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Where Have All the Checkbooks Gone?

Banks and other lenders have become overly tightfisted. They point to the state of the economy and fallout from the housing bust as justification for their current actions. They also note an increase in non-performing boat loans and repos. With all that, one might think the banks are victims. Truth is, they are . . . but it’s primarily of their own greed! Looking back for a moment, it’s hard to identify exactly when banks abandoned their 100-year-old sound business model of loaning money, setting a fair spread, and having the borrower repay the loan and interest in an agreed number of payments. But clearly they did.

During the last few years, lenders actually dumped the idea that being repaid by the borrowers was important. Instead, attracted by the growing amounts of consumer debt coming from instruments ranging from home mortgages to boat loans, banks began packaging these into securities and raced each other to sell them to investors. In such a scenario, repayment of the loans took a back seat to the revenue generated from fees and charges lenders and brokers could immediately get when the loans were made.

Even the Chief Council of the Comptroller of the Currency, Julie L. Willliams, was reported by the New York Times as saying: “Today, the focus for lenders is not so much on consumer loans as being repaid, but on the loan as a perpetual earning asset.”

In hindsight, it’s now easy to see this was a breeding ground for deals like no down payment, interest only payments, loss leader ARM’s and so on. Moreover, less than 10 years ago, there weren’t any mortgage brokers hustling deals to banks. Brokers multiplied like rabbits during the real estate boom. The banks, in turn, were in such a hurry to assemble loan portfolios to sell to investors that they (1) didn’t bother to check out the information about the borrower and (2) acted like it was impossible to lose money in real estate! But wait, there’s more.

Colliding with all this is the fact that we’re in a time when banks no longer have their own money. America isn’t exactly the land of savers. “Gone are the Christmas Clubs accounts and the little old ladies with healthy passbooks,” explains Bill Otto, marine lending representative for Key Bank and former president of the National Marine Bankers Association. “A bank’s money is now borrowed and that cost of capital is high compared to the old days when there was access to lots of fat savings accounts. Then, a lender must add to the cost a decent spread. It all means the landscape has changed again."

So, where are we now? Like it or not, lenders have been forced to go back and follow their own rules of the past as they recover from the mess they, in a major way, put themselves in. It means today, customers must put in some real equity. In addition, the 4.5%-rate train has left the station. But rates aren’t 21%, either.

According to Otto, there is plenty of money to lend. Its availability today simply mirrors the earlier times when initial equity and a customer’s ability to repay are the basis for making the loan. It’s funny but true – the more things change, the more they seem to return to traditional principles.


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