19 November 2011


They want to make money. That's what every business wants.

Traditionally, the most stable, steady profit-making enterprise for banks has been lending money. Sure, there's much higher yields to be made from speculative, high-risk investments and money manipulation, but to ensure the continued health of a bank it needs a solid portfolio of dependable low-risk loans.

And, one of the primary reasons that the economy is still so stubbornly sluggish is that banks are sitting on piles of cash that they aren't lending out. Because of that, companies can't expand, they can't hire new workers, people can't build, buy or sell houses. For any free market economy to survive it needs constant activity fueled by money - more often than not in the form of loans. It's like the proverbial shark that will die if it doesn't keep swimming.

So why was it so enormously difficult for Eva - who I live with - and I to refinance our house recently?

We are about as close as it gets to zero risk borrowers and yet trying to get a bank to take our money was a Herculean task.

We bought our house eleven years ago, not quite at the bottom of the market but near enough to it that our property is still well above water. For our refinance, we were attempting to borrow approximately 15 percent of the current appraised value of our house. (And, according to three different realtors the official appraised value was laughably low compared with current real market value.) If our house burned to the ground, the lot alone would be worth at least two or three times the amount we were asking for.

And we're excellent customers. We have never missed, or even been so much as a day late with any payment.

And the whole point of refinancing in the first place was to cut our monthly payments - by about half - which would make it even less likely that we would miss a payment or be late with one in the future.

So we called up Harris Bank - our then current lender - reminded them of what good customers we've been and told them we wanted to refinance.

They turned us down flat.

On the one hand, what incentive did they have to give us a lower interest rate when we've been paying a higher one for the past eleven years? That would have meant they'd be making less money off of us.

On the other, they were risking losing a couple of very good, reliable customers at a time when banks are claiming that the going is tough for them, and making no money at all from us.

I pointed this out to them. They said sorry, that's the way it is.

Too bad for them. Bye bye Harris.

Thanks to the tenacious, patient and expert efforts of a fantastic mortgage broker, Eva and I jumped through numerous flaming hoops, shoveled the requested shit out of the Augean stables of our finances - being self-employed didn't help - and prevailed. We refinanced our house down from a five percent loan to a three-and-a-half percent loan, cutting our monthly payments in half. (If any of you need a really good mortgage broker I can send you the name and contact information for ours.)

So, I've got to ask, why?

Certainly banks ought to be more cautious than they were over the last decade when it comes to lending money for houses. They got severely burned making stupid loans to pretty much anyone who asked for one for any property no matter how ill-conceived the whole deal was, or how unlikely the person taking out the loan was to be able to pay it back. They figured that the property market was going to continue going up and up and up forever, so even if the loans blew up, they'd still be left with property worth a lot more than they'd loaned out for it.

They were wrong.

So now, to avoid it happening all over again, a lot of banks have put into place internal regulations that make it very difficult for them to loan money to anyone - not just the people who probably shouldn't be taking out loans in the first place.

But because banks' lending business has slowed to a crawl and they still want to make money, they are returning to the other, even riskier, financial juggling activities. Sometimes those do chalk up huge gains. But they also can cause enormous, rapid losses that are horribly destructive.

Apparently banks, and the various government agencies that oversee them, and Congress (of course) haven't learned anything from the recent and ongoing debacle.

The fact that Eva and I had such a difficult time refinancing our house may seem like a little thing. But it is a symptom of a much more severe malady that is not merely getting in the way of our country's (and big chunks of the rest of the world for that matter) economic recovery, but setting us up for the next big fall.

1 comment:

Rob Gregory Browne said...

We refinanced without a problem a couple years back, but this was when I still had a day job. Now that I'm writing full time, even though I make more money now, I have a feeling the banks would turn us down. My profession would be considered too risky.

Did that point ever come up during negotiations?