SOME BANKS DON'T PRACTICE THE IMAGE THEY TRY TO PORTRAY
A new lending wrinkle has worked its way into the policy books of a number of the Dallas banks that made real estate loans that have or will soon default. A like practice is probably permeating many other banks throughout the US.
Here's how it works.
1) The lender offers a discounted mortgage loan interest rate to a potential borrower if he will purchase one of the properties collateralizing one of the bank's troubled loans or REO.
2) The bank will not make a mortgage loan on any basis to that same potential customer if he wishes to purchase a home that's on the free market.
Here's the problem. This is a form of red lining, and red lining has been an illegal lending practice for almost fifty years.
In this case, the banks are using their depositors' money and the Fed funds that they have borrowed - again, public money - to the sole benefit of the bank. In other words, you and I can both have like-homes for sale. They can even be next door to each other. The bank has a troubled lien against mine and is not the financing source for yours.
A third party turns in a contract to buy your home, and you accept it. The buyer then makes application to a bank for a conforming loan to buy your house. The bank turns that loan down, but then in the same breath tells your buyer that they will make a loan - even on better terms than market - to your buyer if he will buy mine instead. You see, my loan with the bank -- the one the bank made a contractor to build a $5 million spec house that's like yours -- is in default.
With my real estate broker hat on, I recently saw a bank turn down the loan application for a home listed in MLS for in excess of $1 million, and then offer to make a loan to that person if they would buy a million-buck spec home out of foreclosure that the bank was going to taking back.
The loan terms offered? How about these: Four percent guaranteed for 10 years, fixed rate at market thereafter, and with a thirty year amortization. Oh, and let me add, the loan would be made with only 5% being required as the down payment.
(To put that in prospective, in today's market, sources for jumbo loans (say over $850,000) are sparce, but even when offered usually require at least a 30% down payment and a rate that is significantly above the current FHA rate.
The bank has no compunction about telling their bank customer - the guy who is also the person whose house the buyer wanted to buy - that they are trumping his deal by
1) Refusing to make his buyer a loan on his house, but
2) Offering a below market loan to the applicant if he'll buy one of the bank's REO instead.
This is a form of red lining because "red lining" are those lending parctices that interfers with the free market.
Banks should be prohibited by law from this practice, especially when their depositors are comprised of the "public" and that are regulated and insured by the FDIC.
Copyright 2010 - William S. Cherry
BILL CHERRY, REALTORS
DALLAS - PARK CITIES
Our 45th Year
214 503-8563
Bill- I can't say I'm surprised. When does it end?
I don't see it as redlining in the classic sense.
It would be viewed as the bank offering incentive to a consumer to buy a bank owned property.
The cure here is simple. Just take the buyer to another financing resource.
The fact that the bank has a credit worth borrower whom they will finance but only on one of their own properties stinks. But, is there anything illegal in it??? I doubt it. Just bad business.
As for the 5% down financing, if a bank portfolios a loan, they don't have to follow any guidelines except their own.
What's the matter with you??? You're looking to banks for ethical behavior???? HA!
Bill, that is just not right. I have seen that, but the lender was very clear to say that my client didn't have to use the lender, just had to present an offer with the lenders preapproval. They also said they would finance her for another property, but we never went there. We used our own lender for the purchase anyway.
Bad stuff.
Lenn,
Let's change the story a bit. Let's say you are a black woman whose is trying to sell her home. Now is this red lining?
What banks are allowed to do or are able to get away with doing are not necessarily congruent with what they are morally and ethically expected to do as the licensed and regulated holders of the public's money, and the primary source of the public's credit.
My piece was meant to point out inequity in banking practices, and inequity is, in general, not allowed under their goverment issued licenses to them to do business.
Unfortunately, year after year, the regulators have to make specific reference to what will "no longer be allowed" because bank managements refuse to police themselves so that their banks uniformly represent the public's interest.
To address your thought about the bank making that particular 95% loan, unless bank accounting/rules have changed, that loan would be classified and the bank would have to set aside an extra reserve for loss until such time as the loan to value and its actual experience with the borrower met the definition of a conforming loan.
While not significantly, nevertheless this would restrict the bank's ability to make other loans because it would cause them to have to inflate their reserve account.
I sold a home to someone with almost identical terms as your note. But the difference was the bank did ot refuse to make a loan on a home they did not hold. So I think creating favorable rates on homes they are holding is fine and a great way to reduce inventory while keeping prices up. However refusing a loan to a borrower as you note is really really bad news and I think illegal
Banks don't look at stories, they look at statistical analysis, right? Ha. This is just one of the reasons it is so important to understand your prospects financial situation so that you can help them through the labyrinth. That is why we get the extra bucks, right?
Not redlining. I think it's just good business for the bank. They own an asset they don't want to carry, and they can reduce their stake by 5% (downpayment) of the selling price. That's pretty good incentive for the bank to take a chance on someone to whom they don't want to extend "fresh money." I'm not a huge fan of big banks, but I think they are using good business sense in this instance.
How about this. You own a car that you want to sell, maybe need to sell it. I come to you and ask you for a loan because I want to buy a car almost exactly like the one you are trying to sell. The other car is owned by your neighbor who is a member of a minority. Oh, and you own a bank. Well, what would you do?
Mike, I don't agree with you.
My education both undergraduate and graduate studies is in commercial banking. I've taught the stuff on the university level and for the AIB. Additionally, I've been in the ownership control group and director of two Houston banks and was a officer and director of a huge federal, mutual savings and loan association when they were cool.
Banks, by definition, have no other purpose but to be fudiciaries at a profit. Your reasoning violates the definition of fudiciary. And those kinds of violations are why the S&Ls went belly up. (I had already resigned because I saw it coming and refused to be a party to it.)
Bill,
This is a very poor and unfair business practice and I'm surprised they are allowed to do this. Mortgage loans should be based on the borrower's ability to pay and the appraisal value of the property, not on who owns the property.
Jo