'Cross-Qualifying' Helps Banks Poach REO Loans
As the largest banking companies try to unload thousands of distressed properties, they are using a controversial practice that can win them new loans and has competitors crying foul. It is called "cross-qualifying," and it works like this: Say that Lender A is selling a repossessed property, or has a troubled borrower who wants to sell the home through a short sale.
Someone makes an offer to buy the house and has been prequalified for financing from Lender B. But Lender A will not consider the bid unless the prospective buyer qualifies for one of its mortgages.
Acceptance of the purchase offer is not conditioned on actually getting a loan from Lender A. It just provides assurance that the deal can close even if Lender B backs out. But another motivation for requiring a "cross-qual," many industry insiders say, is to drive origination business to Lender A. "They say, 'You don't have to get the loan through us,' but they'll make it easier and offer financial incentives if you go through them, like paying the closing costs," said Brian Koss, the managing partner at Mortgage Network Inc., a privately held lender in Danvers, Mass.
Such incentives can help Lender A win a loan — at Lender B's expense. "At times they're taking the financing away from another originating entity that has already done the work," said Marni Scott, the chief credit officer at the $16.4-billion-asset Flagstar Bank in Troy, Mich. Moreover, critics say, if there are multiple offers on a property, Lender A, by collecting the bidders' financial information like pay stubs and tax returns, can choose the strongest credit available to replace its shaky asset.
"They can cherry-pick which borrower they want," said Rodney Anderson, the executive director and senior managing partner at Rodney Anderson Lending Services, a unit of the Dallas lender Everett Financial.
Bank of America Corp., JPMorgan Chase & Co. and Wells Fargo & Co. have all played the part of Lender A, according to more than a dozen lenders, real estate agents and mortgage brokers working on behalf of homebuyers in various parts of the country.
Jumana Bauwens, a BoA spokeswoman, said it requires a prequalifying letter from its own bank to be presented by bidders on repossessed homes because "we want to ensure that the buyer is going to be able to find funding." The Charlotte company does not do this with short sales, she said.
Kevin Waetke, a spokesman for Wells Fargo, said his company has no cross-qualifying requirement for short sales, though for the purchase of REO properties the San Francisco company is selling, it requires either preapproval from another lender or prequalification from Wells Fargo.
Tom Kelly, a spokesman for JPMorgan Chase, said his company has no cross-qualifying requirement for seized homes or short sales, though "we do let them know we have financing available." (Two lenders, in Texas and California, and a California broker all said they had worked on deals where JPMorgan Chase required cross-qualification.)
The practice has become common since the housing crisis began. Some observers say it is a reasonable way for companies to make the best of a bad situation. "If I was a servicer, I would want to be sure I had a bona fide borrower making an offer on my REO," said Dan Cutaia, the president and chief operating officer of Fairway Independent Mortgage Corp. in Frisco, Texas.
"Most of the big servicers have a portfolio retention call center," he said, "and if you get a loan from a broker, you already paid for it." So if that loan sours and the property must be sold, the servicer is "just looking at it as another opportunity" to replenish the portfolio.
But Mr. Anderson, the Dallas lender, contended that cross-qualification gives a home-selling lender "an unfair advantage because it's not an arm's-length transaction. Current lenders should not be able to originate loans on their own foreclosures because they are not a disinterested third party."
Though it is routine to begin the homebuying process by getting a prequalifying letter from a lender or mortgage broker, prospective buyers often get confused when asked to cross-qualify. "I've had buyers say they'll buy the home through that lender if it helps them get the short sale," said Matt McCabe, the president of Loan Resolution Corp., a Scottsdale, Ariz., company that helps lenders work out defaulted mortgages.
People shopping for bargains in the distressed real estate market could also be hurt by the practice. Dave McDonald, a broker at American Dream Real Estate Group Inc. in San Diego, said he represented a prospective homebuyer who made offers on four different foreclosures and "had to get preapproved four different times by four different lenders."
"The number of inquiries alone could affect their credit score, and often the terms and conditions of the loan preapprovals can be beat by other lenders or by a broker," he said.
Nick Bergiadis, the founder of TheMortgageAuction.com, an Ontario, Calif., brokerage, said listings of bank-owned properties on the Multiple Listing Service often state that buyers must cross-qualify through the selling bank. "They want their loan officer to get a shot at the loan," he said, "and they make all sorts of promises to the listing agent, like giving them another REO listing."
Last year, the Department of Housing and Urban Development said it would forbid builders to offer discounts to buyers on the condition that they use an affiliated mortgage, title or settlement company. Builders complained they were unfairly singled out and sued to block implementation. This year HUD delayed enforcing the ban. It has solicited further public comment and is considering whether incentives offered by various companies — not just builders — to use affiliates violate the Real Estate Settlement Procedures Act ban on "required use."
A source close to HUD said one incentive it is examining is offers to pay closing costs or repairs, which cross-qualifying lenders use to win loans for buying REOs.
Mr. Anderson said that these types of incentives are equivalent to "a home builder saying, 'You have to use my lender.'"