In the car on the way home from the studio last night, I had a conversation with a long experienced retail manager at a big shop/bank. He was frustrated with banking half of his bulge bracket shop.

The conversation was astonishing to me, in that it did not reveal any systemic fraud or illegalities, but rather, how some incredibly poorly trained, not-very-bright people who are still working in the loan departments of major banks.

And while I am aware that this is merely anecdotal, it may be revealing as to how the major banks’ training and the compensation system remain are the weak link in the chain.

Our story begins when an existing brokerage client contacts their financial institution. The client has had an account with this firm over many years, despite mergers and buyouts and the like.

They own their primary residence which is valued at $1 million dollars. There is an an outstanding mortgage balance of under $10,000 (current LTV <1%).  They are an entrepreneur — their income fluctuates much more than the typical salaried Joe — but they make a very handsome living.

Out of concern for this income volatility, they wanted to open a just-in-case rainy day backup, on the off chance that their professional career takes a downturn.

So our big firm broker (who has a very respectable track record of managing assets) takes the info down and refers it to a BANKSTER in their banking division; The client requested access to $400,000 (40% LTV).

Here’s where things get interesting: Since this is a second mortgage/Home Equity Line of Credit, it is variable. The BANKSTER calculates the maximum the rate could rise to — 12.99% — and comes up with a number of $4421.67. That is nearly 50% of the applicant’s average monthly take home pay of the past 2 years, and so they reject the application.

I am dumbfounded by the innumeracy of this dolt.

This should not be a second mortgage with a ARM, it is a new mortgage — at 4.25%! Payoff the < $10k mortgage with proceeds at closing, make this a first mortgage (eejit!) Monthly payments are under $2000 a month.

Why on earth, with rates at record lows, would anyone at a bank suggest an ARM adjustable? I wonder: Is there a greater vig to the BANKSTER, or is this simply innumeracy in action?

If this is who is staffing the loan desks at the biggest banks of America, no wonder they are in such terrible shape.

