Where is Jessie James and Robin Hood?
What Happened to Common Sense?
by Howard Spiva
This is a true story that is unfolding and repeating itself with hundreds of people and families in Savannah, thousands in Georgia and millions across America.
Just a few short years ago, banks and other lenders were soliciting and sometimes directly approaching individuals, business owners and investors and offering them ways to refinance their homes and investments at lower interest rates and higher loan amounts. Banks actually were bidding for your business and asking people to leave other banks to make loans with them. “Smart people leverage your money, owe as much as you can” that was the message. Isn't that what guys like Donald Trump do?
Many of us got caught in the excitement; we took lower interest rates, maximized the leverage of our loans and we used the borrowed money to buy even more real estate. Hey if leveraged real estate is good, more levered real estate is better, right?
The payments and cash flows worked. You rented your properties and the rents paid the banks and the taxes and insurance and your equity grew. Tenants got nice places to live. Everyone was happy.
Many lenders only offered these as 5 year loans, some encouraged 35 month loans to save on intangible taxes. Loans came due and they were easily renewed at the same terms and rates, no problem. Banks were your friend.
Lenders were so happy they started lessening the thresholds of qualifying for loans. Creative strategies were employed like “stated income” and “no document” loans. If you don’t know, that is where you just say what you earn and are worth and don’t have to prove it. That sounds risky? No problem the lenders charge you an extra application fee or origination fee or “points” to cover their risk.
Then some things changed.
Some folks claim lenders loaned money to people beyond their means. People who shouldn't own their own homes were given loans. Investors who owed two million were loaned twenty million. Some lenders say the government made them, do it.
Clearly, if you watch the news you know that many people quit making payments and banks started hurting. People lost their homes.
What exactly happened? I know some folks got rich, others went to jail. Not being sophisticated all I know is there are big boxes called buildings (Stock Exchange, Brokerages, and Banks) that had little boxes called computers, and the numbers on those small boxes changed. Suddenly billions of dollars evaporated as those numbers on those machines went lower. Can’t we just change the numbers back? Did the money dissolve?
The economy tanked. Some folks still did okay. They either were conservative in their investing in real estate, or they had tenants to pay the payments or another income to carry the payments.
Everyone, individuals businesses and investors all have been struggling.
The banks then started about 24 months ago with a new approach.
Your loan comes due and the bank says “we are worried, times are bad, in order to make the bank look good to audits, we need you to pay 20% of your loan off and we have to term out your loan and amortize the payments”.
In laymen’s terms (1) you give them all your cash (even if you needed it for property taxes or something silly like food for your family) and (2) your payment increases between 2 to 10 times what the payment was.
Why are you doing this you ask?
We are worried about the economy, answers the banker. But won’t your increasing the payments cause your customer to fail? Aren’t you causing what you say you are worried about?
And wait, how can I pay your increased payments when my rents are the same? you ask.
No worries, the banks assure you that after six months of these higher payments, they will work with you to get your payments back to a reasonable amount. You have done business with the bank for decades, they are your friends. So I admit many of us fell for that and cooperated, we signed the new “temporary” loans. Big mistake.
If that persuasion didn’t convince you to sign, the “bad guy”, another banker usually from out of town, tells you all your credit lines will be closed, your loans will be called due, they will foreclose and ruin you. Ok so now you have no choice and the rest of the folks signed up for this new plan.
Six months to a year passes and the loan is due again.
Now the banker is back and wants all your updated financial information. All your assets, all your checking accounts, everything you have worked for your entire life, and they want to know about it so they can help you. In case you don’t know, you will learn later, it is a bad idea to tell anyone all your business. Before there is time for anyone to review your information that you voluntarily handed over, the “bad guy” is back.
What happened to your friend and long time banker? Well they disappear. They must be on vacation out of the country because they stop answering your emails and no longer take your calls. Now you are only allowed to speak to folks from Atlanta and their lawyers.
Now here is the most interesting part of this story.
Here is an actual conversation between a National Bank representative and their customer of 40 years:
Bank: We won’t be renewing your loan.
What? Why not? Haven’t I been your customer since I started my first job forty years ago at age 11? Haven’t I always paid you back on time for all the cars and homes and investments I made?
Bank: None of those things matter, we are going to foreclose on your property and take it from you.
Can’t you just renew the loan?
No your property is worth less money so we are going to sue you for the difference.
But I am paying you payments and interest based on what YOU told me my building was worth.
Things change, its worth less now so we are going to take it.
If its worth less why would you want it? Won’t the new buyer be paying you payments on the lower amount? You are better off with me, right?
No, your cash flows don't make sense.
Who raised my payments? Wasn’t that you?
We had no choice the bank regulators made us do it.
Who are they? Why would they do that?
Congress made them do it.
How about you change my loan back to interest only? The payments will make sense, you can renew the loan, I will pay you interest and when the economy improves, values will increase and then we can do an amortized mortgage later.
An “interest only” loan is a non performing loan under banking laws, we don’t make them anymore.
So my sending the bank interest every month for the last 5 years is "non- performing"?
Look, this is too complicated to explain to you. We aren’t renewing your loan and we are foreclosing.
I was promised that we would work this out.
I never promised you that.
Your bank did.
There is nothing for us to discuss. We are foreclosing and suing you.
So that I am clear. Instead of my paying you payments, as I have for years, you would rather: (1) foreclose on my property; (2) have zero income; (3) have the property likely sit empty; (4) the bank has to maintain the building, pay the taxes, the insurance; and (5) if it is ever rented, the bank has to be the property manager. All this, while you wreck your customer’s credit, steal their equity and sue them?
I am just doing my job.
Really? I bet your mother is proud.
To be continued… Part 2 “My Solutions” please read here: http://www.spivalaw.com/spiva/blog/part-2-%E2%80%93-solutions