A borrower’s mortgage broker calls his lender with a prospective loan transaction. “The property is in an excellent location, generates amazing income and is a creditworthy borrower!” Before the lender can ask questions, red flags pop up. The borrower’s broker insists that the lender only communicates through him. No communication with the borrower is allowed!
Sound familiar? Is your office littered with canceled loan files that started out just like this one? Are you accepting new loan transactions that should have never been considered? Do you often discover that the mansion overlooking the splashing surf was built on top of a toxic waste dump?
After a preliminary discussion and information supplied by the broker, the lender issued a Letter of Interest. The lender agrees to make a 70% loan-to-value ratio 2nd trust deed based upon an independent appraisal. The approval was conditioned upon the review of a credit package reflecting adequate cash flow of the property and the borrower’s ability to pay.
Once the borrower received and signed the letter of interest, the lender began their due diligence by sending the borrower a loan application; opening escrow, ordering a preliminary title report, scheduling an appraisal, and obtaining a credit report.
As the prove-up information came in, the lender discovered:
- The borrower was 84 years old and lived with his relatives. He had a subject income producing rental property and received Social Security.
- The property had a first lien through another private money mortgage broker that was in arrears with a recorded Notice of Default.
- The preliminary title report revealed four separate judgments for unpaid utility bills, four notices of liens and special assessments.
- Only 3 of the 4 rental units’ income was deposited into the borrower’s checking account.
- The property taxes were not current and had not been paid for the last few years.
- The Borrower had a combination of auto loans and credit card debt of $30,000.
Making a loan to an elderly person without attorney representation is unwise. The minute the borrower defaults, he could file an elder abuse complaint against the broker/lender. Unfortunately, the business person is always wrong in both a court setting and public opinion.
When the lender called the borrowers’ broker to discuss issues, the borrowers’ broker reminded the lender that this was a hard money loan. The lender should not be so stiff in their underwriting. This was an equity loan, not an income qualifying loan. The borrower’s broker then attempted to educate the lender how the private money business works.
Some questions arise about custom and practice:
- How much preliminary inquiry is enough to issue a letter of interest?
- How fast can the lender accumulate feedback data to assess the viability of their transaction?
- When should the lender pull the plug on a doubtful transaction?
- Are some lenders making no documentation, no credit, no appraisal loans and relying only on perceived protective equity?
Processing and underwriting these types of transactions can lead to frustration for all concerned. The reality is that the borrower and/or borrower’s broker may outright deceive and withhold pertinent information. This creates wasted time & effort and overhead expenses.
At every step of the underwriting sequence, the lender should have a continuous feedback strategy to find the negatives and the positives. The final underwritten package presented to a prospective trust deed investor must reflect all material disclosures for them to make an informed decision.
I recommend that a lender train their processing staff to practice critical inquiry and that they communicate any “newly discovered” information. Their company will save a great deal of overhead by quickly killing loan transactions that should have never been accepted in the first place.
Business and Private Money Finance Consultant
Cell (949) 533-8315