>

~~~

UPDATE October 19, 2010 3:57pm:

After lunch, I spoke with the B/D adviser.  She reminded me that 5 years ago, you could get a 120% HELOC.

She told me the client said they wanted the $400k  “for emergencies” more than anything else.

Sorry, but I don’t buy what the client claims. No one asks for nearly $1/2 mill credit line for shits & giggles.

My solution: Take a $100k first mortgage (paying off the $9k), and buy CDs or Treasuries. The 2% spread is your cost of having that cash. If you really feel you need for an additional line of credit, wait 6 months than apply for another $100k HELOC.

>

Category: Corporate Management, Credit, Real Estate

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

34 Responses to “Dumb Bankers Are Everywhere”

  1. Petey Wheatstraw says:

    When you can borrow at negative interest rates, you don’t need to lend to make money. In such a situation, why would you not require a usurious interest rate?

    Also, if the borrower could sell the RE asset for it’s assessed value (in light of that asset basically being owned outright), why would they not sell the property instead of refinancing? Refi relies on BS valuation. Sale sets a real value. In our current predicament, only a sale can determine the true value of a RE asset, and that value is only good for days, if not hours.

    RE is riskier than ever.

  2. John Hempton says:

    Computers. Hasn’t changed.

  3. timabbott34 says:

    Barry, I love the blog, but you completely missed the boat on this.

    Generally a rainy day fund is something that is available to you, but you hope to never tap. In that case, why in the world would someone borrow $400,000, with a known interest cost of approximately $1,500 a month, when all they want is a safety net? A line of credit makes all the sense in the world!

    The line of credit can sit unused, and thus this person can pay $0 in interest until the “rainy day” arrives – if it ever does. It wouldn’t take very many months of saving $1,500 in interest to justify the additional risk in utilizing a line of credit (if the line is even used) versus taking out a fixed mortgage. It’s a different story if the borrower actually need the money immediately.

    If the borrower knew with certainty that they actually needed to utilize the $400,000, then I would agree, it would be incredibly stupid to borrow the money in the form of a line of credit rather than a new fixed mortgage (with a rate in the low 4% range). Perhaps there is more to the story or you left out a key point?

    ~~~

    BR: I thought about that — who needs a $400k line of credit? And as we saw in 2008-09, when you really need it, it disappears.

    I’ll inquire of the rep as to what the client really wants — I suspect that much money line they want something. But again, these are issues the original banker should have asked.

  4. SnowHill Pond says:

    Let’s set aside any hidden incentive plan and assume the banker was a “dolt”.

    BR, I think you’re a smart guy…a really smart guy. A common mistake by smart guys is to think that everyone is as smart as they are. And if they aren’t, they’re just lazy…or dolts…or morons…or whatever…because if it’s so simple, why doesn’t everyone get it?

    Think of it this way: maybe on the bell curve of intelligence, you’re just on the far right (BTW, the only far right you’ll ever be on, judging by your posts…but I digress). And the dolt you’re complaining about is just somewhere to the left of you…probably in the big fat center.

    If you acknowledge that not everyone is as smart as you, behaviors start to make sense. Also, you won’t be as angry all of the time. Because if you’re really as smart as I think you are and the banker really is a dolt, how is your post any different from a high school bully pushing around a scrawny tyke on the playground? It’s not a fair fight. I’m not sayin’, I’m just sayin’…

  5. jackalope129 says:

    It’s a variable rate because it’s a line of credit. If the borrower wanted to draw the entire line at closing it would make more sense to have a fixed rate first lien as you suggest.

  6. dead hobo says:

    Welcome back down from the ivory tower. Now maybe you know why it sometimes appears that we are speaking two different languages that only sound like English. The kind of stupidity you ran into has been common for me to see in many professions throughout my life. It is far more uncommon to run into someone with clarity of thought and the ability to turn those ideas into clear actions.

  7. b_thunder says:

    Dumb or not, but the dumbest people work/worked for the credit rating agencies. However, in the past 3 years a bunch of them made a jump to hedge funds, i-banks and private equity with massive, sometimes deep-into-7-figures signing bonuses. No, they didn’t get any smarter, but i suppose the knowledge of what’s inside the crappy (and formerly rated AAA/AA+) CDOs is very helpful to the vulture fund managers.
    “Dumb” is no longer a barrier to success on The Street.

  8. wally says:

    Did this big-firm broker make any recommendation when he passed the deal over to the bankster? Did he stay in personal contact with the deal and with his client?

  9. rktbrkr says:

    Speaking of dumb how much do you think the BAC self imposed 2 week foreclosure freeze cost them on their inventory of foreclosed homes? Lets say a buyer was willing to pay BAC 100K for a FL FC just before the freeze now BAC announces it’s business as usual in spite of the lingering doubts and suspicions about the FC process esp in places like FL, if the buyer goes ahead I really doubt they’re willing to pay the original 100K now, lets say they go ahead with 80K, a 20% cut. Apply that to 200000 homes and they shot themselves in the foot for 4B

    BAC is guaranteeing title ins from a big title company but that only covers the first transaction, if the home buyer in the example can’t get title insurance when he goes to resell his 80K bargain then he is totally fukked, anybody in that situation should search the market for their own title ins, if they can’t get title ins without the BAC one time guarantee then they should price their offer based on that situation

