Interview with a Banker – Why Banks Still Aren’t Lending
Lender · Salt Lake City, UT · Member since 2012 · 714 posts · 169 votes
With the exception of community banks and credit unions, most would agree that banks still aren’t lending. “Hogwash!” some of you bankers who are reading this will probably say.
As a follow up to a post I did nearly 2 years ago, I did an interview with a commercial banker regarding new policies and procedures for lending in today's climate. Because most banks are still trying rid their balance sheets of residential and commercial properties, bankers are STILL cherry picking the loans they will do. And, even the most qualified borrowers are being turned away or are required to bring in PITI reserves for 6-12 months on new purchases!
How long until banks soften their grip on their cash? Will bank lending loosen up in 2012?
Please share your thoughts on this.
Being a banker I'm going to say "Hogwash"!!
I personally funded over 20 loans in the month of February. I also took out two loans for myself this month.
The reason people keep saying that banks aren't lending is because we aren't lending to EVERY SINGLE person who asks for money like it was in the boom. Banks are now actually lending to people who qualify to pay the money back.
I will admit maybe once a month one of my loans gets turned down that common sense would say we should give them the loan. Example: someone with 3 Mil in stocks/bonds turned down for 250k loan because he lives off those investments but withdraws money spiratically instead of in regular intervals.
On the other hand, 95% of my conversation about banks not lending go like below. You will think I'm joking or exagerating but I'm not:
Customer: I hear banks are starting to lend again I'd like to purchase a home because It's so much cheaper than renting.
Me: OK great, do you know what your credit score is?
Customer: No, but it should be GREAT! I filed BK, but it's been over a year now and I've only maxed out 2 out of the 3 of my new credit cards and I've made at least most of the minimum payments on time..
Me: Sounds good, are you currently working?
Customer: Well not officially at the moment. I have had a few jobs though up until a couple weeks ago. The last one was for about 2 months then I quit. Before that I worked for a long time for the same company like 4 or 5 months. I do some work under the table and collect unemployement now.
Me: Wonderful, what are you planning to put for a down payment?
Customer: Well I was looking to purchase the home for 350k, I want to use one of those 0 down payment programs and actually I was hoping you would give me about 50k at closing so I can buy a new car.
Me: Unfortunately I don't think I'm going to be able to help you with this loan.
Customer: You stupid banks, take our taxpayer money and then won't lend it out!!!
Hey Nathan,
You make a great point about investors needing the credit. It actually fits what banks do as well. Somebody who already owns investment properties will be scrutinized much less when moving and not selling their current residence. Not only does the landlord experience come into play, but the overall likelihood of an investor letting the credit be tarnished is significantly less. I never thought about it that way.
Just to be clear, I am on the residential side of things. So I work with almost all OO properties, not investment props. This is all just my personal opinion from what I've seen, nothing official that I've heard from the actual bank.
You make a great point about investors needing the credit. It actually fits what banks do as well. Somebody who already owns investment properties will be scrutinized much less when moving and not selling their current residence. Not only does the landlord experience come into play, but the overall likelihood of an investor letting the credit be tarnished is significantly less. I never thought about it that way.
I wish the banks would think about it that way. They should be scrutinized much less, but, at least in our case, unfortunately, No. Mortgage payment counts against the payment we qualify for, rental income on that property will not count as income, even though we've had successful rentals, 5 currently, and been a landlord for 11 years now with tax returns to prove it. We would not consider ruining our credit, especially for a property that we love that is rented out to tenants that just renewed their lease, all of which the banks are fully aware of. It's difficult to spend your life consciously building great credit, building a retirement, investments, safety net, etc., yet being treated as if we were scam artists. Anyway, we'll do it their way and just add this one to the portfolio when things ease up, although paying more than I would to get the area we want, which I wouldn't do for an investment property.
@Lance, I wondered why all the sudden while talking to lenders they were happy to talk to me. My conversation style has improved to Credit score 760 job 4yr and so on, lol. I have to admit that I have heard all the negative about banks not lending and i was surprised when told that I would have no problem purchasing my first investment property. We'll see how it turns out after underwriting.
