Do you need a Direct Lender Approval?

Ok, so I have dealt with this enough at this point that I will finally put my thoughts on paper.

Do you need a Direct Lender Approval?

Well at this point of time there are a lot of listings in the market that are requiring that you get pre-approved through a direct lender. Now for sake of the argument the question then would be:

What do direct lenders do differently than we as Brokers do?

The answer is absolutely nothing. They take the application, gather the documents, pull the credit and run your file through the exact same automated engine that we use. Desktop Originator or Loan Prospector are the two engines that are used to determine whether or not your loan can be done and sold on the secondary market. Many of the direct lenders still sell the loans on the secondary market. They are not all in the game and business of servicing. If you go directly to Wells Fargo or you come to me both the Loan Officer and I will run the file through Direct Express. This is Wells Fargo’s engine which issues an LP approval. LP is the engine for Freddie Mac Investor’s.

If we are doing the exact same thing for the approval, what is the difference?

Essentially a direct lender approval is straight from the source. They will be funding the loan Directly from their own warehouse line. A broker will then send the loan to a wholesale conduit to fund the loan on the conduit’s warehouse line. We do not have the underwriters in house. However, the majority of the wholesalers follow the automated findings that have been produced when ran through the engine. The main trick on the wholesale side is that each wholesaler may impose their own set of criteria that will Overlay criteria produced by the investor or in this case Fannie Mae or Freddie Mac. As a broker we get a bad rep because the Loan Officer does not understand or know the overlays which in the end could cause delays in the process.

If you have an automated approval from the same engine as the Direct Lender what then could go wrong?

Again this is a case where it is the Loan Officer not the bank or the underwriter than will make the difference. You see the automated engines are only as good as the information that is submitted. Therefore if you submit incorrect information or do not verify the income, assets, and credit of the borrower you could get an approval that will later cause problemns for the closing. An underwriter may not agree with the income that you calculated for the consumer and this could decrease the qualification amount or turn an approval into a denial. Whether you are with a Broker or a Direct Lender this can happen.

Why then are they requiring a Direct Lender approval on certain properties then?

The answer to this seems real trivial if you take a step back. The bank who owns the property wants you to get pre-approved through their bank because they want to earn some money on a project that they are already taking a loss on. If they retain your loan then at least they will still be earning interest on a portion of the loss plus the fees to do the loan. It affects the bottom line. They also have control over the deal and can check the progress. If only the righ half knew what the left half was doing this would make complete sense. Wells Fargo is arguably one of the largest banks remaining and they are one of the largest wholesale channels today. If they see the value in taking in Brokered loans then I would suggest that there is value in a Broker. I have discussed my thoughts on this in another article before.

REO agents saying that they will not entertain and offer without a Direct Lender Letter.

I will reserve my opinion on this because it does not hold true for all the REO agents that I know. However I have been informed through some of the parties that I work with that there are agents that are big in the REO business that want Direct Lender Letter or your offer floats to the bottom. I simply think that I would do the same for my employer. Yes they get all their listings from the bank so naturally my agreement would be to reciprocate the referral business. It is networking 101. You have to give to receive.

In Conclusion, although a direct lender letter may or may not give your more leverage for your offer they are being required. On the listings that they are required I assist my clientele in getting them. It has been rather easy until the late where one certain bank does not want to cooperate. Our money and our approvals come from the very same place and the loans are packaged and sold the same way. While there are subtle differences a loan is a loan is a loan. Do not be suckered into compromising the comfort and relationship you have made with a Broker because the public is saying that you need a Direct Lender Approval. For all intensive purposes you are repeating the process we did for a second time.

Related Articles:

• 5 Perceived differences between a Broker and a Banker
• Third Party Origination

5 perceived differences between a Bank and a Broker: One Perspective

You are considering taking the monumental step toward homeownership. You are sitting at the kitchen table and beginning to wonder the very dynamics of just how you might accomplish this. There are so many uncertainties that are running through your mind. Should I do this? Is it the right time? Can I get a loan right now? Will I be able to find a home that is not a short sale? Can I low ball the bank? Just these few questions alone may have your mind in a spiral. Where have the questions come from? They generally are formulated based on media exposure, conversations with friends or co-workers, family and from the Internet.

The pressure of wanting to buy before the end of the tax credit November 30th is beginning to mount up and take a toll on you. I want to make sure that I buy in time to get the 8K. Why not? After all it is free money;).  Finding a Real Estate agent in most cases is not a very scary task. After all the inventory is the inventory and the seller pays the fee. You can find one online or just go buy an open house and pick one up right? ( I strongly recommend getting a recommendation as there are so many things that a Great Realtor does for you that you may not even be aware of).

