I have been doing a lot of work to my house lately. And I have a lot more to do. A buddy of mine is a country banker who suggested that I take out a home equity line of credit at his rural branch of one of the bigger national banks. It's low interest, no costs and you only draw down what you need and pay back a minimum 1.5% of the balance drawn every month. Sounds like a good deal for me.
Now I had heard tell that there is a financial crisis in the real estate world. I heard that lenders weren't making these kind of loans anymore. I asked him about this.
" No. A guy like you can still take advantage of this product. ( They used to be just "loans." Now they are "products.") Real estate values in your part of town are stable. You only want to take out 10 grand against an equity cushion of over 100,000 dollars depending on who you believe and you have a high credit score. Besides, if you default I will personally kill your ass. That's what makes this a good deal for us to do."
That's good to know. Because we had a bank get it's ass taken over here in Arkansas last week. And it wasn't in the Delta. We had a bank failure in Bentonville, Arkansas up in the Ozarks where all the money is now. The takeover of ANB Financial by the FDIC was not a pretty thing. You can read all about it here: http://online.wsj.com/article_email/SB121089798170797283-lMyQjAxMDI4MTEwNjgxOTY3Wj.html
Basically it is the same story as what is going on elsewhere in the country. ANB made really aggressive- read "risky"- loans based on two assumptions. The first assumption was that real estate values would continue to rise. The second assumption was that somebody would buy the paper off of them so that if there were problems down the road it would somebody else's headache. And so, as the article states, anybody wearing a tool belt could hold himself out as a builder and developer and get a loan to build a strip mall.
Well, as we know the market tanked. Loans got upside down on real estate which ain't exactly supposed to happen. And ANB also got unlucky. They got into the "go-go" world of real estate financing just when Standard and Poors and the other bond raters started tightening up the ratings about 6 years too late. So ANB got stuck with its own paper. Which couldn't have been the game plan.
When I was young and had potential the State Bank Commissioner came to speak to the Economics Club or some shit at Hendrix College. The Commissioner at the time was a country banker named Mahlon Martin. Mr. Mahlon was an interesting speaker. He would sometimes show up for these type of civic talks in overalls. He was known to pop out his glass eye to emphasize a point. You had no way of knowing from the usual Mahlon Martin production that he had an MBA from Harvard. Which is just the way he liked it.
He said something at Hendrix that has stuck with me to this day. He said he had been in banking for years and that he had never seen a bank failure where somebody didn't wind up going to jail. He said that the way banks are regulated if you play by the rules, the bank will turn a profit. It may not be as big a profit as you would like and you may never get rich in the banking business. But the bank will not fail.
I have had a couple of experiences with banks that have run afoul of the FDIC. These are not people that you want to mess with. And that's the way it ought to be. When a bank gets in trouble, customers get jumpy. Which makes the Comptroller of the Currency equally jumpy. Takeovers and buyouts are messy as hell. Electronic transactions get frozen. People inevitably lose their jobs. Not just loan officers but secretaries and tellers. The local bank gets taken over by people nobody has heard of. And all because guys didn't follow the rules.
Or, as an attorney for the FDIC once told me about a bank in South Arkansas that they had in their sights, " We are just trying to figure out what caused a safe conservative country bank to lose its goddamn mind."
Up until recently a person could pay the kids' tuition, pay off credit cards and tax liens even with a loan secured by a second lien on real estate. It was not unheard of for lenders to make two loans to be closed at once. One to purchase the house, the second to pay off the credit cards. I know a woman who had $60,000 in credit card bills. She got a loan secured by a second lien on her house over the Internet.
Those days are over. The easy "home equity" loans secured by second liens on real estate to refinance the massive unsecured debts run up by credit card millionaires or folks down on their luck don't exist any more. Or they don't exist anymore except at interest rates that are as high as a cat's ass. That's because lots of lenders lost their "goddamn minds" on a collective basis and we are now in a recession. And there is a world of hurt out there because of it.
I am a bankruptcy person. I view these matters from a certain realistic (I like to think) perspective. Lenders and borrowers game the system with equal vigor. At the end of the day what it comes down to is: What is the worst case scenario? They pay what they can pay under the law and you get down the road. But we are at a point where people who have two adjustable rate mortgages at 14% on property that is worth less than what is owed against it make the eminently rational decision to walk away rather than throw more money down a rat hole.
My country banker friend told me to fax him a copy of my driver's license. That way I can just swing by the bank after my golf tournament up there and sign the papers. Everything else was done online. Just to be on the safe side, I sent him a copy of my DL, a library card, my golf club membership card and my thumbprint. I used to get this kind of ID from guys that were in the Militia. (Do those even exist anymore?)
He called Friday night to say that he knew he knew my fax had hit the bank(as they say in the world of commercial paper) when he heard his loan officer say "Day-um!"
"I explained to her that although you are undoubtedly insane and this is against my sounder judgment, amazingly enough, the numbers don't lie in your situation and so this foolish extension of credit to the likes of you will pass an audit. So come in Wednesday and sign your house away."
The loan to me maybe as shaky as hell. but at least my friend isn't betting on the come. His loan and the first lien are over-secured. Nobody ever got in trouble making that kind of deal. My friend is in a lot better shape than the "pie in the sky" types who ran ANB Financial into the dumper.
Because, like Mr. Martin said years ago, people in the banking game that don't follow the rules get indicted.
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