Ian Crane,

Glad to see it seems to be working out finally for you.

If I may speculate a little on the origination process to give some insight on some of the possible deficiencies that caused the delays.  Perhaps it will give you a better way to handle your financing in the future or for other BP folks.

Loan problems start with the application itself.  In my experience it takes a skilled and experienced loan officer to weed through the answers in the interview process.  This is only amplified when the public fills out an on-line 1003 on their own.  Simple exaggerations cause big problems, but are often not malicious in nature.  In example, let's say you put down you make $50,000 per year.  In order for that to be true, you will need to actually earn $4,134.62 each month.  However, if what happened in reality was, you earn $40,000 in salary and $10,000 came in bonus, from an underwriting standpoint you will only be able to use the $10k in bonus there is a history and likelihood it will occur again and has happened before.  There are other common pitfalls when it comes to hourly workers, where last years income was high however the average amount of hours worked over the last two years does not equal the amount of money they made last year.  There are lots more examples, one for each question on the 1003.

An experienced LO, will hear the client answer and will flush out the material facts.  Simply by asking the same client as above if that yearly money includes any salary, would make the information in the application more accurate.  In some instances, the online lenders have do not have Loan Officers but more of data entry folks on the phone.  Those folks, likely do not understand the quirks because it typically doesn't affect their livelihood.  Experienced LO's know what to ask and how to approach things usually from that same issue blowing up in their face in the past.

When an application has distorted information on it, the Loan Approval, which is how they put a rate and generic terms on your loan will also be flawed.  Again, simply using the example above, it is easy to understand how excluding $10k of income can change your debt to income ratio which might cause a loan denial.

If I had a dime for every 1003 I reviewed from the LO's that use to work for me who failed to properly identify property, which then usually means it defaulted to SFR, I would have a lot of dimes.  I could see how that exact same situation happened here.  Sometimes the LO doesn't ask or sometimes the borrower gets approval without having a property so the assumption is SFR.  A condo has more risk in some aspects and the underwriting is a different.  It sounds like someone missed that little detail.

I say this because any LO with a little experience knows that a condo is a tough loan in today's market.  The processor will have to collect the CC&R, financial and ownership information on the condo complex.  It is widely known that there are saturation limitations for underwriting loans regarding occupancy of the condos in a complex.  Exactly like the one you are describing.  Complexes with too many non-owner occupants could suffer from a sever value loss as it is assumed that an investor will walk away from an investment property before walking away from a primary residence.

Without a little more background on the rate lock event it is hard to discern what happened.  In the past, we didn't rate lock until we had a clear to close or had reduced the loan stipulations to a very small manageable list.  In this case, the 4.25% could have been the rate for a SFR, again stemming from the issue above.  A condo would likely have a 0.50% rate hit to it.  Unfortunately, rate locks are used more as a marketing tool than anything else.  If an LO get's you to rate lock, it means you are done shopping for a loan and you will use them.  Realty is rates from month to month are not that volatile.  The public tends to think they are because of the not really being told the truth behind the scenes.  Large rate hikes are not from the market, it is from a bad loan approval.

One of the other concepts here, is the loan amount.  The sale price was reduced to $98k.  As loans get smaller in amount, there are hits to the rate.  (when I say "hit" it means the rate goes up, sorry for the jargon)  An LO would have to factor this into their loan pricing for it to be accurate.  An assumption could be made the loan will not be low balance with approval so when the real loan gets hashed out with a real property, the hit to the rate shows up.

I don't understand the PMI comments.  It seems like you put just shy of 20% down.  What really happened here?  You put down $18k ($98k minus $80k) which is $1,600 shy of a full 20%.  1.0% of $1,600 or $16.00 (heck, give them 3.0% at $48 even) should not be breaking the lender's pocketbook.  To some extent, it seems a bit irresponsible, IMO.  You do not mention what type of loan this is, or, who the investor is for the loan, if this is an FHA approved mortgage, the PMI for $6.00 can NOT be removed for 5 years.  So, I would suggest you get some clarity on that from the lender.

Usually when a low balance loan is originated it is offset with an origination fee.  The standard minimal loan amount for conventional and FHA loans is $50,000 which you clearly exceed in all cases.  So, this story of "cost of lending flags", which I have never heard of being mentioned to a borrower, seems a bit contrived.  I would suspect this stems from the poor loan approval and pricing in the beginning.  See when a LO puts a rate on your loan, they are also pricing out the fees the Lender will make in concert with the origination.  The higher a rate that can be sold, the higher the fees that can be earned.  In the event, the LO screws up the loan approval and a unforeseen hit on the loan shows up, that would mean the fees they planned on making are gone if they want to live up to the rate they quoted you.

Example, 4.25% SFR rate which pays out 1.0% to the Lender.  The condo creates a hike in the rate of 0.50%, so in order the LO to keep their 1.0% fee, they must bump the rate to 4.75%, otherwise at 4.25% the 1.0% is gone or 0.0%.

So then, the age old debate of customer service in loans comes to the borrower table.  Many of the 'explanations' that some LO's and Lenders give is simply, B.S..  The realty, IMO, is the problem started with their side not doing a good enough job initially, at least that is how I always approached it with our loans.  It seems, that due to the misguided information that most of the public has on loans, they stand a very little chance of cutting through the noise to the reality.

