Interview with a Banker – Why Banks Still Aren’t Lending
Lender · Salt Lake City, UT · Member since 2012 · 714 posts · 169 votes
Interview with a Banker – Why Banks Still Aren’t Lending
Most Popular Reply
Real Estate Investor · Woodbury, MN · Member since 2008 · 133 posts · 43 votes
14yBeing 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!!!
69 Replies
- Investor · San Ramon, CA · Member since 2011 · 1k+ posts · 569 votes14y
Chicken and egg problem.
On one hand, housing prices continue to drop destroying the security in mortgages. The economy continues to struggle, foreclosures continue to happen. What was once very secure debt from a bank's point of view, a house, is now viewed by many as a liability.
Of course, others argue that house prices are dropping because banks aren't lending. If they would lend to more, home prices would stabilize and rise.
Chicken, meet egg...
I don't believe it's that simple, I don't think there's many looking for homes. I would like to see data on just how many mortgages are being rejected so someone could extrapolate just how many home buyers are out there but unable to get money to see what sort of increased demand there would be. I don't believe it's as significant as some imply but maybe I'm warped as even with struggles on my credit history, I've gotten 2 mortgages in the past 4 months on NOO homes.
What I do know is few want to be the risk taker. If the industry could move as one, maybe the result is positive and home prices rebound. But the industry doesn't move as one (outside of Government intervention). That means you'll need a leader and rapid followers. I don't see anyone wanting to be that leader, I don't see a major change in 2012 unless Obama tries to buy the election with tax dollars.
- Lender · Salt Lake City, UT · Member since 2012 · 714 posts · 169 votes14y
Great feedback.
- Real Estate Investor · Woodbury, MN · Member since 2008 · 133 posts · 43 votes14y
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!!!
- Real Estate Investor · Salem, OR · Member since 2011 · 422 posts · 149 votes14y
Thats really funny Lance, though sadly true. I've been trying to convince my sister to buy a house since the beginning of last year. They finally looked into it and found out their DTI was to high, how did they solve the problem, went out and bought a new truck. Oy vey, will fiscal responsibility ever be important.
- Investor · Fort Worth, TX · Member since 2011 · 1k+ posts · 450 votes14y
Funny!
Rusty, your comment about the truck reminded me about my wife's uncle. He calls up the other week asking if we can co-sign for a car loan for a truck he "needs" for work. Just a "simple" truck....................for $17,000!!!
I'm an engineer and drive an 04 Chevy Silverado single cab long bed with rubber floors and manual everything that cost me $8,000 when I bought it in 2010. Now that's a simple truck. How a simple truck for a PAINTER should cost more than twice my truck, I am a little baffled. But some people will just never get it. Despite the recession, I don't think most people have learned to truly live within their means.
Needless to say we are not cosiging for anybody.
- Bismarck, ND · Member since 2011 · 142 posts · 16 votes14y
Im a business banker as well so perhaps I can be of some service.
The biggest thing that I haven't heard people touch on is the increased regulations that are being placed upon financial lending institutions. The Frank Dodd bill is going to have a lot of unintended outcomes mainly making it impossible to function if a bank is under at $100mm in assets. It takes so much time and resources to keep up with the new regulations that only the bigger banks can afford all the extra costs.
The margins that the banks are earning now are so slim that they can't afford to be wrong anymore. The well collateralized and secure lender could have a hay day in this market - he can keep leveraging his assets and taking advantage of the low interest rates.
I was thinking about starting a thread about this but even as far back as 5-10 years ago, a lot of people got their start with 0 down and other creative loans. Obviously, times have changed and now its a lot harder to get your investment real estate portfolio off of the ground. I don't think we are ever going to see the type of opportunity that was available to people who were able to snatch up dozens of properties for almost nothing down, fix them up or hold them, and esentially create massive amounts of profits out of basically nothing.
To sum it up, in most jobs, if you are right 95% of the time, you are doing a good job. If you are wrong 5% of the time in banking you are out of business. With the interest rates this low, its no surprise that banks want more skin in the game. Its a high risk low reward situation.
