Wells Runs Dry
Several weeks ago, I received a distress e-mail from one of my mortgage broker friends. Wells Fargo had decided to withdraw from the wholesale lending business. Translation: After July 13th, independent mortgage brokers would no longer be able to place loans with that bank and borrowers would be required to go directly to Wells if they wanted financing. To make matters more complicated and anxiety provoking, for loans already in the Wells pipeline, brokered deals that do not close by September 21st of this year, will lose the bank's funding. With one of the major players in residential lending pulling the plug on the mortgage brokerage industry, the lending landscape is once again experiencing a seismic shift for the worse.
A Coveted Deal Sheet
It was in this precarious lending environment that I received a transaction summary on a new condo deal. The attorney on the other side was a familiar name and easy to work with. To make matters even better, it was an "all cash" deal, meaning that my client would not be obtaining financing in connection with the purchase. Although sometimes "all cash" only means that the contract will not be subject to financing (thereby shifting the risk of obtaining financing to the buyer), in this case, the buyer actually did not require financing. Shortly after receiving the deal sheet, the seller's attorney sent me the following e-mail:
"Ron, good to be working with you again. I see it's an all cash deal. Kiss your clients."
Underwriting Kafka Would Appreciate
Anyone involved in the residential real estate business over the past 18 months will immediately understand the substance of the above e-mail. Residential lending has become so cumbersome and unpredictable that a transaction without a financing component geometrically increases the likelihood that the parties will wind up at the closing table. Unfortunately, lending guidelines appear to be in a constant state of flux as a result of never-ending changes to the Fannie Mae Selling Guide, a 1,200 page behemoth that rivals the complexity of the tax code.
The Impact of the Financing Contingency
As a result of underwriting uncertainty, a transaction that is "subject to financing" often means that the seller has no assurance that the deal will actually be consummated until the bank attorney shows up at the closing with the official bank checks. Perhaps I exaggerate, but not by much. With banks scrutinizing co-ops and condos in as much detail as the hopeful borrowers, there are several tiers of lender approval that must be met before the purchaser's loan commitment has any real value. Most attorneys now realize that a loan commitment doesn't really insure that the loan will be funded and language is usually added to the contract to protect the purchaser in the event the bank changes its mind after issuance of a commitment. The inability to satisfy loan conditions, resulting in underwriting failure, can and does happen, sometimes long after the appraisal threshold has been satisfied.
How to Protect the Transaction
First and foremost, the parties and their brokers must investigate the physical and financial status of the co-op or condo before the contract is signed. There are any number of issues that can create obstacles to financing, including owner occupancy ratios, inadequate insurance coverage, insufficient reserves, environmental issues and ongoing material litigation, just to name a few. Secondly, if possible, lenders should be sought out who have recently made loans in the building in question. Why? There is no assurance that a lender that made a loan in the building over a year ago, will still be providing financing 12 months later. Even if the lender has consummated financing in the co-op or condo, if a building's financial metrics have materially changed, the bank may pull the building from its so called "approved list." Further, if the lender has reached its limit on the number of loans that it will make in a particular co-op or condo, financing may not be available, even if the building has successfully navigated the underwriting hoops and hurdles. The above being said, vetting the financial bona fides of the co-op or condo in advance of marketing the apartment is the best way for a seller to insure a successful transaction.
Residential Reality: Cash is King
At the end of the day, a seller who finds an all cash buyer should thank the deal gods. Even if the price finally agreed upon does not meet expectations, the value added by avoiding the aggravation and delays that will be incurred when a lender is involved in the process cannot be overstated.