Many REO buyers hit financing snag
Can lenders dictate loan in bank-owned sale?
November 19, 2009
By Tom Kelly
Inman News®
Remember when lenders were content to sell foreclosed homes to any qualified buyer? Their popular message was, "We're in the lending business, not in the real estate business."
With the large number of REOs (bank-owned properties) overwhelming most mortgage lenders and driving many others out of business, it's curious that some are making stringent demands on how foreclosed homes are financed.
A few lenders are even requiring that they supply the financing for any foreclosed property in their portfolio.
The policy took Tom Lasswell, a mortgage professional with Guild Mortgage, completely by surprise. Lasswell recently had a preapproved borrower who found a bank-owned property. While the buyers were highly qualified, the lender who owned the property let it be known that two other parties were interested in the parcel.
"Our clients' offer was accepted, but only if they got a loan from the lender who held the property," Lasswell said. "If they wanted the home -- which was perfect for them -- they had to get a loan with that lender and close with (the same lender). If our clients did not comply with those terms, the lender with the foreclosure would move on to the next person in line."
No specific loan terms were discussed or promised. The potential buyers simply had to accept that the financing would come from the lender holding the property.
"I've known some builders that require borrowers to be preapproved or prequalified through their affiliate companies or relationships, but the borrower has not been required to use those services as a part of the contract. They have always been able to choose."
Is it even legal for a bank to ever dictate where a borrower obtains financing?
According to Joseph M. Vincent, general counsel for the Washington State Department of Financial Institutions, a lender can require a borrower to secure financing when the lender is acting as the "seller" of the property.
It is a violation of the Federal Anti-Tying Law for a bank, its holding company or affiliate to condition a loan on the purchase of specific property. However, it is not a violation if the institution is telling any would-be buyers that, as seller, it will not sell the property to them unless they obtain a seller-financed loan for that purpose.
However, if the bank, savings association or one of its subsidiaries or its holding company required more than the seller-financed loan, that extra requirement could be an illegal tying arrangement, according to Vincent.
For example, a bank sells you an office building it owns through foreclosure, the terms of which are 20 percent downpayment and an 80 percent bank-financed purchase loan. So far, so good. But the terms also require that, as a condition of purchase, you agree to use Property Manager "X" or Remodeling Consultant "Y."
The bank, savings association or one of its subsidiaries or its holding company has a beneficial ownership interest in or less-than-arm's-length relationship with Property Manager "X" or Remodeling Consultant "Y." This would likely be an illegal tying arrangement, Vincent wrote.
Vincent cited Sharkey v. Security Bank & Trust Co., where a bank's tying arrangement constituted a violation because the bank required a customer to purchase real estate from the bank as a condition for obtaining a loan. The court sided with the customer, and rejected the bank's argument that the customer must prove the arrangement was "anticompetitive."
In another example, a bank conditioned the extension of a loan for purchase of a restaurant property on the borrowers' agreement to also purchase (at an inflated price) a commercial property that the bank acquired through foreclosure.
When 2008 finally came to an end, there were approximately 871,000 foreclosed, or REO homes, in the U.S., up from 414,000 at the close of 2007. More than 5 percent of all "performing" mortgages were 60 or more days delinquent, pointing to a potentially precarious situation.
TransUnion, the huge credit and information-management company, expects that percentage to double in 2009 as more adjustable-rate mortgages (ARMs) and option-ARM instruments click in to their adjustment mode.
These adjustables, approximately $321 billion strong and scheduled to reset before 2012, could well drive the number of bank-owned homes to more than 2 million. Most of these properties are vacant, creating a drag on neighborhoods and lessening the desire of many other homeowners to hang on.
Those numbers, while numbing, may even be conservative. Elizabeth Warren, chair of the Congressional Oversight Panel, recently said that 10 million to 12 million U.S. homes could ultimately go into foreclosure.
You would think lenders would not be too picky about who would provide the financing.
Tom Kelly's book "Cashing In on a Second Home in Mexico: How to Buy, Rent and Profit from Property South of the Border" was written with Mitch Creekmore, senior vice president of Houston-based Stewart International. The book is available in retail stores, on Amazon.com and on tomkelly.com.
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