Cash-out refi lender insists I pay cash for new properties!?

[Kevin Grove]

Doing a cash-out refi on my primary residence. My plan was to use the proceeds to fund the downpayments on turnkey rentals. I stated this upfront when first talking with the lender. But now that we're almost to closing (4 days til Fri, 8/2), underwriting insists that I provide a letter stating that I will be purchasing this new real estate solely with the cash from the refinance and with no additional mortgage.

Is this normal? It seems like they should leave that to the next bank that has to qualify me for the subsequent loans.

In fact, the CEO of the lending firm responded with the following:

"He will be getting a conventional mortgage(s) for the new properties. But these new properties are tenant occupied with existing leases, so there should be nominal affect on DTI. Further, to qualify, he will still be subject to the same Agency guidelines as for this refinance. So his credit profile after purchase would still meet Agency guidelines."

But in spite of that, underwriting isn't buying it and insists I send them the letter by end of the day, today.

I'm hesitant to walk away, as the terms seem pretty decent (3.5% 30-yr fixed, 1.533 pts).

What would you do?