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And You Thought The Purpose of a Bank Was to Make Loans?

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I’m no economist or banker, so I occasionally labor under the delusion that banks are supposed to lend money to credit-worthy people. Of course, they diluted the definition of "credit-worthy" a few years back. That ruined their liquidity. Then the Feds stepped in with the Troubled Asset Relief Program.

Silly me, I had also thought TARP was partly aimed at restoring banks’ ability to lend money again.

Read the following (real) tale of woe from a qualified would-be borrower–let’s call her Jane–and ask yourself why Wells-Fargo would be so hesitant to lend.

For a clue, look to the end of Jane’s tale.
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Jane’s Tale: If I Can’t Get a Mortgage, Who Can?

Last spring my sister and I decided to build an addition onto our vacation home in Northern Minnesota. Given today’s economic climate, we knew it wouldn’t be a cakewalk but we had no idea what a nightmare lay ahead.

Our family has owned lakefront property on Lake Superior since 1971. It’s prime vacation area with large million-dollar+ homes built on either side. Our parents deeded us the property 20 years ago, mortgage already paid off. After our mother died last year, we decided to build an addition. We hired an architect and a contractor with a long and credible reputation and a crew ready for work. We looked for a bank that would provide a construction loan for $250,000, for conversion to a mortgage when construction was completed. We went with Wells Fargo in Duluth. Their banker told us a loan was possible, but we’d need to open a business account first. My sister deposited $30,000.

Two weeks later, I was in the bank’s mortgage department armed with my loan application and identification; 2007 and 2008 tax returns; pay stubs; bank statements; property tax and home insurance records on this and my primary residence. He soon persuaded us to quit claim the LLC. I would become the sole applicant for the loan because I was an “ideal customer.”

Here’s my profile:

  • My income is in the top 10% of U.S. households; I’ve been a senior executive for ten years with an international NGO;
  • I own a car and home in the NYC area and paid off my mortgage in 2001;
  • I have one child in college and another who has graduated and is self-supporting;
  • I have two credit cards which I pay in full every month, my credit score is 775;
  • I have liquid assets worth more than the value of the loan; my retirement account is substantial but not lavish after the 2009 freefall;
  • The title search is clear and the appraisal of the lakefront property is $520,000.

The bank then required me to close the business account and open a personal account. I transferred the $30,000 and added $5,000 for good measure. I requested and got written permission for an “early start” on the construction because we needed to get the foundation poured before the Minnesota winter set in. For the next two months I endured slow torture at the hands of Wells Fargo and their big, bad “underwriter.” They peppered me with dozens of demands for information and ridiculous questions (Q:“Where did the $30,000 deposit come from?” A: “From the Wells Fargo business account you required me to open and then close.”). I was asked to fax my driver’s license four more times and to disclose the terms of liquidating my 403B.

When I was asked to explain why I made a late payment on my VISA bill in February of 2002 (7 ½ years ago!) I blew my top. For seven long weeks I was told that if I just met a few more conditions we could go to closing. These requests came from various Wells Fargo offices around the country – and were often redundant. When I asked to speak with the underwriter directly I was ignored.

Meanwhile, we were continuing to pay cash to our contractor so that our beautiful house could go up before winter. I reminded the banker that every delay in closing meant that I would be borrowing less money and they would earn less interest. Did they want to make a deal or not? We set a closing date of October 16. Ten days before, I had a conference call with the mortgage banker in Duluth and the Senior Relationship Manager in Minneapolis. I reminded them that I was flying out to Minnesota so they needed to tell me exactly what I should bring with me for the closing. The answer was “only your driver’s license.”

On October 15, hours before I was to board my flight for the scheduled closing, I was presented with several more conditions that had to be met (Q: “Could I explain the large deposits made into my Citibank account in the last month?” A: “You’ve seen my paystubs; that is my income.”) and then “we should be able to close in five days.” The banker’s e-mail said, “I imagine having been run through the gauntlet…that it is doubly frustrating to have to provide so much detail when you are clearly the kind of borrower any bank should love to have.”

At that point I realized I was never going to get a loan from the mortgage giant Wells Fargo, nor are they seeking ideal customers who pay their loans. Happily, our architect is talented and trustworthy and our contractor is honest and hard-working. Those business relationships have been highly professional and free of impediments. We can finance our second home without paying Wells Fargo $50,000 for the privilege of lending us money. But IF I CAN’T GET A MORTGAGE, WHO CAN?

No wonder we have a credit crisis in this country!

 

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Wonder why Wells-Fargo was so unwilling to lend, and unwilling to talk about it? Here’s a clue.

