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!!!
C Rich Regarding "It is NOT more cost effective for banks to reduce branches (service) to a community."
Physical plant costs money and some banks can cost effectively close branches without a material reduction in service(s). Here is one example of just that.
No, Chris. I distinctly remember that people were outraged and posting that the banks had lowered their credit limits although they had never paid late. Lowering somebody's credit limit has the same negative effect on their credit scores as someone who goes on a credit-buying spree because it pushes their debt-to-credit-availability up over 20-30%.
Bank personnel do no run DU, so I don't get your point. If they did, they wouldn't dissuade customers on FICO. However, bank personnel is not trained so they simply ask from their call centers what is your credit score and can I have your ss to pull your credit. If you don't know your score, they offer you a credit pull and typically use the outdated CoreLogic feeds or their own proprietary systems.
Basically, banks have poorly trained customer service that prevents them from making loans. I think this is by design because banks don't WANT the business because if they originated more loans, they'd friggin' have to hire people, pay worker benefits, etc. Maybe the employees are just playing dumb to limit their workloads!
In any event, to get decent loans any more, you have to go to the small, local banks. Credit unions are worst than big banks, but small banks are doing good business deals daily.
@Chris - Your article link backs up my opinion.
"It's not unusual for banks to prune 5 percent to 10 percent of branches for demographic, competitive, cost and other reasons, said Thomas, the bank consultant, who runs branch location.com . Often customers can be diverted to nearby branches, he said, but if a bank cuts too deeply it can lose a precious commodity: ******low-cost deposits.***********"
"In coming years, he expects branches to shrink in size and staffing, as banks increasingly use technology to serve customers." In other words, bankers are replacing their employees with kiosks and you might as well get used to it.
Wow. Regarding C Rich posts... one of the few people I've met on BP where I can disagree with everything you say.
So so true sadly
@Chris -
I'm sure there will be other opportunities for us to disagree.
I see you are an HML and I am sold on banking with real, live banks with branches and employees that offer much more favorable terms to R.E. investors. The local banks in my area offer 5-6% currently to investors as compared to 11-18% HML. In your area, things may be different.
All the R.E. agents seem to push investor buyers to HML, but I knew there had to be something more favorable out there. I rejected HML as an option for my deal since I didn't like their terms or their attitude.
It is easy to disagree with you because you are wrong so often. I am not a HML. I explored private lending via my SDIRA but the quality of borrowers was like Lance H. posted in his Mar 01 entry. One guy tried to hide his 17 recent foreclosures ('That was my LLC, not me'... he said.) I've basically moved on to equity investing....
My area is nothing like yours. HML (for residential REI investments) are not active in my area. I've asked many (probably 8 to 10) agents for a HML reference. Most didn't know what a HML lender was or the business even existed. I've found a few private lenders (including some SDIRA owners) but no HML.
Consistent with my posts over the last few years, I borrow primarily through a small local commercial lender who services loans in house.
Great! Take care. I'm in an area that is diverse, multi-cultural and booming. I thought you were, too based on your Wake county previous postings regarding HML which surprised me since I thought NC buyers fared well in this market and weren't yet subjected to predatory lending.
Here's my take on whether the banks are lending or not.
Given that very few banks on the planet will do 5-10 property
loans even though they can sell them to Fannie Mae, I'm going
to say that banks simply aren't hungry enough yet to make money.
This is a loan product that they don't have to hold
and they refuse to do it for investors because they aren't
interested in doing the work one of these loans takes.
I also find it interesting when lenders come up with
their own nonsensical reasons for declining loans or
for the paperwork.
In the last refi I did, the bank asked for proof that
I received the tenant's security deposit and I had
to show that it went in bank account.
Now what in the world does that have to do with any
fannie mae guideline ever written? Its just some
stupid underwriter that doesn't really know what they're
doing and who has no concept of risk.
So any bankers out there that think they're doing a great
job of lending money, you clearly have never tried to
get a 5-10 loan done! Or else you'd know better than
to try to suggest you're doing a good job.
When I read something similar sounding, it was regarding lines of credit where the limit was lowered. And this occurred due to the lowered value of the collateral (houses in case of HELOC) securing those lines of credit. If the bank offered a HELOC based on CLTV of 80%, and the collateral value dropped by 30%, while the first mortgage balance barely dropped, then of course the borrowers should expect their limit to drop significantly, and even have such lines of credit shut down.
I don't recall anybody discussing this sort of thing for credit card limits.
Steve Babiak I agree. You point out what alot of us see as reality and others can't see because they look at bank HELOCs as an entitlement.
Mike Hasemann you may not like the rules, but they've been there for some time. Mike said "...lenders come up with their own nonsensical reasons for declining loans..." Per Page 45, in MGIC’s Underwriting Guide, "Rental income must be documented with a copy of a fully executed lease agreement and the receipt of a security deposit from the tenant with evidence of deposit into the borrower’s account." And in my state, like many, the security deposit must be deposited in a trust account with a licensed and insured bank.
Regarding "Now what in the world does that have to do with any fannie mae guideline ever written? Its just some stupid underwriter that doesn't really know what they're doing and who has no concept of risk." The answer to the first sentence (question) is on page 489, Subpart 3, Underwriting Borrowers in the Fannie Mae Single Family Selling Guide, which says "... the lender must obtain a copy of the: • fully executed lease agreement, • security deposit from the tenant, and • bank statement showing the deposited security funds."