  10. AG Sage says:

    It sounds like what the bank needs to offer, and I wince to say this, is a more complicated product, one where the available line of credit adjusts as interest rates adjust. A standard HELOC issued for 10 years runs the risk of reaching 13% interest during its time period by my fearful projection too. Unless the guy really wants a cash out refi, but it doesn’t sound like it. But I may be confused here (or closer to the median on the bell curve ;-) I understand the bank(ster) not wanting to offer him a fixed rate HELOC, and maybe the client balked at taking the cash out for certain, with its associated closing costs, rather than just having an open line of credit that cost him $125 a year in base fee. ::shrugs::

  11. “…They are an entrepreneur — their income fluctuates much more than the typical salaried Joe — but they make a very handsome living.

    Out of concern for this income volatility, they wanted to open a just-in-case rainy day backup, on the off chance that their professional career takes a downturn…”
    ~~

    “entrepreneurs” are being disincented..

    though, to me, that guy, the ‘entrepreneur’, should pay heed to Petey Wheatstraw Says: October 19th, 2010 at 7:35 am..

    LSS: his ‘Asset’ profile, in the RE-column, isn’t, nearly, as robust as he may think..

  12. greg says:

    BR, there is a greater vig to the banker. You should be able to verify this pretty easy, just ask your friend. A second mortgage should never be issued when the value of the existing mortgage and the requested additional funds total 80% LTV or less.

  13. Bruman says:

    Part of the issue may be an oligopoly on mortgage securitization. In a freely functioning market, there should be at least one lender who comes up with an acceptable solution for this guy, which is to refinance the first mortgage, freeing up part of the funds at a low 1st mortgage rate, and then create a HELOC for the remainder, which would have the adjustable rate, but wouldn’t be applicable until funds are needed.

    I don’t know the details of this part of the industry (have generally avoided it because it smells like sh*t), but all the signs suggest enormous barriers to entry, erected to protect highly paid stupid/greedy people.

    One might say, just deregulate, but this seems to create countrywides and other problems… instead of a few highly paid dolts, we get many. It’s very odd.

    I’m really not sure what the issue is here: it just seems that where there are piles of money without substantial formal training required to get at it (as with doctors and lawyers), you attract so many dumb greedy people (along with the unethical of various intelligence) that the rest of us can’t tell who’s smart from who’s dumb, who’s ethical from who’s a huckster.

  14. timabbott34 says:

    “BR: I thought about that — who needs a $400k line of credit? And as we saw in 2008-09, when you really need it, it disappears.

    I’ll inquire of the rep as to what the client really wants — I suspect that much money line they want something. But again, these are issues the original banker should have asked.”

    Not to state the obvious, but this borrower is an entrepreneur, and he appears to be at least somewhat successful – he has a decent income and a million dollar house that is almost paid off. It seems entirely reasonable that he might want access to a large line of credit for business opportunities that may arise.

    I’d be curious as to what the client is after.

  15. ashpelham2 says:

    I can totally vouch for the the type of people that are hired by southeast regional big banks, because I’ve toured their home loan departments over the past several years, having worked for a couple of them, and having a spouse who worked in treasury at one of the now defunct big banks, on the SAME FLOOR as a home loan function of that bank. We are talking high school education, and not much more. We are talking $20k per year salaries, which in Birmingham, is typical for a high school education only, and is still not nearly enough to live off of. Since I’ve said where I’m from, and all of you folks being able to figure out which banks are/were located or headquartered here, you know what bank stocks NOT to buy. :D
    As I said, one of those banks is now owned by another, and the other is defunct/merged into a larger REGIONal bank…..All’s WELLS that ends well….

  16. GeorgeBurnsWasRight says:

    I was working at a private school some years ago during one of the mortgage refinancing waves, and had to respond to numerous bank requests to verify employment and salary for our workers.

    The bank forms all had a line on them asking for “date and amount of any pending pay raises, if known.” Our employees all got a raise once a year on a common date, and the amount of this raise was set about 4 months in advance.

    When I listed a pending pay raise, nearly all of the banks would send out a second form on the date that the pay raise took effect, and then another form after that. And each form had to be filled out separately, I couldn’t photocopy the info that wasn’t going to change on the first form and just enter the new figures on the subsequent forms.

    After a while, I got curious/frustrated at this extra work and asked the loan reps why 3 forms, and why all had to be done individually. They responded that this procedure would prevent my lying about a pay raise – a person who would lie about a pay raise once would never lie about it three times, and not allowing me to photocopy anything was the ultimate guarantee that I wouldn’t lie.

    With this keen insight into human nature, I’m shocked, shocked that any fraudulent loans ever got issued.

  17. timabbott34 got it right. There are a number of good reasons to do a Heloc instead of a regular first mortgage. First mortgages are no good at managing cash flow fluctuations because your payment stays the same, (except on a few exotic ARM’s) no matter what the principal balance is. You only make payments on a Heloc when you’ve made a draw against the account, and the balance upon which you make payments can fluctuate indefinitely, up to the limit.

