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Another One Bites The Dust

September 29, 2008 2 comments

Bank Failure
Washington Mutual, IndyMac, Lehman Brothers, Merrill Lynch, Bear Sterns, Fannie Mae, Freddie Mac.  Those are just the high profile failures this year.  As of Sunday, Wachovia had started preliminary talks with Citigroup and Wells Fargo about a possible merger. As time goes on, the banks that bet on the subprime market keep looking a bit more shaky then previously thought.

A while ago, I joked about Bank of America failing.  Now, it’s not so funny.  I’m not totally convinced that they’re out of the woods yet.  A few months ago, Ken Lewis was being condemned about his purchase of Countrywide.  Now that he’s bought Merrill Lynch, some people are calling this purchase a smart move.  Maybe I missed something, but didn’t Merrill Lynch lose money in the subprime mortgage market also?  I fail to see how buying an investment house that has more subprime mortgages on the books is a good thing.

Maybe Bank of America thinks they can get some help from this “bailout plan” the government is proposing.  I hope Mr. Lewis knows that there is a clause of “no executive windfalls” included in the bill.

All these failures have lead to a lot of discussion on blogs and Twitter.  One major topic was, should the government even bail out these companies?  The smaller banks were closed and their assets transfered to other institutions.  Right now, it’s looking as if you’re a big bank, the government will step in and save you, if you tell them you’re in trouble early enough.

Unfair? Perhaps.  I have mixed opinions on the topic, but I do feel the government needs to make drastic changes in the banking industry.  One area is fixing the repealing of the Glass-Steagall Act (Banking Act of 1933).  Glass-Steagall was set up to avoid the very thing we’re going through now.  Commercial banks owning investment banks seems to be a big conflict of interest.  It’s very similar to the proverbial “fox guarding the hen house.”

Bank of America is within a breath of the 10% US deposit threshold.  With them now owning Merrill Lynch and also holding a significant number of subprime mortgages, what would be the effect of almost 10% of all US deposits suddenly going in conservatorship?  Too big to fail?  I wouldn’t bet on it.

This brings up the second area we need to look at; lowering the maximum percentage of US deposits.  When that 10% threshold was set, I’m sure the lawmakers couldn’t imagine the amount of wealth we currently have.  Maybe 10% just seemed like a nice, round, low number.  But if Wachovia is merged with another big bank, this new bank, Bank of America and JP Morgan will control 30% of all US deposits.  Does the knowledge of 3 banks controlling almost one third of the nation’s household deposits make you a little nervous?

Repealing Glass-Steagall has allowed banks to be directly over our savings, mortgages, pensions and retirement accounts.  Yes, offering banking, investment and insurance services can be beneficial to our customers.  But lately, we’ve seemed to lose focus on how to best serve our customers.  We all need to take a serious look at ourselves and figure out how to get out of this mess that we helped create.  I think the last thing we want is a government controlled “Bank of U.S.”

Photo by Paolo Margari

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I Told You So…

April 25, 2008 3 comments

Right now, spread throughout the many banks and credit unions, there are people sitting back and saying “I told you so”. I know that I mentioned to a co-worker or two that these ARMs were going to get a lot of people in trouble. Just because someone tells you that you can afford a $400,000 home doesn’t mean you have to buy it. Over the last couple of years, I heard the term “house rich and cash poor” used quite a bit.

Keeping up with the Jones and having a house worth half a million dollars on paper isn’t always worth the potential consequence. As my wife and I have said to each other, having an appraisal for $500,000 and having someone willing to pay that much are two completely different things. I’m sure these people in Denver and Charleston, SC can attest to that. (side note: Since I married a Jones, are people trying to keep up with us? If so…cool)

Financial institutions that hedged some of their bets on the sub-prime market are really feeling the pain. Right after the news about the collapse of Bear Sterns, I made a joke about “what if this happens to Bank of America”. Well after B of A’s first quarter earnings report, I don’t think it’s funny any more. I enjoy being able to go coast to coast and not pay any ATM fees. Ken Thompson at Wachovia is also feeling added pressure. There is talk about him being asked to step down.

Closer to home, Carolina First took a $201 million paper loss, but a $14 million operating loss in the first quarter. Most of this is because of loans in their Florida operations. Fortunately, their NC and SC areas are holding strong.

The bad part is the banks and credit unions that stayed away from the sub-prime market aren’t exactly safe. Quite a few of them did a lot of business in the home equity market. So if you’re in the same market that is dealing with a depressed real estate market and facing a rising foreclosure rate, what are the odds you’ll collect on that HELOC or second mortgage? If I remember correctly from my Principles in Banking class, second position is a bad place to be in.

I’m not sure how this will all play out, but one thing is for sure; we need to go back to banking basics. Just looking at FICO scores won’t do it. There’s a reason that good bankers also compare debt/income ratio, payment history, job stability, collateral and character. Most of us refer to that as the 5 C’s.

