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How to avoid sticky situations.

HOW TO AVOID Sticky Situations

Most people know the ageless tale by Uncle Remus of Brer Rabbit, Brer Fox and the tar baby. As Brer Rabbit found out when he touched a gooey tar baby, it's sometimes hard to extricate yourself from certain sticky situations once you get involved.

Every time a loan officer sits down to take a mortgage application, he's looking at a potential "tar baby." Already stuck in the tar baby are a buyer, a seller, their Realtors, possibly attorneys and others. All of these people are counting on the mortgage loan originator to provide a closed loan in a timely and hassle-free manner. A Realtor might have between one and four sales in a given month. A closed transaction to a Realtor represents anywhere from 25 to 100 percent of his monthly income. It is no wonder that Realtors sometimes seem to treat loan approvals as a life and death matter. Even more important, these real estate professionals have made certain assurances to the buyers and sellers that everything will turn out "OK" However, when a loan approval is not forthcoming, everything is most definitely not OK. To the buyer's and seller's way of thinking, a promise has been broken. Realtors, attorneys and whoever else is involved professionally are apt to believe that their reputations have been sullied. Further, the customer will not be happy, and the hoped-for referral and repeat business are nipped in the bud.

Market research within the industry reveals that getting a mortgage is one of the most anxiety-driven enterprises in the business world. Months of hard work are often involved to iron out an agreement. Further, all this takes place after buyers have spent weeks or months finding a dream home that may involve the largest purchase they've ever made. Sellers are often eager to move and get on with their lives; some may be escaping a considerable financial burden. All the parties count on the loan officer to guide them through the process of underwriting, approval and closing without undue difficulty.

This article explains how loan originators and managers should correctly approach a mortgage application, gather information and deal diplomatically with the parties involved - without inadvertently getting caught in a sticky transaction that is destined to fail. Mortgage lenders must avoid "tar baby" transactions that only serve to hurt business.

Wishful thinking - the loan officer's


One expression in the real estate environment says: "Buyers are liars." However, buyers are not liars; they are simply wishful thinkers. When a loan officer is called into a transaction, he or she also wants everything to go smoothly. But, it is also up to the loan officer to bring a sense of objectivity that the other parties lack. If the originator can somehow set aside his own fervent desire to see the deal close, he will be in a position to sit down and take a fresh, totally objective look at the situation.

Taking a good application is the secret of producing high-quality loans. A partially filled-out application is considered unacceptable in most companies. If applications are incomplete, the processor must completely "retake" the application over the telephone using all the proper questioning techniques. No processor can pick up a poor-quality application and simply "fix it up" by filling in the missing blanks and checking a few boxes. Poor technique at the application table is how most tar baby loan disasters are born.

The first step in taking an application is to observe the client. If the client is nervous, a few minutes should be spent in relaxed conversation, if possible. This serves to reinforce the customer's good feelings about his overall judgment and this transaction in particular. If the originator can say something to make the customer laugh; it's good sign. It is normal for applicants to be slightly nervous. Most customers will relax when they realize that the experience of talking to a loan officer is not going to be unpleasant.

Asking questions

Trained loan officers seldom ask the questions on the application strictly in the order in which they appear. Instead, they rearrange the order of the questions, grouping those that ask for the same type of information together, to make sure they get correct and accurate replies. The loan officer begins by filling out the property data at the top of the application. The originator will usually leave blank the box that asks for the source of the down payment and save this question for later. Then, skipping down to the customer's personal data, the loan officer asks the customer to spell his or her name, age, etc. All the time the originator is observing the client. If the client responds in a relaxed, automatic manner to these queries, that is a good sign. If the client seems uncomfortable and simply won't relax, then the originator must endeavor, through subsequent questions, to uncover the source of the borrower's discomfort.

The basic principle of taking a good application is to ask a series of questions all pertaining to the same issue so that the applicant has to answer the same question three times in a row. This makes it harder for the customer to avoid giving embarrassing responses or to somehow artfully finesse the answers to uncomfortable questions. An example of how to use this specialized questioning process may be found in a discussion of an applicant's credit history. The loan officer begins by asking: "I suppose, Mr. Jones, that you already know that you have to have good credit to get a mortgage...right?" At this point the loan originator should pause and wait for a response. If the customer sits there like a stone statue, ask the same question again and wait a long time, if necessary, for an answer. If the customer still sits there with his face frozen, there is a good chance that the deal is in trouble.