@Rusty I just sold my truck to get my D/I lower to qualify for more property. I have to admit it was a hard decision me the dogs, they are still looking for "their" truck so they can go for a ride.
Wow! What a discussion I created. I step out of the office for a doctors appt, only to return to the discussion from h*ll !! As usual, I'm going to agree with Joel. The pendulum has swung too far in one direction and there's no middle ground. The saddest part is that the drivers of the economy are the Stated Income borrowers (real estate investors, agents, attorneys, etc) and these people cannot get loans because they don't have W-2 income. These people tend to make MUCH more yearly income as compared with the avg W-2 income earner. But they can't get a loan because Stated Income loans are what got us into this mess....
Now for those bankers who commented on this discussion that are making loans, you failed to indicate if those loans were residential mortgages or commercial? I was referring to commercial loans in my post. Commercial loans are MUCH TOUGHER to qualify for than a residential loan in todays market. (I said with the exception of community banks). This is a TRUE story, not made up as you insinuated Steve B. Are you a real estate investor looking for a commercial bridge loan or commercial refinance? If you are, I would suspect you wouldn't have had to read my post 3 times. These are the people who are getting hit hard by the credit crunch --- commercial real estate investors. These are the types of loans that banks aren't making right now. Private investors have stepped up to fill the void and this is where private money lending has become so valuable to both the Stated Income borrowers who make a lot but claim little, AND the commercial real estate investors.
I agree with Zachary D. in that banks have to better gauge their risk and tread lightly. With commercial loans, banks have to be able to entice investors to buy their shares and right now, to do so, they have to get rid of commercial assets on their balance sheets. This is what my commercial banker friend explained to me. You can read the original interview if you just google, 'Interview with a Banker.'
Thanks for all of the comments. Kind of glad I was out at the doctors office today....
Hey Corey, I was wondering if you were going to rejoin!
I did mention it in a post but to clarify my points are based on residential lending. Agreed commercial is a very different story and I have no idea what that environment is like at this point but I'm not surprised to hear it is still tough.
Thanks for clarifying. Yes I'm back. ha ha.
BTW - Thank you for your service....
+1
BTW...the citation of my thread on strategic default is slanted. If banks loan without recourse they should price their money the right way. It isn't the investor's fault if they don't.
we have too many banks in this country. imagine how much cost can be cut and fat can be trimmed if we had 50 banks or fewer.
there used to be over 14k banks, and now it's down to about ~6k. do we need that many? really? name another industry that has 5k "competitors". how many car companies are there?
you get my point.
Thank you Corey for the starting this Thread. We have been using our own cash for each deal, but this limited our purchase to 1 SFR at a time. I interviewed a company (HML) & so far it's been working out. We bought 2 properties simultaneously & used our own cash for the rehabs. We put between 20-30% down.
This week I started calling smaller banks to ask for their process of getting a line of credit so we can use those funds instead of HML. We know that they wont be giving us a loan so easily but wanted to know their criteria so we can plan for the future. Today we are using HML for our purchases. We are still netting a decent profit for the small amount of money we are using to invest.
Hope to learn more about private lending (not HML) at the Summit.
Toni
there used to be over 14k banks, and now it's down to about ~6k. do we need that many? really? name another industry that has 5k "competitors". how many car companies are there?
you get my point.
How many car dealerships do we have in this country?
there used to be over 14k banks, and now it's down to about ~6k. do we need that many? really? name another industry that has 5k "competitors". how many car companies are there?
you get my point.
I don't agree with this. Granted, I do believe that a "culling of the herd" was necessary given how so many institutions were poorly run and/or made horrible decisions, but I firmly believe that the average person benefits from having a pool of lending institutions compete for their business. I'd hate to see how things would undoubtedly change for the worse if you took away that competition.
Also, it's important to point out that there are a wide variety banking needs that need to be met, and few institutions do can do it all. Considering there are credit unions, portfolio/investment/private/online banks, non-depository lenders, etc. you can have businesses in close proximity to each other that have different products and services
Not to mention that every town/city has small(er) banks that make a huge impact within that community. Especially, when it comes to lending relationships or dare I say "common sense" lending.
