Down Payment Assistance on a No Doc Loan = Dangerous
First Franklin had underwritten this loan as a "No Doc-Stated Income" loan and as a result did not check the buyer/borrower's accounts for sufficient funds to close. On a "No Doc" loan, the lender only requires whichever bank the buyer states the funds are coming from to be the same bank the cashier's check is drawn from at closing.
Jacalyn Smith, an escrow manager for Chicago Title Company in Hobart, Ind., received a phone call and an e-mail from a principal of Golden Chain, LLC out of Chicago. The principal purported to be affiliated with an organization called "Payout One," an organization that brings buyers and sellers together in real estate transactions. He explained Payout One sets up written agreements wherein the seller will pay a stated amount to their program in exchange for helping sell the property. In addition, Golden Chain charged the seller a $5,000 seller release fee in exchange for its services.
Jacalyn was asked to do a mock HUD of the seller's figures and fax it to both of these organizations on one of her existing escrow transactions. The mortgage broker on the transaction was a good customer so she immediately pulled the commitment and complied with this request.
The principal quoted a fee due to Payout One to be paid by the seller at closing in the amount of $29,125. It seemed illogical to Jacalyn that a seller would pay a fee of this amount instead of listing the property with a Realtor®, but she reserved her concerns until she could see the instructions from the lender and determine if the lender had been made aware of this program.
Jacalyn received the loan instructions on the day of closing and found no reference to the Payout One program. She called the lender's office and asked if it was aware of the program and the office insisted it was not. Jacalyn explained that the settlement statement she was about to fax had a line item in the 1300 section with a seller-agreed-payment to Payout One in the amount of $29,125, as well as a $5,000 fee to Golden Chain for a "Seller Release Fee." Jacalyn asked if the lender wanted to see the documentation provided to her by Golden Chain and Payout One … and the lender did. The lender called about an hour later and stated the closing was not going to happen with the HUD shown as it was.
Jacalyn called the principal from Golden Chain and asked him some questions about the Payout One program. Her questions were in regard to an e-mail he had sent. The conversation went as follows:
"Payout One also requires a preliminary HUD showing their payment on the seller side before they will fund." Jacalyn asked him, "Before they will fund whom?" There was dead silence … She said again, "Fund whom? They should be funding my Chicago Title escrow account … correct?" No response still … then he proceeded to tell Jacalyn that she would need to call Payout One. "Why?," she asked. "They have the documentation regarding the down payment assistance program," he stated. "Where was the money wired to? Was it sent to the buyer's bank account?," she asked. "Yes," he replied.
Jacalyn then told him the closing would not happen because the lender was not aware a down payment assistance program existed. She further explained the loan would need to be resubmitted to the lender for approval to include the down payment assistance program and any down payment assistance funds would need to be wired direct to the Chicago Title escrow account and shown on the HUD as a line item in the 200 section to the buyer. Jacalyn called the mortgage broker and explained what she had discovered in her conversation with Golden Chain. The mortgage broker (her customer) thanked her profusely and then began making the necessary efforts to resubmit the loan.
The lender, First Franklin, thanked the Company as well for being smart enough to smell something fishy and bring it to their attention prior to closing. First Franklin had underwritten this as a "No Doc–Stated Income" loan. They do not verify the buyer's account for sufficient funds prior to closing – they only require that whichever bank the buyer states the funds are coming from, be the same bank that the cashier's check for closing is drawn on.
The deal eventually fell through. Jacalyn's astute ability to recognize the lack of disclosure to the lender and the possible harm of its affects was rewarded by the Company with a letter of commendation and $1,000. Spend it well, Jacalyn, we appreciate you!
Moral of the Story
The lender told Jacalyn its Company will not lend on any transactions involving the Payout One program. Their representative stated the loan documents would not have been drawn if the existence of the program had been disclosed on the purchase and sale agreement or if they were made aware of the program during the underwriting process.
The lender was making the loan with the assumption that the buyer's down payment of more than $26,000 was, in fact, his/her own funds. The Payout One program actually funded the buyer's down payment and closing costs and the buyer had no money in the deal. That is especially high risk for the lender. If the buyer has no money in the house, the buyer is more likely to walk away from the debt if they are unable to make the monthly payments.