Lending institutions (and most of corporate America) tend to forget about the “art” of cultivating ‘trustworthy’ relationships and setting appropriate expectations with their customers and teams.
Why is this so important? There are two ultimate reasons to consider how we can shift our business practices to set expectations.
The first is psychological; trust issues and unfulfilled expectations are the ultimate breakdown for all human beings. If we become aware of challenges we may face, most of us can re-set and shift our expectations and appropriately respond; we humans tend to be able to adapt and overcome most adversities.
Unfortunately, most breakdowns in expectations are precipitated by some threat to our existence or reality, which makes it highly emotional driven; especially when it involves our home or livelihood!
The second major reason for managing expectations and clear communications with customers is it costs companies money, time and business reputation. Loss of business includes losing the deal, extra work for sales, marketing and operation teams; diminished revenues, customer retention, and potential legal disputes leading to a tarnished business reputation.
Unfulfilled expectations are created due to lack of clarity about what each party needs to do to constitute a quality transaction; fear of losing the deal; or inability to gage appropriate responses due to incompetency. As an example, most lenders have no idea what a green project transaction is or how to process it, but they don’t communicate their lack of awareness to their customers, in fear of losing the deal.
The mortgage industry tends to be more reactive than proactive in their lending practices. Mortgage deals typically involve many parties and moving parts of the transaction. There are literally hundreds of loan scenarios and guidelines; and no transaction is exactly the same. You have to be mutable and solutions oriented to navigate.
Lack of communication and collaboration in the many loan processes can lead to breakdowns in the entire loan approval process, which in turn leads to major upsets, and unfulfilled expectations, that could have been alleviated if expectations were defined and managed from the very beginning.
Accountability, lack of empathy and inability to connect business with our humanity has permeated our business world; much like a disease. Today we rely more on a computer algorithms than human reasonability and compassion. Our ability to reason is what stands humans apart from other species, yet we have become more robotic, disconnected from our true nature.
This has impacted so many industries and has lead to distrust, and in many cases animosity and legal disputes. Consumers, more than ever, are under siege due to identity theft and corporate abusive practices. We spend more time protecting our credit and assets; as a result we aren’t able to exhibit a high level of trust for most sales transactions.
Over the past decades, the symbolic handshake deal, and our word to fulfill a promise, which was the foundation of business ethics, has been lost. Corporate culture has become devouring rather than empowering. Much of corporate America’s employees report (usually after they leave) how much they hated their jobs and companies. Ask just about anyone working or dealing with the big 12 lending banks, or any major corporation, they are disillusioned, which explains why our sense of leadership and our community support is so broken.
The biggest unfulfilled expectation or breakdown in green project financing is the appraisal. The green appraisal valuation is the major differentiator in the conventional loan process. In the loan qualifying process, appraisals represent a high percentage of the transaction approval; and can require additional down payments if the appraisal comes in low. In a green transaction this happens often, due to the incompetency and inability to quantify value factors 1) lower operating costs and 2) durable quality building upgrades. These two factors in turn reduce risk for both the owner and lender.
A low appraisal event can bust the loan transaction and cause the deal or project to be abandoned if the borrower doesn’t have additional assets to offset the equity guidelines. Renewable energy (solar, geothermal), rainwater harvesting sole source of water (no well or hook up to muni water), unique building materials, i.e., sip panels, earth shelter, etc., can also be problematic if the appraiser or underwriter isn’t competent to address the marketability of the building or home. Many lenders won’t allow these types of measures, period.
Although solar equipment has now become mainstream in high-adaptive regions- it doesn’t necessarily mean that the collateral is an appreciative or high-quality asset. If you add solar to a non-efficient building it does not make the collateral worth more; a crappy building isn’t an improved asset just because solar generation has been added.
Green building adds still another layer of the art of setting expectations. This includes processing an appraisal and a construction loan transaction. If the lender isn’t competent in construction financing and the art of a unique high-performance project, they in turn can’t identify if the appraiser has the skillsets and competency; much less interpret the appraisal report effectively. It’s like the blind leading the blind.
This is why lenders need to educate themselves and work with the right certified team of appraisers, builders and building science experts in order to serve their community and set the right expectations up front. (Not all green builders, raters, etc., are equal or competent either.
So what are the right questions we can ask or do to shore up expectations and breakdowns in a green loan transaction?