- Investor · Southlake, TX · Member since 2009 · 950 posts · 338 votes14y
Corey Dutton I think the banker's comment is correct. Based on our conversations with regional banks, some banks took big losses from real estate over the last few years and are trying to clean their balance sheet of these, as well as reduce the percentage of RE loans in their portfolio. Other banks did not take as big of a hit and continue to make good RE loans, "cherry pick" as you say.
Lance H. do you work for a regional or local bank? My impression is that many smaller banks fared much better than the national mortgage factories. Also, are you saying that the same potential customer would have gotten a loan four years ago? I would think this is an exception to today's applicants, not the norm.
- Real Estate Investor · Woodbury, MN · Member since 2008 · 133 posts · 43 votes14y
Hi Tod,
I actually work for one of the large national banks and I work on the national scale, not just where I'm located. Not saying that the person would have gotten the loan 4 yrs ago, but we could have taken a shot at it. But in reality, this type of inquiry really is the norm for people looking to purchase. I'd say 90-95% of the calls I take don't necessarily have all 3 issues I put in the example, but for sure have 1 and any 1 of those will get you turned down immediately now. Refi's people tend to be of much better credit quality if they have the LTV or fall under HARP.
The point is though, most banks are readily lending, but they are lending to solid people with fair to good credit, solid income and work history, and at least 3.5% down payment. If somebody doesn't pay their bills on time, can't keep a job, or can't save a few k for down payment and closing costs, they have no business buying a home. The fact that banks have finally realized this and quit making bad loans, doesn't mean they aren't lending, it just means they aren't lending to anyone on the street who asks for money.
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes14y
If you look at it this is simple.
Existing banks can't take on anymore losses yet they are at risk of going under.
The bank needs to shred non-performing assets but at a premium.This is pie in the sky and isn't going to happen.So eventually many of these banks are failing every month or getting bought out with the FDIC's approval from another bank.
There are new banks that just opened that do not have the vintage default paper on their books.They are still stringent on loan qualifications.
There is not going to be a huge lending spree because many have some type of blemish these days that disqualifies them.The main reason cash people want a loan is to leverage their money into multiple deals.
All these programs the government keeps coming up with are for highly qualified individuals.If you have 2 million residential loans that still need to be worked through the system on the pre-foreclosure side how many of those people will qualify for these government programs??
Not many at all.
As long as cash is what is getting deals done or private loans with high debt service that will keep prices down if little to no lending is happening with the regular programs.
I think the pendulum has swung back to tight and needs to come back a little for loan lending criteria.Even if current buyers want to conform to a banks tight requirements to purchase something it might take years for them to get there.
- Real Estate Investor · Philadelphia, PA · Member since 2011 · 16 posts · 0 votes14y
Originally posted by Lance H.:
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!!!
Corey,
I read your post 3 times. I gotta ask if you just made this up as an example or was your post based on a true lending story.
I mean, I am a meat head body builder, and sometimes a bit slow on the uptake, but are people really that ignorant about how loans work?
Like on Saturday night live I say!
REALLY?
- Bismarck, ND · Member since 2011 · 142 posts · 16 votes14y
Most people have unrealistic lending expectations. The banks aren't all that tight if you have proper expectations. View points have been skewed due to banks basically handing out money not to long ago which is complete insanity.
- Investor · Los Angeles, CA · Member since 2011 · 242 posts · 61 votes14y
Very funny post Lance.
I have received two conventional loans from big banks for investment properties since the downturn. Banks are lending as long as you meet their requirements which to me seem reasonable. Have some money, job history, and good credit.
- Real Estate Agent · Virginia Beach, VA · Member since 2012 · 2k+ posts · 1k+ votes14y
Joel is right saying the pendulum has swung too far the other way. It is ridiculous the hoops we have to jump through right now. They --regulators, banks, whoever is making the decisions -- are making it impossible even for people with great credit and reserves.
We have years of returns & Schedule Es showing a history of good income, decent rentals, great credit, and reserves. We are having to do ridiculous things due to the new rule about "buy and bail" as they actually think that even with all our assets we would walk away from our old house that we rented out in order to move to a new state for a new job. So not only do they count that whole mortgage payment in with any new mortgage payment to determine how much we qualify for, they won't count the rent we receive from that property as part of our income, even with a signed lease and proven payments -- double whammy.
