Friday, February 24, 2012

A Tale of Two Lenders

It was the best of times, it was the worst of times. 

For banks, it was a time to loan; for homeowners,a time to refinance. The time, that is, for homeowners with good credit and endless patience for the process. 

Broker #1 was in such a hurry to get an appraisal, the appraiser called the Borrower at work and suggested meeting an hour later. It was just after the holidays and the family had started taking the decorations down. Ornaments were piled on the living room coffee table and more were in the dining room.  Storage boxes were stacked against the wall.  Breakfast dishes were on the kitchen counter.  These details aren't supposed to matter - but the appraisal came in well below what was expected.

Then Broker #2 called and sent a different appraiser.  The house was tidy and the rewards were great, with appraisal #2 exceeding the first by more than $100,000.

Both Brokers wanted to increase the amount of the loan to cover closing costs.  The difference was only a few thousand dollars but the Borrower preferred to pay the costs up front.  Why borrow a few thousand dollars for 30 years when you are able to pay now?  "But a few thousand dollars adds very little to the monthly payments," the Broker said.  True.  But the Borrower didn't want to borrow more than was necessary.

Despite several conversations and back-and-forth email, the initial "truth in lending" documents from both lenders showed the higher amount.  "Don't worry," the Brokers said.  "This is just a general statement; the final documents will show the correct amounts." The loan applications again showed the higher amount.  The Borrower crossed it out, wrote in the intended amount and initialed the change.  "Don't worry", the Brokers said again.

The day before closing the final documents arrived showing the higher amount for the loan.  The Borrower called the Broker to complain.  "Don't worry," the Broker said.  "We can change it...but with the delay you'll have to make another payment on the existing mortgage at the higher rate and that will cost you more."  And thus, the Broker increased his commission and the Banker expander his portfolio. 

The Borrower conceded defeat and borrowed the extra money and took the required HELOC and opened the required checking account. 

It was the best of times for bankers.  It was the riskiest of times for the rest.