The Loan Motel
The mortgage industry is awash in refinances due to the extraordinarily low rates with ARMs and 15 year fixed loans in the 3s and 30 year fixed loans in the low 4s. So compared to the past few years and as recently as this past spring, the loan volume and lenders/brokers pipelines are up significantly. This is despite the many people who would like to refinance but can’t due to (i) a decline in their home value, (ii) joblessness (or underemployment) and (iii) lower credit scores due to the economy causing late payments and increased reliance on credit cards.
So, why then are those of us in the mortgage industry complaining (other than, of course, the lack of a purchase market and a federal government looking to put us out of business)? Because, we “have the loans, but we can’t close the loans.” Think of the Seinfeld routine at the Chinese restaurant and the importance of “holding a reservation vs. making a reservation” It was good for the restaurant to make the reservation but without being able to “hold it” the making was pretty much useless.
To use another TV reference to enforce the point, and one with a little better analogy, there is the Black Flag Roach Motel. Their slogan is “the roaches check in, but they don’t check out.” That is the mortgage industry now. There is a lot of business and we are all working very hard on it, but as a result of (mostly) lender fear mixed with a heavy dose of incompetence (and a touch of arbitrariness), it takes an inordinate amount of time to close a loan (if they close at all). And, even when a loan is scheduled to close (and sometimes even after the closing), things happen that prevent a final closing and funding of the loan! Just this week we had 2 loans scheduled to close and then they did not close. The first because the borrower was receiving $5,000 back at closing which exceeded the permissible amount of $2,000. The second because the lender could not find the Certificate of Trust that was previously provided, filed and approved by the underwriter on a loan where property was held in a trust. And, these are the easy ones to fix!
Loans are taking a minimum of 8 weeks to close on a refinance (though purchases are much quicker) with banks taking 3+ weeks just to approve the loans. In addition, even on a “clean” file they are adding many (often unnecessary) conditions as requirements to be satisfied prior to closing. This is putting additional financial pressure (as if we needed more, LOL) on the mortgage industry that now has a tremendous sum of money tied up in “Accounts Receivable.” But, it is in a nebulous cash-flow position since they must operate but cannot convert the Accounts to cash. So, as to the theory, we are indeed an industry of “Loan Motels” where loans come in, but they do not come out!