The following is an account of a loan horror story recounted by a Charlottesville lender.

First, a solution:
What Realtors can do to avoid a similar scenario: Work with lenders who have successfully closed at least five loans in the past twelve months of the type they are proposing. Work with lenders who have a reputation for ethical conduct. Choose your lenders based on factors other than glad-handing, happy talk or willingness to buy you lunch.

Take note of last-minute loan blowups and share that information with your business associates and clients. (I know many Realtors already do this when their client is proposing use of an on-line lender about whom the Realtor has already heard horror stories.) There are plenty of good lenders who would be happy to competently handle your deal, and there’s no reason for lenders who blatantly abuse their industry partners and clients to be making money.

What Buyers can do: ask lenders for names of satisfied clients who did the type of loan they are considering. This is perfectly reasonable. Don’t buyers and sellers ask Realtors for testimonials from happy clients? (ed. note: one of my more favorite questions of late is, “tell me about one of your dissatisfied clients, and why they were so dissatisfied”)

We’ve never seen a lender hauled before a panel of their peers on ethics charges (as happens in the Realtor community) though there’s certainly been ample cause. That’s unfortunate, but forewarned is forearmed.
Now, the tale:

Buyer (happens to be first-time but that doesn’t matter) and Seller enter into a contract, after two Realtors spend the usual hours marketing, showing, driving, negotiating and doing paperwork …

Buyer is going to do an FHA loan. They’re so popular now, for good reason. Buyer is hooked up with a lender. Don’t know how they connected, whatever, but if it was his Realtor who referred him to the lender we hope she’s learned a lesson.

The lender is not FHA approved. He’s pretty sure he will be, soon, so he originates the loan. Home inspection, appraisal done and paid for. Commitment letter issued (hearsay, I didn’t see it). Two weeks prior to closing the lender apparently gets worried that this FHA approval isn’t going to come through. It likely never will.

He contacts at least two local FHA lenders and attempts to refer the deal to them. One of them turns it down flat and the other takes the application, runs it through his underwriting system and can’t get an approval.

The lender doesn’t notify the borrower or Realtors at this or any point. Now we get into hearsay, in italics.

Two days prior to closing the lender told the borrower that they didn’t qualify for FHA (they didn’t, but the lender didn’t even have the option. If they’d been an experienced FHA lender they’d have know he didn’t qualify). The rate went from about 6% to 7.75 or higher. Closing costs/payment also went way up.

This is the problem with hearsay but you get the idea. The lender had flipped the loan to FNMA/conventional, got what’s called an expanded approval, which has high rates and high PMI. The payment was at least $200 higher and this was an “affordable” home.

On closing day the listing agent went to the closing table with the sellers expecting to sign. They were at the table when they found out the buyer’s loan wasn’t going to close.

At that point one more FHA-experienced lender was called in and ran the loan through his underwriting system- it wasn’t approved.

The listing agent is out all her marketing time and expense. The seller has lost valuable marketing time and now has a stale listing if they didn’t before. The buyer’s agent is out all the hours spent driving around a client who didn’t qualify, negotiating, doing paperwork etc. The potential buyer is out appraisal fee, cost of home inspection, maybe more, and has given up the lease on his rental unit so doesn’t have a place to live.

Oh, also, the lender didn’t get paid his commission. He put all these people’s time and money on the line in the slim hope that he might get paid. They all got screwed by this industry partner. (Sorry for the salty language.)

This is an easy problem to avoid. There are a lot of lenders out there now who don’t have what it takes to manage the current market. They might not be able to do the loan and not even know it. They might be able to but not know how. I hate to see you guys lose time and money. We are all in the same boat. There are a lot of good lenders who can get deals closed in this lending environment and will tell you if it’s not going to work.

I hope you can make this into a cautionary tale to help your readers- buyers, sellers and Realtors. Let me know if you have questions or need a referral to the other lenders or Realtors involved. I’m not sure they’d talk but I’d hope they would, to help someone else avoid a similar problem.

This story originally appeared on RealCentralVA.com and appears here by request.

I know it may not be PC (in most REALTOR® circles, at least), but this editorial from today’s (March 12) Wall Street Journal makes good sense to me. The gist of it is that helping homebuyers stave off foreclosure (for an additional month or so…) and programs that attempt to keep marginal borrowers in their homes at any cost is actually prolonging the agony. The author argues that the market won’t reach bottom and start back up until the bad credit risks (or at least the worst of them) are out of the homes and bad loans. In particular, he writes:

….Government policy is working against itself. The Fed is pushing on a string — it can’t bring back confidence in specific assets by flooding the market with generalized liquidity, though it can certainly undermine confidence in the dollar and its own anti-inflation credibility. On all sides, meanwhile, the call for a housing bailout is becoming deafening, nigh irresistible. But the seized-up credit markets won’t be unseized by trying to induce debtors to cling to houses they now see as throwing good money after bad.

By definition, the only haircut lenders rationally want to take is the minimum required to keep owners on the fence about walking away. Not much better are bailout plans that try to keep borrowers in their homes by shifting some of their equity losses to the taxpayer. The market has utterly changed from the market in which these recent purchasers made their purchase decisions. They’ve been renting their homes and don’t really lose much through foreclosure. Let them go.

What do you think?