The Prom Queen of the Market

Whenever someone asks me a real estate question, my initial response is to direct them to a real estate agent: that's their specialty.  Yes, I'm a mortgage guy, and I work among real estate agents all day in the same market, but I went to mortgage school, not real estate school.  Assuming I know as much about real estate as an agent is like asking a dude with a degree in Elizabethan Literature to comment on a particular entry in the Urban Dictionary because the common factor is the English language.  More likely than not, Elizabethan Literature guy is going to vomit up an answer that might go longer than the soliloquy by the Duke of Gloucester in Act 3 of “Henry VI”, but what you get out of that answer is only going to confuse you further.  My point is that I’ve found this piece of advice to be particularly helpful: stayeth in thy lane. 

With that said, though, there are times when someone asks me a simple question about real estate that I feel comfortable answering.  The reason being that a real estate agent had previously answered that question in my presence, and I soaked it up like a sponge ready to wring it out the next time it came up.  Having those answers in my back pocket help make me look smart without having to dedicate a heck of a lot of brain space so I can actually learn stuff – my brain is chock full of lyrics from 80s songs and quotes from “Uncle Buck” so I have to be careful of space management. 

Of the ten remaining people who have made it this far in reading my musings, probably half of you already know the answers to the mortgage-related questions I’m about to share.  But for the other half who want to look smart when asked about mortgages (without having to shuffle a lot of grey matter), here goes.

Why do banks/lenders have so many strange rules that make it seem like they don’t want to give you a loan?  Aren’t loans how they make their money?

Banks/lenders are basically risk managers.  They look at each loan application through a risk-reward lens.  They already know what the reward is, so they determine how much risk they’re willing to take on before the reward is no longer worth it.  For example, when COVID hit, they looked at their current rules and decided that they allowed too much risk in light of what the market was now experiencing with the financial effects of COVID; so, they asked for more documentation, they disallowed certain types of property to be financed in certain ways, etc.  And when a time comes that they think their rules aren’t allowing them to maximize their reward, they’ll take more risk and change things again.  

 As for the second but related question: yes, that is exactly how they make their money, in short.  Let me put this in terms of the market today in which supply is being outstripped by demand, so sellers are doing very well – they’re setting the terms of most deals.  Well, for the banks, it’s ALWAYS a seller’s market with them as the sellers and all of us in the unwashed masses being the buyers.  I’ll use an 80s reference here (which means I’m probably risking two or three of the remaining five readers’ attention): in Sixteen Candles, Jake’s girlfriend – the homecoming queen, prom queen, etc. – tells him that she has a herd of men lined up to take his place.  Jake asks if that’s a threat, and she coolly responds, “No, it’s just a fact.”  Well, banks/lenders are the perennial homecoming and prom queen, and they know it. 

Why do underwriters ask for so many things?  Why do they wait until the last minute to ask for things?

While many believe it’s the underwriter’s job to find every conceivable way to deny your loan, that’s not really the best way to look at it.  An underwriter is someone who is paid a salary (and some of them might get bonuses based on files that pass audit, etc.), and their primary focus is to keep their job.  End of story.  They don’t care how compelling the applicant’s story is or how time sensitive the deal may be or whether this deal is one vital piece in a chain of dominoes that has to fall perfectly.  They have a checklist to complete, and that’s all they care about.  They want to make sure that if they give a final approval on a particular loan, no one in upper management or the auditing department can EVER come back to them and ask, “Why didn’t you request X?”  If no one has reason to ask those questions, the underwriter keeps their job.  And this is why you’ll get an underwriter who will come out of the blue and ask for something at the last minute: they likely woke up in the middle of the night in a cold sweat and said, “I need to ask the applicant why he spent $7.36 at Circle K on July 20^th at 1:37 a.m. to make sure he’s not trying to launder money.”  The scenario is silly, I’ll admit, but the sense with which underwriters come up with this stuff is true. 

I might be down to my very last reader – thanks for sticking it out.  Underwriters are creatures of process.  They go from point A to point B, and if point C is still a few days away, they won’t check in with D & E while they’re waiting.  Often, we’ll get a list of items from the underwriter (the fancy word for these items is “conditions”) that we need to run down and submit so the underwriter can check them off their list.  The day after we submit all of the requested items, we’ll get a new list.  Why didn’t the underwriter include them in the first list?  Personally, I think alcohol is involved, but it’s due to their being creatures of process.  Their process is such that the completion of the first list GENERATES the second list – it’s the way, in their minds, that they keep everything logical and in order.  Arguing against that, though you’ll be right, will only get you more angry, and alcohol may come into play.  

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Whether you want to answer these questions when your clients ask them or if you want to refer them to me, that’s your call.  I just figured having this information not only helps you understand the process a little better, it does enable you to look a little smarter if you choose to be the giver of wisdom.  I just recommend you don’t do it under the influence.