On the other hand, if the customer acknowledges the loan officer with a smile and affirmatively responds loud and clear, then the loan officer can respond by saying, "I'll need to ask you a few questions about your credit, because your credit history will affect the rest of the application process." The loan officer should then ask what have come to be known in the industry as the three credit questions. (Remember, it is important to wait for a response after each question.) They are:

"Have you ever paid any bill, loan or charge card late?"

"Has anyone ever sent you a notice that you've paid something late, even in error?" (These kinds of mistakes by creditors can be time consuming to correct and may considerably delay approval.)

"When we pull up your credit report, will it show that you have perfect credit?" (Assuming that the first two questions are answered negatively.)

This third question is very important. Applicants may say that they can't recall paying anything late; or they may say that no one has ever called them or sent him a late payment notice, even in error. But when they get to question number three, they may respond, "Well, maybe not absolutely perfect." This opens the door for the loan officer to ask, "What do you mean by `not perfect?"

Remember, applicants are wishful thinkers. Those with a strong propensity to wish their troubles away are going to try to avoid confronting the unpleasant truth. When applicants are forced to answer the same question three times in a row, it becomes very difficult to disguise a problem. Even applicants who don't know for sure about their credit, but may feel subconsciously that they might have been delinquent on payments, often reveal their concerns when questions are asked in this fashion. This is what is meant by saying that a good loan officer can often know if someone has a credit problem even though the customer does not know it himself.

This same investigative technique also works for determining assets to close. Earlier, the originator set aside questions concerning the source of the down payment. Now, the loan officer needs to inquire, "Is any part of the down payment borrowed?" Afterward, the loan officer immediately follows up by asking about the source of the down payment.

At this point, the originator should attempt to account for every dollar of the down payment and the closing costs. Does it come from savings, gifts, sale of assets - exactly what are the sources? After locating the assets to be used to purchase the home, turn over the application sheet to the back side and fill out the asset portion of the form. This forces the customer to go back over his story on the front of the application and fill in the details so that the information can be verified. Usually after this procedure, the applicant's asset picture is clear.

Telling a story

The purpose of a loan file is to tell a story. If the application does not provide sufficient space to explain exactly what the client does for a living, this should be described in a short supplementary memo to the file. Underwriters hate files where they can't tell what is actually going on. Generally speaking, alternative documentation through W-2 forms and pay stubs with year-to-date information provides better quality information than verification of employment forms (VOEs). Anyone who has worked with VOEs knows that they can be erroneously filled out, because those who complete them may be subject to influence and pressure from the borrower. Unlike verifications of deposit (VODs), persons who fill out VOEs often do not have an arms-length relationship with the loan applicant.

The loan officer should list all of the borrower's debts on the application. Since these debts will be used to calculate debt ratios, it is important to ask the customer to provide information on all trade accounts. If there is any doubt about the completeness of the customer's account of indebtedness, the loan officer should revert to the three-question technique in order to ascertain the truth.

At the bottom of the application, just above the signature, is the most important question on the application: "Do you intend to occupy the home?" When asking this question, it is vital that the loan officer make eye contact with the applicant and listen carefully to the answer. Fraud on the question of owner occupancy is considered one of the most serious violations of agency warranties. Loan officers have lost their jobs and have even incurred criminal penalties when found to be parties to this kind of fraud. It is most important that the loan officer speak forcefully and clearly convey to the applicant that wishful thinking or avoidance of this question will not be tolerated. Remember, a company's reputation for intolerance of loan fraud is its best defense.