How many people here would be out of business if their small bank/credit union went out and they had to go to a large bank and apply for funds?
there used to be over 14k banks, and now it's down to about ~6k. do we need that many? really? name another industry that has 5k "competitors". how many car companies are there?
you get my point.
How many car dealerships do we have in this country?
they are still in business because of the car companies, that do in fact compete for every car they sell.
the dealer is nothing but the middle man between you and the car company. I am not saying get rid of the branches. i am talking about the number of individual banks.
The market (or government) will dictate how many banks it needs. The Frank Dodd bill is doing a good job at making it very difficult for smaller banks to survive (the opposite effect it was intending to have).
We, as consumers, need competition amongst banks. The more competiton and the more banks there are the better because they get hungrier for deals. When a new bank comes to town, they basically have to buy a book of business which means pay over the going rate for loans. If a new bank opens up in your town, I would hit them up for financing.
You are getting your wish - there are going to be less and less banks every year. The smaller ones are going to be squeezed out. Just for an example, there are over 90 banks in North Dakota that are under $100 million in assets. None of them are going to be able to survive the next 5 years. They will either be bought of close up shop. Im not really sure that is a good thing but it is inevitable.
how much better will the deals be if they could cut all the fat by being a single institution in a single location serving a city of 25k? you could pay .25 less if they did not have 4 vice presidents in your local bank (where everyone holds a major, major title, so they all feel important).
we have roughly 10 car makers in the US (that sell most cars). plenty of competition among them, do you agree?
how many oil producing companies do we have? how many airlines, dept stores?
we have more banks (not counting credit unions) than starbucks.
I guess Im a little confused as to why you would think that less competition (supply) would equal lower prices.
We could have a discussion about the Auto Workers Union vs. the managers of a bank and they costs they incur vs. what they generate but that might be another discussion for another day.
Generally speaking, the supply of banks is going to be directly related to how many people utilize their services. Somebody is going to meet the demand.
Its the same thing all the Occupy Wall Street people complain about but Ive always said if they don't like it, go home and pay off your CCs, auto loans, and mortgages as well and manage your own money from a tin can. If you can't, be greatful that somebody is willing to trust you with their money so you can have a house and a means of transportation. Its really that simple. If everybody did that, banks would be going out of business left and right.
Banks are cutting their costs. Its the only way they can survive in this low intrest environment. The fact that remains is that they provide a service that is in such demand that almost everybody person over 20 has to utilize their services in some way, shape, or form and we should all hope there is an abundance of suppy for those services or what would hold them back from increasing their margins and passing the costs onto us?
George, the number of firms in an industry depends upon the demand for the final "product" (we don't have many typewriter repair shops anymore ... no demand) and the barriers to entry into that industry, either economic (large capital requirements) or regulatory (charter requirement).
Generally speaking, as the number of firms decreases, competition also declines and the consumers of that industry's product pay higher prices for lower quantities.
I would LOVE to have the only gas station in town and persuade the town council that I alone can safely deliver gasoline without risk of spills or explosions. Similarly, I would LOVE to be the only banker in a town or county. In both cases, I would face no local competition for deposits or loans. In the internet/smart phone age, my only direct competition would come from internet banks (Ally and the like). The local merchant would still need some place that accepts deposits at night for safekeeping.
Once my direct competition has disappeared, I would work on the indirect competition by lobbying for the licensing and regulation of private money lenders and hard money lenders.
Who loses in that scenario?
What Lance said!
Actually, banks are definitely lending, just not compared to the way they were back in 2005 when you could get mortgages with no income or asset verification.
The area where I think lending standards are still a bit tight is for self-employed individuals. I've unfortunately had to turn down very well-qualified self-employed people because they couldn't show any positive income on their tax returns after all their deductions. Some of these people have had enough assets in the bank to pay off their mortgage a few times over, but banks are focused more on monthly cashflow and less on assets, unfortunately.
...
On the other hand, 95% of my conversation about banks not lending go like below. You will think I'm joking or exagerating but I'm not:
Customer: I hear banks are starting to lend again I'd like to purchase a home because It's so much cheaper than renting.