Define all loan requirements and expectations upfront; align all parties, lender,buyer, seller, builder, etc.?
- Interest rate-loan program
- Down payment requirements
- Ability to qualify – type of employment documentation (self-employed, etc.)
- Special loan considerations – (most people have something quirky, this includes green)
- Transaction timeline – closing and funding (hint if it’s under 30 days it’s a red flag due to TRID regulations)
Qualify the lender (consumers have a right to make sure their lender is qualified):
- Do they have experience- is their processing, underwriting and appraisal management company competent in the art of transacting a high-performance project? (Are you their Guinea pig?)
- Do they recognize the value and uniqueness of high-performance building?
- Are they aware of specialty, Fannie Mae, FHA Green Initiative guidelines?
- Are they are licensed mortgage banker or chartered bank? Do they have their own loan portfolios (private capital) or are they dependent on 3rd party investor or secondary market underwriting and funding approval?
- Do they know what a HERS Audit is? (or high-performance – net-zero – passive home)
Vet the appraiser when they are scheduling the inspection-provide them with quantified data:
- Are they trained and certified in conducting green property valuations?
- You have the right to dismiss the appraiser and request another appraiser to be assigned if you believe they are not competent to value the property. The Appraisal Independent Requirement (AIR) Policy includes a guideline called the Competency Ruling. This policy states that if the appraiser is not competent in the art of appraising a unique project (i.e., this includes green building) they should not accept the assignment.
- Ask them what type of data or information they need. It is extremely important that owners and builders provide the appraiser with quantified data to support value.
This includes HERs, LEED or other 3rd party building science certifications and audits; utility bills or regional utility data reflecting lower operating costs; cost breakdowns that include pricing differentials for building materials, i.e., insulation, equipment and building materials, etc.
If the answers are ambiguous and aren’t satisfactory, it would stand to reason you should move on and keep searching. More lenders are getting on board and actually competent and passionate about funding high-performance buildings. So many transactions get derailed by not being transparent and setting proper expectations.
In some cases, it can become so frustrating and overwhelming, that many people may give up on finding the right team. But they shouldn’t give up! It often takes perseverance; and anything worth having usually takes more time and patience. Especially anything untried and in pioneering stages of market acceptance.
In Search of Perfectly Aligned Expectations in a Green Loan Transaction – What a Green Market Team Should Look Like
It takes a village as the saying goes. As much as lenders need to qualify borrowers, they also need to be qualified and vetted by their clients. This is true for builders, contractors and Realtors. The green team should be proactive and collaborative.
Lenders especially need to demonstrate a certain level of corporate culture and responsibility. They need to be accountable, transparent and they have to be educated and proficient with green transactions.
The good mechanics of a green transaction requires a higher level of competency; a willingness to collaborate and an ability to execute. High-performance projects require specific skillsets – but no matter how skilled you are, if you aren’t a team player and can’t set the proper expectations, your proficiency won’t matter.
Structuring the project and loan with the right building and lending team, in the beginning of the design process, is the key to creating a an exceptional loan funding experience.
If comparable properties aren’t available in close proximity to the subject property, due to square footage, land size, age or other variables, it can become an arduous process, often causing cost overruns or additional down payment requirements.
There are many ways to negate these challenges. But most importantly, setting the expectations and conducting proper due diligence upfront, can make all the difference in a everyone walking away with a positive experience. In the end, that’s all we remember anyway!
The Green Transaction TEAM – A Lot of Moving Parts & People
Why Big Banks Are Losing Mortgage Business to Smaller Non-Bank Mortgage Lenders
Who do most consumers turn to when they need mortgage financing? According to an article published in February by the San Francisco Chronicle and the data provided by the Mortgage Finance Publication, it’s the smaller, regional non-bank lenders who are providing the bulk (over 55% of the market) of mortgage financing nationally.
Wells Fargo, the largest according to the market study, also sells their loans to the same secondary market channels. They are a large provider of wholesale lending channels with smaller non-bank lenders, who originate, process and close the loans Wells Fargo purchases.
This could mean that the data might not be accurate in the percentage of loan volume due to wholesale lender secondary market sales.
When it comes to green lending, most mortgage non-bank funding channels, or smaller regional, non-bank lenders may become an important channel for their communities to champion high-performance loans.
These companies know their communities and are often the best sources for funding than national entities who don’t have stake in the communities they are lending.