It was announced a couple days ago that Wells Fargo bought its way out of TARP, including its restrictions on executive pay, etc. To get there, as I understand it, they had to restore their loan-to-capital ratio. One way to do that is raise more capital; another is to make fewer loans.

Draw your own conclusions, and share them here.

 

Decaying Social Trust and Moral Indignation

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Pop quiz!

Who wrote: “This is how the world will end—not with a bang, but a whimper.”

a. T.S. Eliot
b. W. H. Auden
c. Robert Frost
d. e.e. cummings
e. Alfred E. Neumann

Answer at the end; no fair peeking.

I don’t know about the world, but the subprime/mortgage/credit crisis shows how social trust ends. Not with a whimper, but with righteous moral indignation—on all sides.

We are in the midst of the deflation of a debt or credit bubble, itself based on an asset bubble—overpriced houses. As of today, according to the Mortgage Bankers Association, 24% of subprime mortgages are delinquent or in foreclosure; ditto for 4% for prime mortgages; and for all mortgages it’s a record 7.9%, the highest since records began in 1979.

Everyone played musical chairs. And the more frantic the music, the more rightous the talk.

Here’s the Heritage Foundation—mind you, just last November, 2007—demonstrating its utter subordination of logic to ideology, arguing against H.R. 3915, a House bill to reign in predatory lending:

[the bill] would establish an explicit series of credit standards for lenders, which could have the effect of excluding many moderate income borrowers from the ownership market. In sum, the enactment of H.R.3915 would delay the housing market recovery that is now struggling to get underway.

Yup, Congress killed the real estate bubble appreciating market.

A year earlier, in September 2006, the Mortgage Bankers Association stated that

“the subprime market has evolved dramatically in recent years, providing significant benefits to consumers…increasing regulation could decrease competition and increase rates that the subprime market offers consumers.”

But this is not a populist rant.  Consumers were far from just hapless victims.

An FBI Mortgage Fraud report 3 months ago stated that up to 70% of early payment defaults may have been linked to buyer misrepresentation on loan applications.

What about FICO credit scores?  Courtesy of BusinessWeek, meet “credit doctors,” companies who will manipulate credit ratings by blitzing credit agencies with disputes about old reports (which have likely been lost), setting you up as an “authorized user” of an account owned by someone with good credit, or just creating paper accounts.

“All legal,” they protest. Of course. No miscreants here.

So—end game—bang or whimper?

Dateline, CBS Evening News February 12, 2008.  Meet Karen T., a married San Francisco suburbanite who bought a condo as a second home for $505K, financing it 100% with mortgage debt. Now it’s worth $340K, and her adjustable mortgage goes up $900 this June.

They own another home. They can afford the rate increase. So—what to do?

Karen’s answer?  Walk away. Default.  Give it back to the bank.

Is Karen distraught? Not really. “I’m not doing anything illegal.  Everything’s negotiable in business—this is just another business decision. I don’t see why this is any different. I’m within my right to walk away from a bad deal.”

And 60% in an LA Times Real Estate blog poll agreed with her.

Karen is morally indistinguishable from a landlord turning off the heat under rent control; insurance companies withdrawing sole-provider coverage from unprofitable markets; banks charging usurious credit rates; emergency rooms turning out the uninsured; de facto mortgage redlining; and a thousand forms of “fine print."  Or—come to think of it—from a banker foreclosing on a never-should’ve-approved-that-loan loan. 

The rallying cry is always, “I’m not doing anything illegal.”

But here’s the kicker.

Karen’s not morally indignant about walking away. To her, that’s “a business decision.”

No, her moral indignation is reserved for the consequences she might face.  She leans her face on her hand, her voice intensifying, as she says, “It is devastating to think that my credit scores are going to drop 200 points," she said.

OMG, it’s just so, like, unfair!

Huh? Devastated because you were educated, had the money, and placed a 100% bet on an overheated market—and lost? And you can afford to pay the piper—but don’t want to?

Take a trip to Vegas, Karen, and see if the blackjack dealers buy it.  Better yet, go tell it to someone with half your education and income who’s been foreclosed on after having spent their last money trying to pay the bank. 

It doesn’t matter who started the food fight.  It seems that the decay of social trust is accompanied by higher levels of self-righteousness and narcissism on both sides.

When business and consumer alike choose moral bankruptcy over financial bankruptcy—without even thinking about it—and then justify it indignantly through Darwinian arguments—well, Houston, we’ve got a problem in trust-land.  Not to mention ethics-land. 

Oh yeah—T.S. Eliot.