After the application

After the completion of the application, everyone is tired, and the temptation is to let the appraiser deal with the property. The trouble with this approach is that it may take anywhere from four days to several weeks before the appraiser comes forth with any problems. Therefore, the loan officer should ask several questions with respect to the property in order to attempt to flush out any unexpected problems. Here are a few examples that mortgage lenders should consider at this juncture:

"Mr. Jones, I need to ask you a few questions about the property now that pertain to the mortgage process. Tell me about the neighborhood in which your house is located. Is its a neighborhood of quiet, tree-lined residential streets, or is the house on a busy street? Are there stores or businesses nearby, or any apartment buildings? I need to know what's nearby and next door to your new home."

"Is there anything about the house that needs to be fixed? Is the roof sound, and is the basement dry?"

"Is there anything at all unusual about the house, anything at all that I, as the loan officer, ought to know?"

If the loan officer spots a problem, a visit to the property is warranted. The majority of property problems can be seen from the street.

The more complete a loan application, the faster it can be processed and closed and the less likely a company is to find itself with a loan reject on its hands midway through the approval process. Loan rejects are born at the application table when the loan officer misses a part of the story, fails to account for all the money or allows the applicant to cover up his problems. The goal of professional application-taking is to identify problems immediately and to keep the loan officer and his company out of unwanted tar baby transactions.

Prequalifying and pre-approval

Loan rejections are the enemy of the loan officer. They cost time, income and good will. If there were a way to avoid loan rejections, most loan officers could substantially increase their business. The easiest way to minimize rejected loans is to run the best prequalification and pre-approval program in town. Prequalification entails sitting down with the customer while he is still shopping for a home, counseling him or her on various loan programs and calculating how large a mortgage the applicant can afford. Through skillful questioning, a loan officer can learn if a customer has a good credit record and advise the customer concerning any other limitations on his search for a new home. When a formal application is also taken, and a credit report ordered, a lender may issue a written approval of the borrower's credit pending an appraisal of the property when a sales agreement is finally signed. This kind of "pre-approval" simply carries the process of prequalification one step further. It is also useful because written verification of many items can be obtained in advance, making for an unsually expeditious approval and closing once the customer decides on a final home purchase.

Realtors have more to lose than the loan officer when a loan is rejected. Rejection of a loan application often entails frustration and disappoinment. Realtors and borrowers are apt to feel that the rejection of their application is in some way a personal rejection of them. The Realtor may blame the loan officer, who then suffers the loss of one of his important referral sources. But with a strong pre-approval program, unacceptable buyers can be weeded out before they advance too far in the process. While these customers may be lost to the lender, Realtors may go on to sell those customers appropriate homes with seller financing or some other kind of B- or C-credit loan for which they are qualified. Often the loan officer, with knowledge of the many players in the lending industry, can be helpful in guiding the Realtor and the borrower to an appropriate funding source.

In order to successfully sell prequalification and pre-approval services, a loan officer must call on Realtors consistently. The loan officer should also share with the Realtor case studies concerning prequalification scenarios that have "saved the day" for other Realtors. A loan officer should make Realtors aware of how prequalification and pre-approval services meet the need for a dependable loan delivery system and increase the respect and trust of the buyer for the Realtor - more than rate shopping.


Loan rejections are the plague of the professional loan originator. They cost customers and referrals. They can waste enormous amounts of time and sap a loan officer's energy and morale. Once you get caught in a tar baby origination, Realtors, buyers and sellers are often unwilling to let go because they know that the next lender may be sharp enough to spot the flaw from the beginning. So some lenders end up getting trapped in the tar baby, with the other parties to the transaction pressuring and threatening the mortgage company to close a substandard deal.

Fortunately, this sorry state of affairs need never come to pass. Through a well-run prequalification and pre-approval program and proper application-taking procedures, sticky problem loans can be avoided. Loan officers can stop selling just on price and instead, can show Realtors how to earn their clients' trust by providing consistent and dependable mortgage loan service.

Richard Greene is a vice president of The Washtenaw Mortgage Company based in Ann Arbor, Michigan.
COPYRIGHT 1991 Mortgage Bankers Association of America
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991 Gale, Cengage Learning. All rights reserved.

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Title Annotation:avoiding problem loans
Author:Greene, Richard
Publication:Mortgage Banking
Date:Mar 1, 1991
Previous Article:War stories from the due diligence zone.
Next Article:Seeking common ground.

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