So to alleviate this problem, we are buying a much smaller unit here in MD, will live in it until we have 2 schedule E's for the old property, when it will just blend in with our other rentals on our tax returns. We can then qualify for a nicer primary residence as the new lower-price one will be counted against us instead of our old home with twice the mortgage.
And they wonder why banks aren't lending.
- Real Estate Investor · Woodbury, MN · Member since 2008 · 133 posts · 43 votes14y
Thomas C.
Unfortunatly that was a real scenario. I talked to that person about 15 minutes before writing the post. Normal basis I would have stopped the conversation at the first question, but I had just read this post so I let it ride a little further before turning him down. I have very similar conversations 5-15 times each day, and almost every one of them says the banks are evil.
- CT · Member since 2011 · 41 posts · 3 votes14y
The fact that banks are still requiring only 3.5% down in some cases also shows that the consumers aren't the only ones that didn't learn a lesson. Of course, these 3.5% down loans are probably getting FHA insurance or are getting sold to FNM, FRE and we taxpayers are still taking the risk.
- Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes14y
Originally posted by Thomas C.:
Originally posted by Lance H.:
Being a banker I'm going to say "Hogwash"!!...
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: 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!!!
Corey,
I read your post 3 times. I gotta ask if you just made this up as an example or was your post based on a true lending story.
I mean, I am a meat head body builder, and sometimes a bit slow on the uptake, but are people really that ignorant about how loans work?
Like on Saturday night live I say!
REALLY?
Given that you called Lance by the name of Corey, I'd say that you hit the nail on the head when you said "a bit slow on the uptake" ...
From what I read, Lance is re-creating what he routinely encounters, and this is not some verbatim exact real-life example.
- Commercial Loan Officer · Southern Maine, ME · Member since 2009 · 782 posts · 415 votes14y
Originally posted by Zachary Dosch:
Most people have unrealistic lending expectations. The banks aren't all that tight if you have proper expectations. View points have been skewed due to banks basically handing out money not to long ago which is complete insanity.I think this statement about sums it up. On the commercial side, I'm seeing increased lending appetite from banks, but it's a selective appetite and it's just a given these days that in the CRE space that a borrower must be credit worthy.
Unfortunately, there are lot of borrowers who are not accustomed to what it takes to obtain financing in the current market, but that is slowly changing. It can be a rude awakening for someone who's never missed a payment on their chimerical loan to be turned down for a refinance simply because the bank is trying to restructure their balance sheet.
More so with commercial than residential properties it can make big difference knowing what is going on internally with a bank as that can have an impact on what types of properties a bank may be bullish on. Not only can this information impact getting an approval, but in some cases, it may impact the terms of the loan.
Just because a bank may be willing to loan you money doesn't mean you may be getting the best rate, LTV, or amortization.
- Flipper/Rehabber · Louisville, KY · Member since 2008 · 1k+ posts · 1k+ votes14y
That is right, unrealistic lending expectations lead to ridiculous statements like "Banks aren't lending".
The whole problem in the first place was that they were lending to much (meaning to too many unqualified people).
So of course they are going to lend less (only to qualified people).People's expectations for whether they are qualified is still pretty f***ed up.
If you are well qualified, you can get a loan. That is how it should be. Most who complain are not well qualified.
- Investor · Cincinnati, OH · Member since 2010 · 1k+ posts · 928 votes14y
Banks are also much more focused on experience these days. Too many small-time landlords are just idiots: they overpay, they don't screen tenants properly, they underestimate expenses, they spend their reserves, etc. There is little "professionalism" of small-time property management. These little guys are not applying proven business models, they're seat-of-the-pants. It's the wild west in this investment space, and in the downturn the banks have lost their butts on these small-time landlords holding 1-4 unit properties.
So yes, aside from credit scores, reserves, and job history, the banks want borrowers to have some proven experience in order to count the rental income. Two years is becoming pretty standard. Without counting the rental income, this blows up the DTI ratios pretty quick.
