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:
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 you explain the large deposits made into your 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 [that after] having been run through the gauntlet... 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 loan, 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.
TARP repayment, I believe, is contingent on increased equity and capital ratios; higher capital helps, so does lower assets, including loans. Why would Wells Fargo want to pay back TARP so quickly?
From the San Francisco Chronicle of January 1:
The stock awards come on top of stock-based salary increases worth nearly $14 million for the same four executives announced in August. That boosted CEO John Stumpf's salary to $5.6 million, more than six times his 2008 base pay. The company said at the time that the raises were intended to move the leaders in line with industry pay averages. The executives couldn't sell that stock until Wells Fargo paid back the TARP loan.
Draw your own conclusions, and share them here.
Follow Charles H. Green on Twitter: www.twitter.com/charleshgreen
Sounds like it's not just the "executives" in corporate America that are overpaid.
Frankly, it's hard to muster any sympathy for the "suffering" this wealthy executive had to endure to build her "beautiful" home on Lake Superior. Couldn't the author have found a better example?
And since most NGO's pay much less than corporations, I suspect it's not fair to lump her in with the "overpaid executives" phrase.
But even if you disagree, remember her point was, "If I can't get a mortgage, who can?" Still a good question, I think.
please, do you work for the bank lobbying group or one of the tbtf's?
Though I do not have all positive thoughts about Warren, I do agree with his "old fashioned" banking approach, which is that the borrower needs skin in the game (a downpayment) and reasonable debt/income levels. I'm an old banker myself.
I can only imagine Mr. Buffett would be ill to see this story from what he suggests is his beloved Wells Fargo.
For the record, I happen to think that Wells Fargo is a near insolvent bank propped up primarily through the now legitimized fraudulent accounting that is FASB 157. Take a look at Wells' balance sheet to see what it would be worth if marked to market.
In addition to their well publicized problems with first mortgage residential loans, keep your eye out for their Home Equity Loan (2nd lien) portfolio..i'll bet you might find they may have just a little bit of a problem there as well.
By the time the underwriter asked to see my home utility bills it was getting too late to meet my payroll and I had to borrow from myself to cover my business bills.
I wil be removing my money in the next few weeks.
Tell no one of this....especially Obama, he thinks they're working....LOL..!
I actually am employed by bank addressed in this (but on disability for cancer)...I've a connundrum (sp?)...I am , duh, uninsurable right now by any "new" company..still have health insurance via my employer...yet..as I approach time to return to work..I have this MORAL thing about being with this company. I need health insurance...would find a way to pay for a public option that let my pre-existing illness still allow me "in"....I need to work (no trust funds..no money...HUGE medical bills, even with decent insurance)..and..well..rent, utilities..etc etc.. how can I look myself in the mirror as part of the "team"..when almost everything they do is anethema (again sp?)...sorry..to what I BELIEVE is ethical. (BTW...always had my baby checking and savings with a Credit union...NOT my employer)..
Help! this situation (the one above) is frankly the Bizzarro world..
http://www.mysanantonio.com/business/local/You_could_end_up_a_dead_peasant.html
Maybe the EEOC might be a help.
WF also told the homeowners that they would be contacted by a representative from "Titanium Solutions" who would just come knocking at their door sometime to help them do a lot of new paperwork. They were told they should let this stranger in, answer all their questions, & fill out new paperwork about their financial situation. These people now have NO IDEA when their loan mod will become permanent. The sickly wife lives in fear of some stranger knocking on her door when her husband isn’t home and that she is required to let that person in or stand a chance of not having their loan mod approved.
Many of the owners of the mortgage backed securities bought credit default swaps that protected them against a drop in value of the bond.
When a house goes into foreclosure and is sold, the owner of the mortgage may not lose any money because of the credit default swap. It is like an insurance policy, and they get paid by the 'insurer' when the house is sold to make up the difference so the security holder is made whole.
If they write down the loan or it gets 'crammed down' they would lose money because those are not covered by the terms of the credit default swap.
So it's better for the capitalists if the houses are foreclosed than if they write them down.