Banking Blunders

As some of you know and some of you don't, my last job was in a bank. I worked on the mortgage-side of banking, doing things like quality control on recently approved loans and then later telling people that their check from their Line of Credit didn't go through because their signature didn't match the one on file -and then getting to tell some of those same people that their Line of Credit available was going to be decreasing because it was directly tied to the amount of equity available on their now rapidly depleting in value house. It was a fun job. And it explains why I'm not working now, as there is surprisingly little demand for someone whose main experience is in an industry experiencing a massive crisis and whose degree is in literature.

Because of this, I have an odd understanding of the mortgage market, and of the banking system. The first thing I know is that banks aren't evil. They weren't deliberately trying to screw over their customers. They weren't even really letting loans go through that they knew would never be repaid. What they were doing -and are still struggling to do- is succeeding in a system where success is based on growth, and large amounts of it. Banks consistently live with the fear that if they don't continually have their stocks rise, if they are not continually building up vast amounts of new business and opening new accounts and reaching out into new areas, that they will be taken over by a bank whose growth is rapid and who is doing all of those things. So, bigger banks take over smaller banks and more successful banks take over less successful banks. And we are taught -via capitalism- that this is a good and righteous process and that it will work out for the best. Except when it doesn't. And that is where we are right now. Banks are in a crisis because they were forced to play a game they are not built to sustain. They are in a crisis because their stockholders, their CEOs, and Wall Street value short term success over long term growth. Which is why banks need to be better regulated. Which is why we have to make it so that banks can't play that game. Which is why banks either need to recognize that for themselves across the board, or we need to recognize that for them.

About a month ago, a friend of mine wondered if the current housing and banking crisis was based on predatory lending or if it was more on the borrowers who were taking on more debt than they could afford and lying on their loan applications, and suspected that the answer was somewhere in the middle. My answer is that it is on neither. This crisis wasn't based at all on a malignant set of people trying desperately to screw the other set out of their hard-earned money. It wasn't about banks taking advantage of the disadvantaged, or about the disadvantaged lying in order to secure that loan. The banking process is infinitely more complicated than that. Banks, due to being a business, generally don't approve loans they know -or even suspect- will default or fail. Banks, due to being regulated, generally don't involve themselves in predatory practices. And the amount of people who lie on their applications and don't get caught doing so is negligible. If enough of them succeeded to bring down the banking industry, then the banks are really, really dumb and should overhaul their post closing departments, their quality control departments, and their closing departments -and there are enough banks that not every single bank could have this issue. Instead, the problem is one of short-sighted good faith. The bank assumed that the economy and housing market would continue its boon, even with all evidence to the contrary. The borrower assumed that his job would still be there, his house would still be worth X-amount, and that the economy would continue at a steady and good pace. For the borrower, many of them were not taking on too much debt at the time of the loan. It was only when the housing market bottomed out, when the economy slowly started to sink, that the loan that had been before possible now became impossible.

Banks are fairly well regulated now so that they cannot take advantage of their customers. The interest rates are federally regulated. The mortgage agreements are drawn up and every contingency -including how much it will cost to pay off the loan before the prescribed time and the amount the borrower incurs for a late payment- is clearly documented. There are very few actual surprises within the mortgage agreement itself. But what does need to be done is to reimagine the way we value banks' success. If we imagine success as being holding onto loans, not selling them to other banking institutions, not racing to open up as many loans as possible, and instead try to envision a company that will outperform over a longer period of time -decades, instead quarters- then we can help to revise and revive a flawed banking system. It isn't the only solution, nor an all-encompassing one. But I do think it will help.