Dennis' Mortgage Blog

Question of the week:  Should I release my loan contingency?  

Answer: No, not unless you are ready to fund.

Sometime ago the California Association of Realtors, who provide the standard contract used in most real estate transactions, thought it would be a good idea to amend the contract from stating that the offer was contingent upon the buyer being approved for financing to having a specific time frame within which the buyer has to obtain financing.  To be more specific it has become customary for most agents to bind their clients into a seventeen day loan contingency period during which the buyer can invoke the contingency, declare they cannot get financing and cancel the contract and have their deposit refunded.

This seventeen day period begins the day the buyer and seller agree upon price and terms and is most often agreed to by the buyer and seller and their respective agents without consultation with the lender, consideration for the current lending environment, consideration for any complexities that may exist in the transaction, or other factors that have been challenges in the mortgage industry.  Although there have been numerous articles, commentary, and media segments on the tightening of lending criteria and the challenges for even very qualified borrowers to obtain financing, for some reason agents continue to insist on writing offers for their clients with the loan contingency time frame and a short escrow period.  Why? Most often because “it gives you the best chance to have your offer accepted.”

At the same time agents representing the sellers insist on these clauses because they feel they are protecting their seller; instead they are getting what they want to see instead perhaps of a realistic presentation of what will happen once escrow is opened.

Can we at Stratis Financial close a purchase escrow in thirty days? Absolutely.  Can we confidently inform every client to remove their loan contingency in seventeen days? Not unless we have loan approval, loan docs and are ready to fund, because until then many factors can upset the approval process. 

Here are several factors that can impair loan approval and require more time for a loan approval and closing:

·        On condominiums inability to get proper documentation from the Homeowner’s Association in a timely fashion, or after receiving discovering the HOA is not approvable.  For instance too many non-owner occupied units or dues that are delinquent to name two of several factors.

·        Appraisal issues that underwriter calls out requiring work to be done on the property or additional comparable sales after the appraisal has been received at value.  Recently we had on transaction where the underwriter noticed black spots in a shower and suspected mold infestation and required it to be cleaned and addressed.  The file was otherwise approved, it was mold and the infestation was deeper than the seller thought, buyer cancelled and it took some time to negotiate the deposit back because she had removed her loan contingency and the appraisal contingency. 

·        Since April when the HARP 2 program for upside down homeowners to refinance was opened up applications throughout the industry have exploded in volume.  As a result there is a backlog throughout the pipelines of everyone in the industry.  It takes longer to get appraisals, get into underwriting, get approvals, get conditions reviewed, get loan documents and get funds for closing.  While most of us in the industry give priority to purchases that does not mean that every purchase jumps right to the front of the line, there are still files ahead of it.

·        Credit reports are good for sixty days with most lenders, as opposed to ninety days previously.  If you are pre-qualified/approved at the end of March, enter escrow in the beginning of May and underwriting has your loan at the first of June they will pull a new credit report.  Changes in FICO scores, increased balances, etc may change the approval and renew the processing of income, assets and/or debts.

·        Every file must have IRS form 4506 completed and returned by the IRS prior to final approval.  This form is sent to the IRS who returns a line by line printout of your tax returns.  With the flood of applications into the system nationwide the IRS has been taking three to four times longer to return this form.

·        The most frequent topic I write about, addressing the issue three to four times a year, is verification of funds.  Too often, despite coaching beforehand, borrowers deposit untraced funds into their accounts.  This leads to delays, and possibly denials, to trace the funds and ensure they are qualified for underwriting and approval.

Because of the limited timeframe contingency put into offers too often undo pressure is then put upon buyers to release loan contingencies on transactions with many moving parts and potential pitfalls that need to be ironed out to obtain loan approval.  As my friend and co-worker David Pemberton who also has more than twenty years in the industry said as we discussed this topic earlier this week, “there is no reason to put increased pressure on a buyer in a transaction, especially in this environment and especially for circumstances often beyond their control.” 

Sellers and listing agents pressuring for release of a loan contingency after seventeen days into an escrow on a transaction where they are aware of the issues and that the buyer and lender are working towards loan approval need to ask, what is to be gained by pressuring for release of this contingency and what are the consequences if the buyer does not, are you willing to try to cancel the escrow and start all over?  In almost all cases with a properly prepared borrower this would not be considered a prudent course of action.

Another long time professional in the real estate industry, Marilyn Tyo with RE/Max told me about fifteen years ago, “escrows are like pregnancies, you have a due date given to you, sometimes the babies are early, sometimes they are late and sometimes they are on the date.”

More often than not escrows are delivered on time, however everyone involved in a transaction needs to take into consideration a myriad of factors influencing the process to ensure a positive result for all involved.

Communication, cooperation and understanding between and amongst all parties will result in a positive outcome. 

Have a question?  Ask me!

Reaction has been a bit over the top to the news this week that existing home sales were up in April as well as the median price nationwide.  I say over the top as I saw one “insider” opine that it signals the return of the housing market.  After lower sales in prior months to have one good month and declare it as housing is “back” seems to me as if the Lakers had popped champagne and declared themselves champions again after they won game three of their series against the Oklahoma City Thunder.  One game a series does not make and one month a market does not make—positive or negative.

Stocks have been battered this month as investors react to increasing data showing dramatic slowing in economies worldwide.  European issues have been well documented but add the mammoth economy of China to the list of slowing economies and one’s concern ratchets up a bit.  While stocks have lost significant value in May, fixed income investments, i.e. bonds, have benefited.  Money has poured into U.S. bonds, corporate and public, and rates have benefited.  As mentioned the past few weeks mortgage bonds have seen prices climb but lenders have not passed all the reduction in secondary market rates to the consumer.  Faced with higher costs due to regulatory conditions and closer scrutiny from Fannie and Freddie, banks are increasing their margins between their buy and sell prices.

Looking ahead we are in a very narrow range on rates that appear to keep bouncing off a bottom several times then cracking through to a new low over the past several weeks.  Depending on where we are in the “bounce” rates are up slightly, flat or down slightly but no major moves one way or the other.  With the global situation I expect rates to remain in their current range for the near future, hard to see them going any lower as we have the dual factors of market resistance and lender reticence to pare off margins to lower rates.

Rates for Friday May 25, 2012:  Friday’s before three day weekends generally see little movement in a positive direction as investors sell into cash for the long weekend so they don’t get caught short when markets re-open Tuesday.  Rates are up a bit from last Friday’s lows on such activity on conventional, a slight drop in FHA high balance.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS

30 year conforming                               3.5%                Up  0.125

30 year high-balance conforming           3.75%               Up 0.125

30 year FHA                                         3.25%               Flat

30 year FHA high-balance*                   3.5%                Down 0.125

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked.  Rates are based on 20% down (3.5% for FHA)  with 740 FICO score for purchase mortgages.

* Current rates include credit towards closing costs, call for quote on rate and credit.

In many parts of the country where seasons are easily differentiated Memorial Day weekend is welcomed as the official start of summer.  Pools open, fashionable women can begin to wear white, and many kids are out of school. 

Amidst the gatherings and barbecues I hope everyone takes a moment to reflect on the gravity of the holiday, memorializing the men and women of the American armed forces who have lost their lives defending freedom and liberty.  And not just ours as the people of Germany, France, the Philippines, Japan, Iraq and Korea among other nations can attest. 

Here is a very good history of Memorial Day that you may wish to share with your children and grandchildren.

God bless those who have lost their lives so that we may remain the most free nation in history and a beacon of liberty for those around the world who are not as fortunate as ourselves to live in the greatest nation past and present.

Have a great week,

Dennis