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The 144% Loan

It happens all the time. Sure, mortgage brokers get accused of being unscrupulous but they don’t even compare to some large national banks. In fact, mortgage brokers are only as good as their lenders. We encounter national bank over-loaning regularly when trying to help borrowers out of difficult situations. Today is no different.

Last week I was buying some Christmas trees from a man who was recommended by a friend. During our course of conversation I told him that I am a mortgage lender and began his tale of woe. All I can tell you is that he has been screwed by a large Bank in America.

He showed me his loans; a first with a payoff of $96,000 and a second with a payoff of $43,000. Simple math says $139,000 worth of loans need to be paid off.

While interviewing the man I asked him if he knew the current value of his home and he said the last appraisal he has is the one done for the bank and they valued his property at $179,000. “Great!” I said, that will keep us below 80% and you out of PMI range.

So I took his application, pulled his credit, got his basic documents – about 2 hours worth of work – and then ordered the appraisal. The appraiser called back just a short time later and said, “There is no way this property is going to come in at $179,000. About $96,000 is the highest I’m possibly going to get this appraisal.”

I’ve been in the business long enough to trust the appraisers we use but I went ahead and started the QC on the property just to be sure. My findings show that the property has a highest value of $123,000 and low of $88,000.

Just for kicks I had the QC officer order a “pencil search” from another appraiser without telling them any of the story they cam back with “about $95,000 max but I’d have to look at it to make sure.”

144% LTV – wow! The sad thing is we run into this ALL the time. The big name bank will do a second on a property without much real consideration of the value. They don’t mind over-loaning because it’s “money in the bank”.

Some people think listings in the neighborhood indicate value. Not even true. However, some banks will use listings as a value indicator for a REFI but not a purchase. Even so the highest listed price in this particular neighborhood in the last 12 months was $141,000 and it never sold – it’s still listed but reduced to $125,000.

So now this gentleman has a rising rate second of $43,000 and a fixed 30 with 24 years remaining of $96,000 on a home worth …. $96,000. And the kicker? His value has gone up (according to several evaluation services) over 12% in the last 3 years!

The moral of this story; just because it’s a Bank in America (or maybe due to the fact it is a Bank in America) doesn’t mean the borrower is not getting stuck in a loan in a home they can’t sell or refinance without a huge out of pocket expense. Wants must give way to facts and details even when they oppose you. Always ask someone you can trust – always ask a third party to look at the deal. If one solution seems worlds better than the others it’s probably got teeth. In this case the borrower could have spoken to more mortgage sources than just the one who sent him one of those “checks” in the mail.

Be careful out there.

UPDATE: Because of the persistence of Brian Brady and because what he says is true, unfortunate but true, here are two items of import worth mentioning. While the applicant indicated the bank appraised his home for $179,000 banks generally do not do full appraisals for HELOCS or even seconds. Instead they utilize, and have for many years, the automated valuation model. However I still defend the position that the general public needs to know just because you CAN borrow the money doesn’t mean you SHOULD. And I do still believe it is an unscrupulous maneuver to put unknowing people into situations which are difficult, at best, to overcome. And I am a conservative capitalist!