The second sentence isn't based on fact. See pages 148 on under RISK MANAGEMENT in Fannie Mae's 10-K SEC filing.
I still find it humorous that investors bellyache about following the rules to getting government subsidized loans, yet few ever look to see what the rules even are.
So any bankers out there that think they're doing a great
job of lending money, you clearly have never tried to
get a 5-10 loan done! Or else you'd know better than
to try to suggest you're doing a good job.
Your whole post seems dead on, at least for me and my frustrations the last 2 years. I finally found a local bank through a wonderful RE agent that actually knows what he's doing and is willing to work with us, but WOW, what a PITA most lenders are. Most hear you already have 4 and just hang up. What is the difference when they aren't holding them, anyway? I have the extra requirements needed, all ready to go -- why are they so mean?
I think the government (or whatever Fannie Mae and Freddie Mac think they are) should require that lenders either follow ALL their guidelines for ALL customers, even the 5-10 loans, or they can't sell ANY of their loans to them. That would get the ball rolling.
Another problem is the stated income borrowers. These are usually more qualified to actually service the debt on a loan versus a W-2 wage earner who may lose his/her job anytime....
Stated income borrowers can't get loans these days at all...unless its a private money loan.
@Steve Babiak -
Here are some links (and excerpts) from major news and website sources that discuss borrower credit card limit deductions and the impact on the borrowers' credit scores. The borrowers didn't cause problems, but by lowering the borrowers' credit limit, it forced the borrowers to appear maxed out or near maxed out and this triggered lower fico scores.
Bloomberg: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=adCwmmkzFI3U
"The credit limits on Brown’s cards have been lowered, which has raised his debt relative to his available credit. This so- called utilization rate is a key factor in determining credit scores. Brown, a 58-year-old construction company owner in San Diego, has seen his credit score drop to 650 from 760 over the past 13 months."
CreditCards.com: http://www.creditcards.com/credit-card-news/lending-crisis-credit-score-cut-limits-1270.php
"Even if you haven't been directly affected by subprime mortgage problems, your score could take a hit. That's because new research says a majority of credit card lenders are lowering credit limits to reduce their risk in the wake of the credit crunch.
When a customer's available credit goes down, for any reason, it brings the current balance closer to the limit. That can lower the consumer's credit score substantially. Why? A key component of credit score calculations is the ratio of used credit to available credit -- the 'utilization ratio.'"
ABC News: http://abcnews.go.com/GMA/story?id=6993495&page=1#.T1gV5TGPUtE
"By lowering people's credit card limits, banks are also lowering people's credit scores in many cases.
And that means these families will pay tens of thousands of dollars more for things like mortgages and car loans."
"The Craigs' credit card company cut their limit by more than half -- slicing it from $15,000 down to $7,000 -- not because their situation had changed but because the company's had. 'I called the credit card company and asked them why they had reduced my credit limit,' Sean Craig said. 'And she said that it was due to the current economic crisis.'"
Thanks C Rich. This is great info. I didn't know this at all. The credit system in the U.S. as a whole may need a complete re-haul after this whole mess is finally over....:)
Fair point Chris and good references.
There would be no need for gov-mint subsidized loans if there weren't any. Then everyone would be playing on the same field when bidding for assets and we could eliminate the distortion the this subsidization provides.
If lending was done locally based on relationships where lenders priced risk properly with competition from other bankers then the market would take care of this nonsense. As things currently stand a borrower that is more creditworthy than someone else bidding for the same asset could pay a higher loan constant because they already have mortgages in their name they are servicing properly. That makes zero sense!
The small regionals I deal with tell me about what their regulators let them do. Many would like to finance more specs right now, but they are constrained. Financing through a commercial lending process isn't the be-all-end-all it is made out to be in this post.
@Corey Dutton
Glad to help. As investors, we shouldn't have to overpay.
@Bryan Hancock
"As things currently stand a borrower that is more creditworthy than someone else bidding for the same asset could pay a higher loan constant because they already have mortgages in their name they are servicing properly. That makes zero sense!"
Exxxaactly! That is the problem in a nutshell and this seems to be by design. But, if the banks hired and trained their people, dumb decisions wouldn't disqualify people from making money for themselves or the banks. Unfortunately, the banks are the last to know as long as the upper echelon in their organizations make loot for downsizing/cost-cutting and don't seem to have a vision for making even more money.
Its not about hiring trained people, its about the lending guidelines of the bank and the concentrations limits for the different asset classes that the bank currently has. The FDIC is on every bank to keep their concentrations down.
An example I can give is where Im from, there is a shortage of hotels but basically no bank can finance anymore because we have all hit our concentration limits so we can't do the deal despite the fact that they would be very profitable and there is a huge demand for them. Its out of the banks hands.
Often times, the banker will have to think outside of the box to get a loan done. You should develop a good relationship with a business banker so they know your situation and can be an advisor to you.
Unfortunately, banking is an industry where if you are wrong 5% of the time, you are out of business. Banks would much rather pass on 3 good loans rather than have 1 loan go bad. Its a product of the low interest enviornment which makes margins razor thin.
Also, the issue of overpaying when you own multiple propeties can be addressed when you work with a business banker that knows your entire situation and can take it all into account. Its much more subjective. When you work with a normal residential mortgage banker, they have much stricter lending guidelines they have to adhear to.