Banks and adjusting loans


With the downturn in the economy, many people have been hit hard (myself included).  Some have fared better than others, and the government stepped in and said that banks should negotiate loan adjustment in hardship cases. Problem solved, right?  Ah, but then there is reality.

I'm not sure how people managing banks manage to keep their jobs.  There seems to be a complete lack of thought and analysis in what they do.  No wonder our banking industry is such a mess.  Let me give you a couple of real-world examples from people personally known to me.

The Motorhome

The main breadwinner was laid off, and after some time it became clear that luxury items would have to be the first to go.  The mortgage was given priority with the limited funds available, and the motorhome was not paid for 3 months.  This got the attention of the bank, who wanted the loan brought current, or the vehicle surrendered to the bank.  The balance was $40,000 and there were several years left on the original loan schedule.  Since bringing the loan current wasn't possible given the limited funds available, a proposal was made to the bank to resume loan payments, but the missing 3 months worth of payments would be added to the end of the loan.  One would think this would be a pretty good solution for the bank.  They'd loose no money in the end, and not have to spend time and money taking any action.  Of course, the wizards at the bank decided it was not a good deal for them, and so the vehicle was repossessed.  The bank spent money to hire a company to repossess and store the vehicle, money to store it and auction it, and when it sold, they made less than $20,000.  So let's see, they are now out of pocket $20,000 right off the bat, and they aren't going to make any more interest on the loan.  Why yes, what a sound business decision to make! (sigh)  Even if they had done the deal and the people had flaked on the loan a few months later, they would have still been able to repossess the vehicle and so forth.  They had absolutely nothing to loose.  But you know what?  I bet they all got nice fat bonuses that year for their hard work and business acumen.

The Home

Another couple had a reduction in salary, and they knew by doing some simple projections that they would soon run out of money and be unable to pay their mortgage.  In order to prevent this from happening, they contacted the bank to arrange a loan adjustment.  Surprise! The bank said that they would not even talk to them about an adjustment until they were 3 months in arrears!  Well, that's certainly a dubious strategy.  Once people are in arrears, it is extremely difficult to fix the problem.  Also, for this couple to allow that to happen just to start a conversation is ridiculous.  Their credit would be immediately impacted (a long term effect, for no good reason – they were attempting to be good stewards), and they would be dicing with the possibility of a foreclosure.  In a booming real estate market, I can see that a bank might take this sort of approach in the hopes that they could foreclose, and sell the property for a big profit.  However, perhaps they haven't noticed that we don't have a booming real estate market at the moment.  Perhaps they enjoy having a large inventory of properties which they can't sell, are costing them money (taxes, etc), and are a hassle to rent (especially as it's becoming more and more difficult to find qualified renters).  Once again, where is the thought and strategy that is supposed to be employed when in a money management business like a bank?

I don't think that banks should be altruistic charities and simply forgive loans, or make crazy deals to make their customers happy.  On the other hand, I don't think that it's wise to make stupid business decisions which cost the bank money in the long run.  In our current environment, the name of the game should be "Minimizing Losses" and "Survival".  What is it going to take for them to "get the memo"?  If they keep making such bad decisions, we'll have bailout after bailout and the whole industry will sink.

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