Holding an Offer HOSTAGE for a Second Preapproval

I have not experienced this requirement before but I am glad I have thought it through in advance now because it will!

Sally - I think it's a dangerous game that agents and sellers are getting involved in more and more. Although it may be perfectly legal (and I agree there should be something in writing from the seller), my fear is that as the practice grows, it will come under more and more scrutiny. Although no one is saying you have to use that lender, there is a certain implication that comes with it. An implication of preference. My guess is that there will come a day when it gets to the point where someone will step in and swing the RESPA hammer. The fear is that with all corrections, the hammer will swing too far. Perhaps there will come a day, when we find ourselves unable to even discuss the lenders with our clients. When saying that Lender XYZ has or hasn't come through for your clients in the past becomes a violation. I'm very curious to see how things like RESPA evolve over time because of our (or others) actions. Look at the HVCC. Although we all groaned about it, there was a good reason it came about. It was meant to fix a problem - unfortunately the agents and lenders who manipulated the system of appraisals created a situation that needed to be corrected...but how? Enter the HVCC, which was designed to correct a problem in our industry, but at the same time swung the pendulum so far to one side that it created its own set of problems. We have a tendency to overcorrect. That's my fear.

As primarily a listing agent, my clients and I have requested this.  Many of my builders require this if the buyer will be making many color selection changes or choices as they want to be 100% they buyer is approved... and they want to hear those words from someone they know and trust.  I do not see a problem with the second request for approval. 

We do this up front, Sally.  We include in the listing that the buyer has to provide a pre-qualification from the seller's lender (generally a foreclosure, short sale or builder listing).  The buyer is not required to USE this lender, just get a pre-qual through them.  This gives everyone a better feel that the transaction will ultimately CLOSE!  We don't, however, tell them AFTER they've presented the Offer unless their original pre-approval/pre-qualification letter comes from a lender witn a horrible reputation (say, some that do them online, never even pulling the credit of the buyer).

Most REO sellers are going to require a Pre-Qualification from a specific lender.  They are doing this in an effort to reduce the extremely high fall out rates of actual closings.  I regularly see borrowers supposedly "Pre-Qualified" elsewhere who really don'tqualify at all and I don't see how they ever could have. 

I actually had a buyer's LO email me one day, with a cc to the listing agent no less, that her client was in the middle of getting re-scored and she was not at a 620+ yet.  She was positive it would get the score above 620 which was the minimum score for the bond program that she was doing.  This was an LO issuing a letter based on speculation of what a credit score was going to be.  Funny thing is, the buyer told me this is now her 2nd re-score since the first one didn't work.  Would you want your seller to take that letter?

I have one on my desk right now from someone who makes $2,000/month and says she has been qualified for a $200K home.  Her tax returns don't show her making over $18,000 in either of the last 2 years and there is no co-signer.  You have to wonder how she got that letter.

The ones (buyers and agents) who put up the biggest resistance know they have issues and they don't want the sellers lender to see them.  This is the red flag to us.  They know their chances of their offer getting accepted will be much less.  Some agents have even told me they don't care if the buyer qualifies now or not, they just want to get the property under contract and deal with qualifyingpart later.  That is just an agent desperate for a closing.  Do you really think any seller wants that buyer?

REO sellers want viable buyers who can actually close.  Since so many LO's still issue garbage letters, this is the only way to control the process and reduce the marketing time of their properties.

Here in AZ, we see this alot. Banks do not trust anyone, especially other banks. They know the swiss cheese letters, because they developed the concept! What they probably under-calculate is the showings that do not happen when the listing has this language. Many buyers will not go along with this tactic, thus it is filtered out before they hit the streets. Do the banks care? Do they even know?

On several occasion I have talked to the listing agent about this provision and the agent has relented and said they would present my client's offer without the approval from the seller's bank. 

If the buyer's offer is solid with a strong preapproval letter and Buyer's Financial Statement these "required" approvals sometimes can be avoided.

Sally - My blood is boiling. It so irritates me when the listing office, not always bank owned, requires this. If it is with my MLO of choice that the buyer has gone with, my MLO provides not only the information that a pre-approval should have, but a fully executed DU. This shows that the buyer is who the MLO says they are.

Like what Donne says sometimes they can call the "lender required" and give the DU and documents required directly so the BUYER is not inconvenienced with having to do everything all over again.