You can see this in the song and dance you received about the closing documents being sent to the Title Company.  The idea that this is not an event that is extremely tracked and monitored is simply foolish.  No Lender agrees to fund a loan and then is not exactly sure when to send the closing documents so they can actually lend the money.  They have to coordinate the execution of the documents with the delivery of the capital (<---- the "important" stuff).  Having a Clear to Close, is a specific event.  Usually once a loan is cleared it is sent to the closing and funding department for the exact reason above.  It is also helpful to understand, the "market" does not affect paperwork.  The actual loan documents are a template that are exported off to the title company with your information in them.  30 seconds later, they will send the same package to another title company for another borrower.  It is really, a click of a button.

Another hole in the story, if you locked in your rate, a shifting market would not affect said rate, which is the point of a rate lock. Food for thought.  Below is the historical 30 year mortgage rate during your loan origination timeline:

July 25, 2013	 4.31%
July 18, 2013	 4.37%
July 11, 2013	 4.51%
July 3, 2013	 4.29%
June 27, 2013	 4.46%
June 20, 2013	 3.93%
June 13, 2013	 3.98%
June 6, 2013	 3.91%
May 30, 2013	 3.81%
May 23, 2013	 3.59%
May 16, 2013	 3.51%

When you locked in your rate, you were 1.0% above market.  Now that you're getting your loan, you are 0.20% above market.  That is a cost the Lender may have to swallow, perhaps by loss of revenue, for not delivering the loan to you during the rate lock.  I also recognize, you paid for the lock.  A lock is usually only good for 15, 30 or 45 days.  You can keep a loan locked forever technically, but someone, either the lender or the borrower has to pay for the investor to maintain the same market rate from the lock period.  You didn't mention any called and asked you if you wanted to extend the lock for another fee, usually a sign the Lender is making the logistical errors for the origination because if a borrower caused the loan to take longer, you bet they get a call.

Moral of the story, you have managed to get what you were offered, which is great and I commend the Lender for doing the right thing.  I would revisit the PMI thing to make sure you know what you are getting as well.

In the future or for any borrower, I think the only real defense against much of this is taking ownership in your own loan application.  Every field in a Uniform Residential Loan Application (Form 1003) has an entry/answer to it.  For your own sake, it is wise to take the application before signing it and make sure the information is filled out and is 100% accurate.  Loans are a game where details matter.  Don't be afraid to ask the LO questions and if the answer is not great or they don't know, have them get a supervisor or underwriter who does know.  Just because an application was put in your hand today doesn't mean you can't take it home for a day or two and google some answers as well.

The honesty that nobody wants to say here, NO ONE, will care more about your loan and your loan terms than you.  The LO and the Lender certainly care to some extent, but it is rooted in the monetary nature as to the level of care, which is simply how the world works.

Ian Crane · Answer

The good news is that today they waived the higher cost and are honoring my original GFE.  I sign on Monday morning :)

Ian Crane · Answer

Dawn A. - I’m working with LoanDepot.com. I refinanced my home with them in December and got a fantastic deal that closed quickly, cheaply and painlessly. I don't know about any guarantees on customer service, but it's good to know that squeaky wheel might still be an option.

Wayne Brooks - They're not local.  They're currently trying to get a finance exception internally.

Joel Owens -  This is an owner-occupied property in good standing, and the original idea was to do a conventional loan. I went back to the same guy for this deal and things seemed like before.  But there were a variety of delays once the loan was submitted for processing.  Each interaction took much longer than expected and there was a lot of back and forth.

My offer was for $105K and the appraisal came in at $98K.  I said I’d pay the difference, but then some "cost of lending flags" came up because I wouldn't be borrowing enough to justify them processing the loan. So then we added PMI in order to borrow at least $80K; I figured this was fine since it’s only $6 a month and I can turn right around and pay it back down if I want.

The next issue arose because it’s an 8-unit condo and one non-resident person owns two units.  That triggered underwriting to take a deeper look into the HOA’s finances and to request the appraiser to evaluate how that rental percentage affects the market value for the unit I’m buying.

I agree they should have mentioned something before my rate lock expired on June 17th. The processor’s manager told me that’s what they’re working on now – getting an exception from higher up; otherwise my rate becomes invalid, I think the he said that was due to the current cost of points.

I paid $495 up front for the appraisal and rate lock.  The $495 applies toward closing costs or may be refundable in some cases, but not if I choose to decline the loan.

I think they're honest, but their performance on this particular loan has been disappointing.

Joel Owens · Answer

Ian did you use an online lender, local mortgage broker, or a direct contact at a local bank nearby??

Is this an owner occupant loan, investor loan and was this purchase a short sale??

You are over 80 days in and they still cannot close. Most loans should take 30 to 45 days to close out unless you are waiting on bank approval for a short sale or lien issues to work through with title etc.

Before financing contingency ended your lender should have mentioned options for extending the rate lock or getting a buy down credit from the seller etc.

Hopefully you didn't pay a bunch of upfront money to whomever this group is.

Wayne Brooks · Answer

If you received approval to close, you need to know what documents they are trying to obtain.  If they're local, show up at their office.

Dawn Anastasi · Answer

What lender did you work with?  One lender I worked with that I had a bad experience with, they wound up giving me $200 back due to me complaining.  Does your lender have such a customer service guarantee?