    Neither the banker nor the client are as stupid as you seem to think. There’s nothing outrageous here. No oppressively stupid bankster trying to screw somebody. It’s just a pretty ordinary transaction, where one party has money that the other wishes to have access to. That the loan is secured by real estate means the bank can charge basically “prime” to the customer, but it is like a commercial loan, and will fluctuate according to the prime rate. And if the foreclosure moratorium really gets legs, it may make Helocs look even more attractive to a bank. Helocs are generally second in priority, and so get wiped out by a foreclosure of the first mortgage. No first mortgage foreclosures also means no washed-away Helocs, but the scenario is not really applicable here.

    The only thing I’d do differently if I were the client is go ahead and pay the first mortgage off, even if it means dipping into savings. If the first mortgage interest is 5-6%, there’s no way you can get that sort of guaranteed return anywhere else, and what a lot of people don’t get is that saving interest is the same as making interest.

  18. AHodge says:

    his company not actually a bank
    though they have a vestigial appendage
    the big banks all shut down their credit depts about ten yrs ago,and dont do that anymore
    with the big money elsewhere
    actual banking
    if you do it
    is for losers and drones

  19. Petey Wheatstraw says:

    I don’t think it’s stupidity. The potential to collect 12.99% on a $400K loan? (More details on the interest rate index would help). Throw that shit against the wall and see if it sticks. Aren’t we supposed to have had a vast infusion of cash that the banks are supposed to be lending? Hasn’t that cash been demonstrably backstopped against any possible loss by virtue of TBTF designation?

    One or more of the following must be happening:

    1. The bank sees asset deflation coming – generally, or specifically in the RE sector (on the off chance the bank rep didn’t just pull a number out of his/her ass).

    2. The borrower’s credit/income/employment history and prospects aren’t kosher, and/or the bank sees increased wage deflation coming (“ . . . the off chance that their professional career takes a downturn?” Nah, couldn’t happen.).

    3. The bank representative perceived the borrower to be an idiot.

    4. We have deregulated the banking industry to the point of anarchy. Anarchy, it is.

    5. Despite getting effectively free money, the bank(s) is/are insolvent.

    6. Less risk elsewhere (I wonder where that would be?).

  20. Lyle says:

    Actually the situation spelled out is why the pay option arm was invented to handle these sorts of situations. Of course there is an alternative but it hurts the economy, spend less now and save for the rainy day.

  21. NoKidding says:

    What, nobody has anything to say about the pendulum graphic at the bottom?

    Message received. Still 50 percent?

  22. Bob is still unemployed says:

    >> Why on earth, with rates at record lows, would anyone at a bank suggest an ARM adjustable? I wonder: Is there a greater vig to the BANKSTER, or is this simply innumeracy in action?

    When the rates are low, banks tend to push ARMs so that the interest rate on your mortgage will rise in the future.

    When the interest rates are high, banks tend to push fixed rate mortgages to lock you in to the higher rate.

    This may sound confusing if you ponder it with the viewpoint that the banks are looking out for the good of their customers. You need to squash that thought immediately.

  23. DiggidyDan says:

    It ain’t just bankers, love. . . pretty much a cross section of the entire population. That’s what a few decades of poor education, poor parenting, poor nutrition, and mind numbing entertainment and medication will get you. Unplug from the system and go learn something or read a book. Hell, just take a walk and clear the goo from your synapses and think about that.

  24. Soylent Green Is People says:

    A) At least the title was correct.

    B) A HELOC is the better choice out there than a new, fully funded fixed 1st TD. If the PIQ couldn’t get $400k, they could get $300k to $250k. These lines can be increased with strong repayment history. The cost of borrowing is minimal and the monthly payments zip if no draw is taken.

    C) Worried about a 14% rate environment? That means Prime Rates in the 11% range. Imagine todays world with an 11% Prime. The carnage would be epic. If Prime is at 11, I’d be thrilled to have money in hand (as I’d draw the entire line out) and not worry so much about a small monthly pay out. Cash in that environment would be king – as would ammunition and water purification devices.

    D) If lending standards are too stupid, step in with your own funds and start lending. The market is thirsting for “common sense underwriting loans”. Gather up about $50-$100m of private funds, hire a few of the remaining “white hat” mortgage bankers out there, and start lending on common sense deals. I’m sure that a few investors would like to earn 6% or so net on their funds, providing that the risk level was mitigated by the make sense nature of the transaction. There are enough people out there able to discern between a smart deal versus a rat hole borrower to get something like this off the ground.

    Actions speak louder than words. Don’t like the way things are? Make some waves.

  25. bergsten says:

    In my personal experience, the big bank I’ve dealt with is incompetent beyond statistical probability (even completely morons aren’t always wrong). No mortgage foul-ups (I wouldn’t have trusted them to handle something that complicated, and their rates were never even close to competitive). But, as some examples:

    - Cash Machine cards linked to no accounts

    - Other people’s accounts linked to our personal online account

    - Opening two identical corporate checking accounts at the same time with the same person and getting entirely different sets of checks, etc.