And yes, local banks are over-weighted in 1-4 unit (residential) investment property loans in their portfolios, with lots of them impaired, and they're compelled to cut off new lending to comply with regulator and Board directives to reduce exposure in this area.
They all want to focus on secondary market lending, preferably to wage-earning OOs, where the underwriting is easier, as the income they can generate for this activity features a very high ROI, without taking on any credit risk for the bank. These fees have risen sharply during the downturn, interestingly, so that's where their energy is. Small-time real estate loans are just way too much work, and too much risk. Property values are still trending down, and appraisals are suspect due to lack of non-distressed real estate sales.
Property values have fallen so much that the loan sizes are much smaller as well, and these smaller loans are much less profitable, and thus less attractive, for the local bank to originate.
So a host of things conspiring.
- Real Estate Investor · Woodbury, MN · Member since 2008 · 133 posts · 43 votes14y
Hi Lynn M.
I understand your position completely as I am personally in a similar one myself.
Unfortinately the reality is that there are a lot of people doing exactly that. Buying a new house and bailing on the old. Many of these people have a good amount of assets and bail as a business decision having nothing to do with if they can afford the home. Take for example this thread:
http://www.biggerpockets.com/forums/99/topics/58810-strategic-default-or-efficient-breach-
In fact, this is another regualar conversation I have with people looking to buy a home. You would be surprised how many people tell me right up front this is there plan. Many of these people are very well off individuals.
The point is, right now it is a major risk for the bank and they are trying to mitigate as best as they can.
- Investor · Union, NJ · Member since 2011 · 838 posts · 295 votes14y
I agree with Joel things have swung a bit too far in other direction which is understandable.. to a degree.......
I have been and am currently being put through the ringer with a top 5 national lender on a small 2 family purchase.
They just FINALLY issued me a committment with such crazy conditions that the committment isn't worth the paper it's printed on!!!
I had originally planned on putting 25% down they came back and said they won't do the loan unless I come to the table with 70% LTV - whcih I can understand. But the other conditions they are requesting are a bit crazy and honestly make no sense. I will give you an example.. on my w-2 my taxable income is X and they are asking why my w-2 doesn't jive with my yearly income. It is clear as day that due to my 401k pretax contributions my taxable income is LESS!!
It is shocking to me that an underwriting department does not understand this!!
Anyway, it's a brave new world out there folks.
regards,
Chris - Real Estate Agent · Virginia Beach, VA · Member since 2012 · 2k+ posts · 1k+ votes14y
Lance, Thanks! Very interesting. So, basically, it's the States' fault I am seen as a possible loan dodger -- they set up rules to make it easier to just walk away, then wonder about the unnecessarily high foreclosure numbers exacerbated by those using the option allowed them by certain States even if they could afford to pay their debt.
I'm learning that I am much more naive than I thought ...
- Investor · San Ramon, CA · Member since 2011 · 1k+ posts · 569 votes14y
Originally posted by Lance H.:
Hi Lynn M.I understand your position completely as I am personally in a similar one myself.
Unfortinately the reality is that there are a lot of people doing exactly that. Buying a new house and bailing on the old. Many of these people have a good amount of assets and bail as a business decision having nothing to do with if they can afford the home. Take for example this thread:
http://www.biggerpockets.com/forums/99/topics/58810-strategic-default-or-efficient-breach-
In fact, this is another regualar conversation I have with people looking to buy a home. You would be surprised how many people tell me right up front this is there plan. Many of these people are very well off individuals.
The point is, right now it is a major risk for the bank and they are trying to mitigate as best as they can.
Lance, I wonder what the % of walk aways is on real estate investors versus simply people who OO. A typical non-investor doesn't "need" their credit, especially if they are well off. They can buy cars, appliances, whatever else in cash.
Real estate investors generally need their credit. If someone is a demonstrated investor, I think it's a fair presumption that their need for future credit will discourage them more to not voluntarily default and exclude themselves from financing for several years. No guarantees... I'm just guessing if you look at probabilities, it's far lower among investors as the penalty to us is that much higher.
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