Madison, WI - Over the last year REALTORS®, title companies, lenders, consumers and
regulators have sought a solution to the problem of mortgages that are not
funded at closing. Despite the conclusion that only a small percentage of loans
are funded late, there are enough of these transactions that REALTORS® have
asked how to deal with the problem.
There are not a lot of short term, “external” solutions in sight. Federal
regulators have preempted state laws blocking the Wisconsin Department of
Financial Institutions (DFI) from regulating federally chartered lenders. The
DFI is working on improving their regulation of state-credentialed lenders, but
has a ways to go.
One short-term help is the slower refinance market, which reduces problems
stemming from high demand and not enough capacity to process loans in a timely
manner. In fact, market forces may be the most effective tool in the short term.
As a major part of those market forces it is important for REALTORS® to focus on
the issue and the solutions that are available
The gentlest approach to the problem is education for both the buyer and the
seller, including an explanation of the issues for both and a determination of
whether or not additional steps are necessary. Educational language may be
incorporated into the offer, such as is found in the Greater Milwaukee
Association of REALTORS® Addendum A: Buyer acknowledges Buyer’s obligation to
have the total purchase price including mortgage loan proceeds available at the
time of closing. Buyer is advised to determine when Buyer’s loan proceeds will
be funded to ensure that the funds will be available at the time of closing.
One REALTOR® collected the names of local lenders who fund at the closing
table and gave this information to buyers. Obviously buyers will not select a
lender solely on this point, but all things being equal, what buyer would choose
a lender who may cause him to breach his contract if funds are not available at
the closing table? And, one broker is extending the occupancy date by one or two
business days if a buyer does not use a lender who provides written verification
of funding at the closing table. This avoids the seller having to pack up when
they may not be getting funds, without putting the transaction at risk.
Some brokers have used language in offers requiring buyers to use local
lenders or discouraging the use of mortgage brokers or Internet lenders. This
type of an approach misses the mark, however, as many Wisconsin-based financial
institutions use out-of-state lenders and many mortgage bankers have secured
lines of credit and fund closings on time using their own funds. The key is to
look at lenders individually and not at their location or institution type.
Educating lenders is also a very appropriate tool. More lenders are seeking
to control their risks by adding additional review and approval procedures. WRA
staff members have spoken to lenders who were appalled to find out that their
customer’s loans were not being funded on time. It took a call from a REALTOR®
in one situation to notify the lender that there was a problem with the systems
the lender had set up. The systems were tweaked to eliminate the problem.
Needless to say, it’s best to call the head lending officer rather than the loan
originator with questions about funding.
The strongest approach is to use language in the offer that requires a buyer
to use a lender that provides written verification of funding at the closing
table. Brokers using this solution have required written evidence within a
certain number of days after closing or the seller is allowed to terminate the
offer. This solution limits the number of lenders available to the buyer, but if
the seller needs the funds at the time of closing, this may be the most
effective way to provide that.
There are other steps that can minimize the impact of out-of-state lenders
and institutional procedures that cause closing delays. If you are interested in
avoiding these problems, recognize that scheduling closings early or late in the
day increases the likelihood of funding delays. Back-to-back closings present
obvious issues and should only be scheduled if the first lender has guaranteed
funds. Make it a routine practice to ask the closing office if they are aware of
funding issues with the lender and schedule the closing accordingly. Many
lenders attend closings, many don’t. Ask the loan originator to attend the
closing so that if there are problems with funding the buyer’s and the seller’s
frustrations are directed to the right person.
Over time this matter can be resolved, but if you stay on top of the issue in
your transactions you can be perceived as part of the solution rather than
(inaccurately) part of the problem.
Published: 1/10/2006