Now that you have all that down it is time for the money and the question of the day is Where should I get my Financing my bank or a broker? I am going to outline 5 perceived differences between the bank and the broker (from my point of view) and let you make the determination.

1. Brokers are more expensive than banks – I hear that we are more expensive than the banks all the time. I understand why one may think this and agree that they may be right. Generally we (the broker) have an additional fee that you will not see when you go to the bank. We have our Processing fee and the wholesalers underwriting fee where the bank will generally have only their own combination of processing and administration. The difference is generally along the lines $500-$700 dollars. The Twist – Our rates as Brokers are better. We can always match the fees and the rates of a bank. They are never doing anything special. Price is what you pay value is what you get.
2. Terminology and Description of the Fees – Banks are not bound to the same level of disclosure that Brokers are held too. In my opinion, we are held to a higher standard because we have to display and disclose our Yield Spread Premium. As you might have read in my other post this is the compensation we receive from the wholesaler for delivering a certain rate to you as the consumer. Banks receive this as well but they do not have to show it. Banks also commonly state that they are charging no “origination” but they charge a discount fee that goes to them as the bank. It would appear that they are lowering their fees or that the loan officer is not trying to make money but it is simply a play on terms that is confusing to the consumer. If I charge discount to a borrower it goes directly to the wholesaler and your rate is reduced. I will also charge an origination fee because when I charge discount I do not receive Yield Spread Premium.
3. Expeditious Closing Times – Many times I hear that Brokers cannot close a deal in less than 30 days. This is so far from the truth. I just closed two deals in less than thirty days from the time that I was told we are in “Escrow.” One of the deals closed 28 days early. Closing times are a combination of a lot things. All parties have to be committed to the process and have to do their part in getting the deal closed. If you are asked to get something to someone and you do the deal proceeds quicker. MDIA has changed the time lines a bit but I think that we all have a grasp on this. As a Broker I care for two reasons about getting your deal done on time: a) I  work by referral only and I want you to send me customers as well as the agents involved and b) selfishly I want to get paid for my work and that is the only way to get paid is to close the deal. On the other hand bank loan officers are usually on a draw against their commission and are paid net 30 so they will not see a dime on your deal until the following month. In the meantime they will be paid something. They generally are shoveled leads that call into the “big name” bank and work those leads. Many of the LO’s are beginning to market themselves outside of the office but generally it is inbound customers.  They generally do not have the level of the relationship with the Realtors that Brokers do. I know many Loan Officers who are leaving the large Banks and coming back to the broker world just because they cannot get the deal closed in time.
4. Transactional Versus Realtional – I have chosen to be in the Broker world because I do business relationally. I do not see you as a transaction that needs to get done. A number on my belt. I see you as a potential homeowner that we will be in the world of homeownership forever. I have gone to parties with my clients, coffee, dinner, in the same small groups and many times our kids are playing ball together. The Purchase is a small piece of the overall picture. From Estate Planning to Insurance to finding the right handyman I am there to help you.   I believe that many of the Brokers that I know that are still in the industry have this very same approach to their business. You do not have to take a number and wait for me. That being said I do have boundaries but I will also return your call in a respectable time and respond to your email and questions. I can be found if you need me.
5. Special Discounts – I commonly hear that because I am a bank customer I am getting a special discount. Again take it for what it is worth but as a consumer we all want to feel like we are getting something for nothing. Take a look at the furniture industry. They are always liquidating or having very large sale items. This is not a coincidence. We have trained our minds that a sale means good deal. This is a phenomenon that banks have learned to capitalize on. As a valued customer we are going to waive this fee or that fee. It is a perceived added value but in the end you pay what you should pay for a loan. It is a rare case when a client has a large sum of money with a bank and to keep that client happy and those deposits in their bank they do something that I cannot compete with. I have very rarely lost a deal to a bank. When I have it has never been because I did not have comparable price or fees. They simply had a comfort level with the bank. I do understand that I am not the guy for everybody.

In the end we all fish from the exact same sea. The rates are the rates and the fees are the fees. The types of loans available are available to all of us. The Separation is in the Relationship. You will either have a better relationship with the bank or the Loan officer at a brokerage firm. If you are simply negotiating for the “best perceived deal” in the monetary terms you can get it at either place.