Solving The Housing Crisis

November 9, 2007 2 comments

Forbes has an article about solving the housing crisis that we going through. The article is located here. Here are the 10 ways they listed:

1. Federal Oversight Of Lending Industry

2. Restore Investor Faith

3. Expand The Scope Of Fannie, Freddie And The FHA

4. Jobs, Jobs, Jobs

5. Cut Prices And Construction

6. Non-Agency Loans Need To Return To The Market

7. Investors Need To Learn From Their Mistakes

8. Don’t Cut Rates, Cut Inventory By Any Means Possible

9. Buyers Need To Look At The Market In A Long-Term Sense

10. Buyers Need To Realistically Assess What A Price Trough Means

Categories: Subprime Lending

CRA Doesn’t Mean Community Reckin’ Act

September 26, 2007 Leave a comment

There has been a lot of news about the subprime lending problem in the lending community. Ron Shevlin posted his take on a newsletter by Don Peppers and Martha Rogers. I agreed with him until he got to the personal accountability part.

So let’s get this straight: Consumers went looking for loans, lenders paid people to sell these loans, and customers decided on their own free will to take the loans. And now someone wants to come along and blame “short-termism” for the situation? Sorry, I’m not buying it.

 

We live in a society (here in the US, at least) that places great emphasis on owning your own home. Many people who suffered “subprime woes” were simply trying to get their piece of the American dream. At the time, the lenders were heroes for helping them make it happen — but now they’re the villains, when the situation turns for the worse.

What is being missed, in a lot of cases, is these people weren’t looking for loans. They were being targeted. As Ron said, being a homeowner is part of the American Dream. So imagine, you see all these people buying homes. Your household income is $45,000 a year and you have about $5000 of debt. One day, you open your mail and see a letter that explains that you may be eligible for a loan to buy your first home. There is even a low interest rate. Being somewhat cautious, you call the number and setup an appointment. After meeting with the broker, they explain that yes, with your income and first-time home buyer status, they can set you up with a 100%, no money down loan, for a $150,000 home. They can do this by offering you an adjustable rate. Plus, rates are so low now that if the rate goes up, you can just refinance. Well this just sounds great. Besides, Sharon, your co-worker, got one of these ARM thingies to buy her new house. So this must be on the up and up. And her mortgage is a tad bit more than what her rent was. And you get to build equity for yourself. Sounds like a dream come true to me.

So you sign your name on the dotted line and everything is just great for the first two years. Then, you get a letter saying that your interest rate will adjust because “prime” has gone up. To your horror, you see your new payment is $400 more than what you pay now. You call your broker so that you can refinance but they tell you that you don’t have enough equity in your home. So now you’re stuck, and after six months of delinquent payments, your American Dream is shattered.

This is what has happened in a lot of cases, even more so in minority communities. A couple of months ago, a forum was held in Charleston, SC about the targeting of minorities for subprime loans. This came about because Charleston, SC and Greenville, SC were #1 and #10 in the nation for the differences in what whites and non-whites paid for their mortgage loans. Interesting enough, the Charlotte Observer reported in 2005 that even blacks with incomes above $100,000 a year were charged high rates more often than whites with incomes below $40,000. New analysis found the gap between blacks and whites widened slightly in 2006. Another thing that is being missed is the slow decline of whole neighborhoods. Charlotte, NC and New York are two examples that are seeing the effects of this.

I used to think that mortgage brokers were the primary culprits in this sub-prime fiasco. But have you noticed that some banks have been closing their subprime divisions? Read any news about Countrywide, Wells Fargo, or Washington Mutual lately? The NAACP has even named Citgroup Inc, HSBC Finance Corp., Washington Mutual Inc., and others in a lawsuit about their subprime lending practices.

A few years ago, I also had an ARM on my home. When I sat down to close on my house, no one told me what my mortgage payment could adjust to if the rates went up. And I work for the bank. Fortunately, I read up on ARMs and knew exactly what I was getting into. I bet I’m also one of the few people that actually reads all the documents in a loan closing. I’m willing to bet that if someone, either the broker, lawyer, or real estate agent, told these people that their payment could increase by $400 to $1000 in a worst case scenario, there would be a lot less problems now. Especially since everyone working in the industry knew the rates would go back up eventually. I mean, we did have record lows, and what goes down must come back up. Telling someone that their rate may increase from 5.25% to 11.25% doesn’t mean anything. Telling them that their payment may increase from $1100 to $1950 gets the point across in a hurry.

So, in the end, I agree that there should be some personal responsibility. But a majority of the fault falls on the lenders that purposely put those people into a predicament that they knew was detrimental to their financial health. That act alone puts a black-eye on the lending industry and is completely inexcusable.

Categories: Subprime Lending