Banks steering irks some buyers
Loan requirements could shut door on foreclosure sales
Bob DiMicco figured he was just the type of homebuyer Bank of America needed to unload one of its festering foreclosed properties.
The Aloha retiree was willing to pay the bank's full $145,000 asking price on a Hillsboro house and make a hefty $45,000 down payment. He has a sterling credit rating and came armed with a letter from his lender verifying that he was prequalified for a mortgage loan of double the amount needed.
But Bank of America refused to accept DiMicco's offer -- until he agreed to get prequalified again for a loan through Bank of America.
Tigard resident Jilena Castillo and her husband thought Bank of America would jump at their $125,000 offer for a foreclosed home in Aloha listed for $118,000. But the bank refused to take their bid unless they went through the loan prequalification process a second time, through B of A.
Many Portland-area real estate agents and mortgage brokers say it's increasingly common -- and harmful to their clients -- for B of A and other large banks selling foreclosed properties to insist that buyers first get prequalified with their own lending departments. Then, critics say, the banks try to coax bidders into taking out home loans with them.
Bank of America does require all bidders on its foreclosed properties to first be prequalified for loans with the bank's lending department, says bank spokeswoman Kris Yamamoto. It's not an uncommon practice in the industry these days, she says.
"It's just to determine if someone is eligible to finance the property," says Yamamoto, a senior vice president for corporate communications.
If a buyer comes in with a loan prequalification from another lender, she says, "We don't always understand the underwriting guidelines of the other lender."
But critics say the big banks' practices can be costly to homebuyers who forego shopping around for the best loan terms. They also could hurt buyers' negotiating positions and delay sales of foreclosed homes at a time when the Portland real estate market is hampered by a glut of distressed properties.
And, it's another potential black eye for mega banks, which helped spark the Great Recession and housing slump.
"I feel like they are bullies," says Castillo, a Portland State University student. "They are picking on us, and we have no power to stop them."
Castillo and her husband wound up being prequalified with Bank of America and are awaiting word on their bid. But she resents the treatment she's getting from the bank and other lenders selling foreclosures.
When pursuing a Beaverton foreclosure held by Freddie Mac, she says, her real estate agent got the message that their offer wouldn't be successful if they didn't use a Freddie Mac loan.
DiMicco also agreed to get prequalified by Bank of America, but says the bank's agent then gave him a "hard sell" to take out a home purchase loan with the bank to buy the home.
"He said I would be better off going with Bank of America, cutting out the middle man, which makes sense, I guess," DiMicco says. "They said they would be able to give me a better deal."
When DiMicco told his real estate agent about B of A's tactics, he says she "went ballistic."
That's because, under the 1974 federal Real Estate Settlement and Procedures Act, known as RESPA, people in real estate transactions aren't allowed to steer homebuyers to related services, such as home loans, when they get compensated for it.
"They are very obviously trying to steer people into their bank," says DiMicco's agent, Tami Parks, who's with Century 21 All Professionals in Beaverton.
Bank of America officials say they are careful not to link their lending services with their sales efforts. The bank has "purposely erected a wall" so personal financial information obtained by its lending department isn't shared with its agents handling the property sale, Yamamoto says.
"It's baseline information," she says. "There is absolutely no requirement that they obtain financing through us."
Yamamoto insists that a bidder's decision to turn down B of A financing "has no relationship to which bid is accepted."
But she didn't dispute that B of A agents may aggressively court the clients to use the bank's home loans.
"It's a sales opportunity," she says. "It's an opportunity for us to present our services."
RESPA violations for steering "have been swept under the rug for years," says Andy Harris, the immediate past president of the Oregon Association of Mortgage Professionals.
When banks force people to get prequalified through their lending arms to make bids on foreclosed property, "their intent is to get the business," Harris says.
"We all know what's going on. It's just how do you prove it?"
David Feathers, president of Avelloe Mortgage in Lake Oswego, says he recently obtained an email that appears to document illegal steering by B of A, from David Churchill, retail sales manager at the bank's Pearl District office.
In the email, Churchill notes that B of A's listing agent for a foreclosed property is supposed to include the "assigned loan officer contact info" for the bank with the Regional Multiple Listing Service, where most Portland-area homes are listed for sale. "Then we pick and choose the loans we want to take on," Churchill states. "If the agents don't have a good conversion rate we replace them."
That conversion rate presumably measures the proportion of bidders who wind up taking out B of A loans.
"That's blatantly illegal," Feathers says. It's saying "if we don't have enough people steering to us, we will fire them."
Harris, who also has seen the email, calls it a "blatant violation of RESPA."
B of A spokeswoman Yamamoto denies there have been any RESPA violations and says the email is "misleading" and taken out of context from a larger string of emails. However, she declined to provide those other emails or permit the Tribune to interview Churchill.
Feathers forwarded the email to the Oregon Department of Justice and to state banking regulators.
Because most large banks are regulated by the federal government, not states, most RESPA enforcement traditionally has been handled by the U.S. Department of Housing and Urban Development. However, that responsibility recently shifted to the new Consumer Finance Protection Bureau. That bureau's media relations staff declined an interview request.
Even if mega banks aren't violating the law, critics of the prequalification requirements say they hurt consumers.
Making buyers go through an extra hoop before they submit an offer on a foreclosed home risks another buyer swooping in to grab the property, Parks says.
In addition, every time a prospective homebuyer authorizes a credit check, as needed to get prequalified by additional lenders, that can be a strike against their credit rating. If their credit rating drops, the interest rate on their home loan can rise.
Parks says some banks' practices of handling foreclosed property sales are "unethical." When the bank gets its own credit report on the customer, she says, it gets privileged information about the buyer's assets before a deal is struck on the property.
If a buyer offered $150,000 on a home but could easily borrow $175,000, the bank has inside information to use in bargaining.
"The seller has information about the buyer that they have no business knowing," Parks says.
The most costly result of banks' aggressive salesmanship on foreclosed properties is when homebuyers don't wind up with the best loans.
"The whole idea with prohibiting steering is to make sure consumers can use whatever services are available to them and search for the best deal," says Kirsten Anderson, mortgage lending program manager at the state Division of Finance and Corporate Securities.
In short, someone buying a home from Bank of America should be able to shop around for the best rates and terms.
"I have never walked into a Bank of America and seen a loan rate that's hard to beat," Feathers says.
Feathers and other mortgage brokers help clients find the best loan terms from among many lenders. They're getting shut out of the process when banks steer loans for foreclosed properties to their own lending operations.
Feathers worries that Bank of America, or other banks controlling foreclosed properties, might turn down his client's high bid on a home in favor of a buyer who is getting his or her loan from the bank.
Bank of America isn't the only Portland-area lender requiring bidders on foreclosed properties to get prequalified through its own lending arm.
"Chase does it, as well," Feathers says, but in his experience B of A is being the most aggressive.
Plus, B of A has a large share of foreclosed homes here. After the 2008 financial crisis, it acquired bankrupt Countrywide Financial Corp., once a dominant player in the risky subprime loan market.
Dave Jolivette, a mortgage broker and president of Associated Mortgage Group in Portland's Johns Landing, says all homebuyers should be cautious about taking a loan from the same bank selling the foreclosed property. There's a built-in potential there for "taking shortcuts on the due diligence process," he says.
Such shortcuts were typical of real estate practices of the last decade, he says, which helped sink the real estate market.
DiMicco is still shopping for a deal on a foreclosed home, but he's getting frustrated.
"This banking system is really hard to do business with," he says. "I haven't had trouble spending money before, but I sure am now.
"If they want to get the economy rolling again, they've got to sell this stock now."