How far can a bank bend commercial lending rules, for their own REOs

Question

Hi BP,

Just what the title says. I have 4 reo condos under contract, not a snowballs chance in hell, of being financed conventional. I asked for and received (on Paper) a 3yr lock @4%, with a 25yr AM. in house.

Now were haggling over purchase price. I don't see how this deal could ever get thru Underwriting at their asking price. The 4 units could either be rentals or resold. Offering flexibility for Me.

I guessing that My loss mitigation contact has not spoken with the loan department. I've seen this before and have used it as leverage, but this is a different bank.

Where is this going? What about DSR and other loan criteria in this case?

John

Mehran K. · Answer

Not sure on the ins & outs of regulations, maybe Bill Gulley would know.

From my understanding, that sounds like a portfolio loan, and they have a lot of flexibility with their own guidelines if they are going to be keeping the loan on their own books like that.

Maybe they have so many REO's because of similar lending tactics, who knows!

Bill Gulley · Answer

Generally a lender won't finance the sale of ORE.

First issue is amounts received above the book value go to the prior owner, that means making a loan and then disbursing loan proceeds to the foreclosed upon borrower, won't happen, IMO.

If the bank is beyond this issue with the borrower, they don't lend on properties that they got taking the risk of getting the same property back and going through the same pain again. That's not prudent, especially for a non or poor performing asset. Doubt that happens.

But, there are always exceptions, in rural areas they may be the only game in town for any buyer to use, if that's the case financing it to a new borrower, getting a better collateral position is better than it sitting on the books and taking automatic write downs while holding it for sale.

Their written loan policy will dictate what they can do, to avoid issues of lending outside adopted loan policies means changing the policy for all loans, not just to a single transaction. I'd say they won't change written policy that is reviewed by regulators just to do a deal, but if they can justify lending outside that policy regulators may accept the reason and nor beat on them so much. :)

Mehran K. · Answer

I'm not sure how far banks are willing to bend their own criteria when underwriting their loans. BUT, you should have a good idea of your maximum purchase price (PP), regardless of what the bank is trying to sell the properties for. I know of a bank that operates in Wisconsin (WaterStone) that has their REO's listed wayyy above market value. I believe it's for negotiation tactics.

If the DSCR doesn't meet their general 1.2 criteria, it's probably a bad deal at that price either way.

Bill Gulley · Answer

If the price is too high I'd suggest you go fish, especially in a rural area where investors aren't knocking the doors down! :)

John Adamkewitz · Answer

@Bill Gulley            Thank You for weighing in on this. I'm in  rural Wisconsin, and finding that if You have a reasonable plan with the reserves to back it up, that the reo owning banks are quite reasonable on price and finance terms. Reflecting what You've said.

This deal however, has someone in the backdrop holding to a ridiculous price that IMO, cannot be realized. Save for a less then savvy cash buyer.

The banks holding costs are over $4000 per month currently, plus the loss on what ever was owed originally. We are 100k apart, but they still counter and offer the requested finance terms.

I'm guessing that they have just not bled long enough.

What prompted the question, was after looking at the last counter offer I thought, How the hell could they get this deal thru their own underwriting dept?

I was going to call and ask them, but thought that some insight was in order first. Instead I'll think I'll stay silent for a while, knowing that I'm now in their rolodex.

Thanks, John

John Adamkewitz · Answer

@Mehran Kamari  Exactly.

So the question is, Can they bend at all with all the new regulation?

This is the beauty of the reo bank financing their own reo.

How could they ask for a price, that would never get thru there own underwriters?

John

John Adamkewitz · Answer

Bump for Knoladge.

How far can a bank bend commercial lending rules, for their own REOs

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