Some lenders are too picky on their foreclosure financing

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 real estate-owned properties – those that revert to the mortgage company after an unsuccessful foreclosure auction – overwhelming most 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 even require 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 pre-approved 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 also interested.

“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 them. If our clients did not comply with those terms, the lender with the foreclosure would move on to the next person in line.”

No 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 pre-approved or pre-qualified through their affiliate companies or relationships, but the borrower has not been required to use those services as a part of the contract,” Lasswell said. “They have always been able to choose.”

Is it even legal for a bank to dictate where a borrower obtains financing?

According to Joseph 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 tells a buyer that it will not sell the property to them unless they obtain a seller-financed loan for that purpose.

But if the bank, savings association or one of its subsidiaries or its holding company require more than the seller-financed loan, that extra requirement could be an illegal tying arrangement, Vincent said.

For example, a bank sells you an office building it owns through foreclosure, the terms of which are 20 percent down payment and an 80 percent bank-financed 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 has a beneficial ownership interest in or less-than-arm’s-length relationship with the property manager or consultant. This likely would be an illegal tying arrangement, Vincent wrote.

When 2008 ended, there were about 871,000 foreclosed or real estate owned homes in the U.S., up from 414,000 at the close of 2007. TransUnion, the huge credit and information management company, expects this year could end with as many as one in 10 of all “performing” mortgages 60 or more days delinquent – twice as many as a year ago – as more adjustable rate mortgages and Option Arm instruments click in to their adjustment mode.

These adjustables, $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 be conservative. Elizabeth Warren, chair of the Congressional Oversight Panel, recently said that 10 to 12 million U.S. homes could ultimately go into foreclosure.

You would think lenders would not be picky about who would provide the financing.