Me: OK great, do you know what your credit score is?
Customer: No, but it should be GREAT! I filed BK, but it's been over a year now and I've only maxed out 2 out of the 3 of my new credit cards and I've made at least most of the minimum payments on time.
...
Me: Unfortunately I don't think I'm going to be able to help you with this loan.
Customer: You stupid banks, take our taxpayer money and then won't lend it out!!!
Corey,
I read your post 3 times. I gotta ask if you just made this up as an example or was your post based on a true lending story.
I mean, I am a meat head body builder, and sometimes a bit slow on the uptake, but are people really that ignorant about how loans work?
Like on Saturday night live I say!
REALLY?
Given that you called Lance by the name of Corey, I'd say that you hit the nail on the head when you said "a bit slow on the uptake" ...
From what I read, Lance is re-creating what he routinely encounters, and this is not some verbatim exact real-life example.
Steve,
The gentleman's post I was responding to was Lance H.
I see that Corey, started the post so I many have mistakenly put his name at the top. I meant to say Lance ;-)
I read the whole thread then post. My bad, sorry.
Now its time to try today to bench press my personal best. 405lbs!
Wish me luck! You are welcome to join me.
Thanks!
Banks aren't lending because they haven't trained their people to recognize risk now that automated credit scoring (fico) dictates approval. Most people's credit went down after 2008 due to nothing related to their own creditworthiness.
we have roughly 10 car makers in the US (that sell most cars). plenty of competition among them, do you agree?
how many oil producing companies do we have? how many airlines, dept stores?
we have more banks (not counting credit unions) than starbucks.
I completely disagree with your line of thought in saying that less banks would be helpful. However, if you are meaning that less branches would be more cost effective then you may have a point.
I think you are confusing the two topics. Getting rid of banks (competition) and getting rid of branches (overhead) are two completely different matters.
The more banks the better.
@Jad Allen -
I completely disagree with you. The more service the better and so the more branches the better. It is NOT more cost effective for banks to reduce branches (service) to a community.
Before ANY branch/service is cut, CEOs and fake VPs pay should be cut. Bankers need to HIRE people and TRAIN them to do their jobs in a services industry. Without services, convenience and local branches that facilitate service activity, what good would they be?
Most of us can keep our money in a mattress so the point of banking in 2012 is services -- offered at local branches by real people!
The alternative is ATM's only banking and loan-making/r.e.-for-sale kiosks (think soda machines). Neither ATMs nor Kiosks pay taxes nor do they contribute to the economy by buying other economy-supporting chit like food, water, electricity, cars, gas, clothes or luxuries.
1ct returns to bank shareholders is not worth closing down branches, imo.
Well, apparently my household income puts me squarely in the upper middle class. I've been on my job for almost 11 years, my wife has been on hers for over 5 years. Our bankruptcy was finalized over 10 years ago, so should no longer be on our credit history. I have no idea what my current credit score is. How likely am I to be able to get bank loans for REI activities if my credit score is a low Good?
Current qualifications are credit score about 680 for mortgaged properties 1-4, 720 for 5-10 (if you can find someone to do it.) Need six months PITIA (a= anything else like HOA fees) for new loan, 2 months for others for the first four. After that, six months for all. DTI under about 45%. Rental income usually not counted until you have two years experience. Net rental income is 75% of rent less PITIA. So, if net rental income is negative, the property is a drag, if its positive, it helps. Once the properties are on your tax return, they look at the actuals.
Banks certainly are lending for qualified borrowers. A friend has purchased four houses in the last few months. I had a letter from Chase offering to refi one of my rentals.
I disagree with both sentences. The FICO "substantial upgrade" in 2008 (actually released in 2009) dropped peoples scores when they "borrowed" other good FICO accounts (accounts where another consumer is added as a user of the primary cardholder’s account). I believe it was in congressional testimony where they coined the phrase FACO (Fake-O) numbers. The number of people adversely affected was very small (percent wise) and by design these people's scores dropped.
Your first sentence implies bank loan personel can't run or follow standard desktop underwriting guidelines. This just isn't the case.