    - Uncredited payments

    - Unusable, buggy, crashy website

    - Laughingly bad customer service

    And on and on and on.

  26. AG Sage says:

    I have an idea for a product that would fit this situation. The HELOC is split into 14 six month maximum draws. The interest rate for the money drawn at each six months is set at the beginning of the period. Money drawn on that period is fixed at that rate. Repayments have to exceed draw downs after five years and no draw downs after seven and a half years. Payments would have to be applied to the highest interest rate, per the new cc regs.

    It’s a thought, anyway. The bank is skittish because they haven’t a clue about the future. Well, at least they’ve finally learned that lesson. Okay, overlearned, but how else could they learn it?

  27. nofoulsontheplayground says:

    I think the bigger issue is how this loan would look to regulators. A $400,000 HELOC should be a $400,000 liability for the bank whether or not it was drawn upon. As such, I believe it would have to be servicable by the income of the borrower if a federal regulator was to review it.

    It’s likely the borrower is only looking at this as a “rainy day fund.” However, the bank needs to book the entire amount as a liability upon approval, and that’s where the income and ability to re-pay should come into play.

    If the borrower wanted to have access to the money at a low cost, they could take out a fixed $400,000 15-year mortgage at maybe 3.7% APR, put the money in 10-year T-bills at 2.5%, and probably come out better after taxes than going down the HELOC route. I’m not an accountant, so I couldn’t be certain about whether they could do this.

  28. jwagner says:

    About fifteen years ago the large bank with the office on a nearby corner sent me a letter that started out with “To better serve you…”. The letter went on to tell me that we would be assessed fees on our second checking account (my wife’s account), even though I had negotiated a free second account with the local office. They do irony pretty well.

    To make a longer story shorter, after calculating interest and fees it worked out that the local credit union would save us about $300/year. I can talk to a human being at the CU if I need to, escalate problems into management and they haven’t re-sold my mortgage.

    Why do people continue doing business with BoA, Citi, etc.?
    Jim W.

  29. Dexter says:

    Last month, I was asked in a mailing to subscribe to paperless banking with RBC, which has my 2nd mortgage. To do it, I had to go online.
    After many failed attempts to setup an online account, I called them and was told I had to have a checking, savings, or CC account. Reluctantly, I filed online for a free, no minimums checking account. At the end of the process, it asked for my initial funding (minimum $100). Reluctantly, I wrote them a check for $100, of which I plan to reimburse to myself $99 later on.
    The online application then told me to print out the forms, sign and snail mail them to RBC. I figured it was so they would have an original signature, not a scanned one.
    Today, I get a call from RBC saying they are working on the account, and they have to have an original signed signature card. So they have to snail mail one to me, and I have to snail mail it back.

    Paperless – my ass.

  30. bergsten says:

    @jawgner, dexter — Yeah. Sad to say, I tried the credit union route — the one that had the highest rating to boot, and they weren’t all that better. Very similar processes, only much more immature.

    Same issue with “setting up an account online.” When I went to the branch, they had to type in everything from scratch because, “their online and internal systems don’t talk to each other.”

    It took several interactions to get paper checks and a debit card. More transactions just to find out the routing codes and (get this!) my account numbers (“for my protection they don’t give you your account numbers”). Huh?

    Inscrutable, unusable, ACH transfer application. Three to five business days where the transferred money “vanishes completely” (for fun, I called and reported it stolen).

    Online applications that ask you for your dog’s birthday on each transaction.

    I’m telling ya, I’m startin’ my own bank, if I can only find enough morons to staff it.

  31. Mannwich says:

    @bergie: I’m sure you’d have no problem finding enough morons to staff it. That’d be the least of your worries.

  32. Fred C Dobbs says:

    Another no-brainer. Of course, there are a lot of dumb bankers. There are a lot of dumb people everywhere, all over the earth*. Some are bankers, some are teachers, some are policemen, some are bartenders. Some can speak English, and others can’t. Some are men and some are women. Some are young, and some are old. ETC.

    It is hard to award points for stating the obvious. And, you know something, it is not going to change, and there is nothing you or I can do about it.

    *O I forgot, no one ‘on Wall Street’ is dumb. They are so smart they can tell me where ‘the market’ is going to close tomorrow, and where my stock is going to sell for in a month or two.

  33. philipat says:

    You’re missing the point. It’s all driven by the “Bonus Culture”. So, not dumb, just part of the same corrupt system to stuff the customer for the greatest amount possible to earn a larger bonus.

  34. solartrix says:

    I’m not sure about the “rainy day fund” thing (what that is exactly), but I’m one of these entrepreneurs who’s tangled with some idiots at my bank. They told me I couldn’t get a home loan because I hadn’t had my current company for more than two years, even tho I explained several times that my current company was an outgrowth of my previous company and that my previous company still existed but that I was working full time on (and taking my paycheck from) my current company. I guess that was too hard to figure out, even though I could show a nice six figure income going back several years on my tax returns… Ugh. Frustrating just thinking about it again.