O.K. I am better now.

It's interesting to me how many agents will "pass" on showing certain houses just because extra requirements from the seller.   Bank of America is one that almost always requires that preapproval.    I couldn't fathom eliminating showing any and every B of A house, just because of extra work invovled.   I coach my buyers when looking at bank owned homes and short sales--this is THEIR game, and we have to pay by THEIR rules.  If the house appears to be an over-priced money pit, sure we'll pass it over.  But for my buyers, bank owned homes and short sales are worth the effort, in my opinion.

I'll give the Tutas' an exception -- there are SO many to choose in their market in Central FL, its probably no big deal to skip a few...

 

Sally - First and foremost, Matt is correct that this has become such a problem that HUD is finally investigating this practice.  I hope you don't mind but I am including the link that TBWS recently did on this issue and how HUD is now considering on making this a RESPA violation.

Pimpin Their In-House Mortgage & Escrow Companies

Secondly, I get so sick of all the Realtors and their preferred bank lenders claiming that every other lenders pre-approval is a worthless piece of paper.  I have lost count on how many borrowers I have helped over the years because some bank rep and/or "preferred lender" screwed up some escrow so bad because of their worthless pre-approval.

Don't even get me started on the REO banks and short sale negotiators who are absolutely clueless as to what the LA is doing in regards to forcing prospective buyers get pre-approved with their (the LA's) "preferred lender".  For the record folks: it is a RESPA violation for MLO's to provide anything of value to a Realtor for the exchange of referrals.  Any MLO engaging in this type of conduct is at risk of losing their license.

As someone mentioned earlier, here in CA there has to be a written authorization from the seller and/or bank stating that they are requesting this particular process and, of course, any BA asking for a copy of that authorization automatically gets dismissed and/or ignored.

WOW...Like you I insist on a preapproval letter and also some discussion with the lender but having an agent get a 2nd approval and forcing it to be with a particular lender is ridiculous and may even represent some sort of conflict. What if the 2nd approval is not accepted or worse accepted and then falls trough because of actions by the 2nd lender. This is making my head hurt thinking about the possibilities!

I never liked the practice of requiring second approvals, still don't.  Especially on REOs, this is the real estate industry handing over one more level of control.  I dare say that this requirement often inhibits the sale...I thought the listing agents job was to SELL the house and create no barriers?  Tongue in check!  Snark Snark

it is none of the other agents business, if the buyer is approved, by a qualified lender, it is all that is being disclosed, if the sellers agent does not want to present the offer, my next call is to his/her manager, to request intervention for breach of duty (as in present all offers)

And yet no one made mention if the lack in fiduciary responsibilty and confindentiality to your client since once you have them pre-approved through the listing agent's lender that agent/broker now knows what your clients buying power is and now their negotiation position is compromised.

Unless it's specifically an REO listing, I would advise my clients to make the offer minus their unneccessary pre-approval, and in this market any agent that would still refuse to allow me to present my offer is foolish. Further more if they don't have the required documentation by the NWMLS and they still refuse to present my offer will discover how quick I will go to the Seller directly...

I see this on REOs very frequently and it is becoming a part of the new landscape of real estate. 

Let's put aside REO's or short sales.  It is not Mr. and Mrs. Seller who are choosing the lender for the 2nd approval, it is the listing agent who does this.  This raises all sorts of conflicts and fiduciary problems.  In other words, the listing agent is becoming part of the lending process.  This is not a good idea.  Could not  the seller sue the listing agent if the lender of choice refused to qualify a qualified buyer?  Could the buyer do the same?

With all the bogus loan approval letters I have seen from mortgage brokers, asking for a letter from the funding lender is not unreasonable.  The broker they are using can send it to the funding lender they are planning to use and have them review it.  This makes their offer stronger and helps prevent both the buyer and the seller from going through preventable pain later.

Aloha Sally,

You've got so many comments on this one, I didn't get quite through them all.

This is a topic that came up a week ago at our SoCal CRS meeting when when had the CAR legal counsel as our speaker. It's well within the right for sellers (and we know it's ususally at the suggestion of their agent) to make that request, just as anything else stated in the lising.

Some times we can work around it, yet other times it involves another phone consultation. I agree with Lenn when she says it's also about preparing our buyers.