A Day in the Life...of a Loan
April 19, 2010
Not a day goes by when something isn’t said about how tight credit is and how difficult it is to get financing for the purchase of real estate, whatever the real estate might be. With this reality in mind, I thought it would be instructive to relate the real life twists and turns that occurred when I helped my niece and her boyfriend with the purchase of an apartment at a new development in Brooklyn... Quoting Sergeant Joe Friday, the names have been changed to protect the innocent. Actually, in this case, to protect the guilty.
Week One: So it Begins
I had been pushing my niece to buy her first apartment if she could afford to, as we are living through a dynamic down market that won’t last forever. To my amazement, she actually listened to me and the next thing I knew, I was attorney, broker and hand holder in chief.
Week Three: They Find a Place
After looking at the current reasonably priced hot spots, I suggested a development in Brooklyn with lots of unsold units and an agreeable sales staff (like I said, there were lots of unsold units). They found an apartment they liked, a good price was negotiated and agreed to, and initially, it looked like we were on our way.
Will Low Owner Occupancy be a Problem?
If a development has less than fifty percent of its units sold, bank financing will be difficult to find, and sometimes, is just not available. In this case, only about twenty-five percent of the units were sold, so I was very concerned that financing might not be possible. To make things more interesting, the kids needed ninety percent financing. Needless to say, low owner occupancy and a need for a high percentage of financing is not a great combination. Surprisingly, one big bank (affectionately referred to as the "Lender") had made loans in the building, was willing to stay in the project for another thirty days and was also willing to make a ninety percent loan. The only proviso was that the borrowers had to obtain private mortgage insurance (that is, an additional monthly payment covering a premium on insurance to protect the bank against a default). The kids put in their application and everything looked good.
Week Four: A Lousy Way to Start the Weekend
As a colleague of mine always says, if something sounds too good to be true, it’s not true. Late on a Friday afternoon of week four, I got a disappointing call from my contact at the Lender. The bank had changed its mind and was not going to underwrite the loan. In fact, it was no longer going to lend in the development at all.
I called the sales office first thing Saturday morning, to find out if any other banks were lending in the building. I was referred to a “mortgage bank” that was supposedly still active in the development. Calls to the new bank on Monday produced dismal results. First of all, ninety percent loans were out of the question. Secondly, it then appeared that the bank was no longer lending in the development. On Tuesday, I finally tracked down a principal of the company, and after being placed on hold for a few minutes, I was told the bank was “fully committed” in this development and would not be making any further loans. “Fully committed?” That's a new one.
On Thursday, a new source developed through the sales office. I was referred to a loan officer at another mortgage bank who had “worked miracles”. As fate would have it, I knew this individual from other transactions. He seemed real and he was confident that he could get a ninety percent loan done in this condo. So far, so good. My niece and her boyfriend started working up a new application and things seemed to get somewhat back on track. Then an Alfred Hitchcock twist. Apparently, at closing, the mortgage bank would be selling the loan to the Lender, the bank that passed on the financing a week ago. Huh? I called my contact at the Lender and related the story about the sale of the loan back to the Lender. How could the Lender pass on the loan, but agree to purchase the same loan from a third party? My rep told me he would investigate and would get back to me shortly.
Week Five: The Mortgage Bank Guy Gets Hinky
On Monday morning, I got a frantic call from my niece. The mortgage bank person had not returned her calls or E-mails for two days. I put in a call as well. No response. I also sent an E-mail asking for an update and requested that the individual contact my niece. No response. On Tuesday afternoon, I finally received an E-mail: "I've been in meetings all day and I will will get back to you tomorrow"…but he didn't get back to me in the morning. In fact, he never got back to anyone again. And I know this guy...
Week Six: Back to the Future
So the kids were stressed out and disappointed, as they had made the inevitable emotional commitment to a piece of real estate. After the mortgage banker vanished, we discovered that there was financing available out there, but thirty percent equity was required and a down payment of that size was just not in the cards for these first time home buyers. Sales activity was picking up at the condo and I was concerned that the developer was losing patience and that the deal was about to die. On Wednesday, just as things were about to go completely south, my rep at the Lender called to tell me that the Lender had changed its mind again and was willing to make a ninety percent loan in the development, at least for the next sixty days. The kids had to be approved for private mortgage insurance, but it looked like that would not be a problem. All he needed was the purchase agreement so he could get a commitment issued. We were back in the game.
Finishing the Paperwork
The contract we negotiated weeks ago already contained a financing contingency and a funding contingency, but I wanted to protect against the unavailability of private mortgage insurance. I proposed language specifically stating that the inability to obtain private mortgage insurance would mean that the financing contingency had not been satisfied. I forwarded my requested language to the sponsor’s attorney on a Thursday. The sponsor’s attorney indicated that the sponsor was out of town and that he would get back to me on Monday. My representative kept calling to get the purchase agreement done as he couldn't get a commitment without the signed purchase agreement. We were about to enter another weekend without a contract. I didn’t think it was a problem, but the sponsor was having an open house and there was a significant increase in sales activity at better pricing for the sponsor. Could the deal still blow up?
Week Seven: The Lender Does the Right Thing
On Sunday, I got an E-mail from my loan rep, attaching the loan commitment for the transaction. Yes, the bank issued the loan commitment even though we didn’t have a signed contract. I called the rep and asked about the issuance of the commitment without the signed purchase agreement. It didn't make any sense. “I know”, said the rep.
Week Eight: The Home Stretch
On Monday, the sponsor’s attorney called and approved the private mortgage insurance language. By Wednesday, we had a fully-executed contract. On Saturday, my niece was showing her mom the apartment. Someone used the word “fabulous” in describing the apartment, so it started to sound like a New York real estate transaction. At the moment, we are wrapping up the title issues and things are moving along to a May closing. The development still has not been officially approved by the Lender, but things look good. The deal appears to be done.
A year ago there would not have been a happy ending to this cautionary tale. Slowly, the lending market is shifting and banks may be coming back into the market. Finally, the light at the end of the tunnel is no longer the headlight of an oncoming train.