In the car on the way home from the studio last night, I had a conversation with a long experienced retail manager at a big shop/bank. He was frustrated with banking half of his bulge bracket shop.
The conversation was astonishing to me, in that it did not reveal any systemic fraud or illegalities, but rather, how some incredibly poorly trained, not-very-bright people who are still working in the loan departments of major banks.
And while I am aware that this is merely anecdotal, it may be revealing as to how the major banks’ training and the compensation system remain are the weak link in the chain.
Our story begins when an existing brokerage client contacts their financial institution. The client has had an account with this firm over many years, despite mergers and buyouts and the like.
They own their primary residence which is valued at $1 million dollars. There is an an outstanding mortgage balance of under $10,000 (current LTV <1%). They are an entrepreneur — their income fluctuates much more than the typical salaried Joe — but they make a very handsome living.
Out of concern for this income volatility, they wanted to open a just-in-case rainy day backup, on the off chance that their professional career takes a downturn.
So our big firm broker (who has a very respectable track record of managing assets) takes the info down and refers it to a BANKSTER in their banking division; The client requested access to $400,000 (40% LTV).
Here’s where things get interesting: Since this is a second mortgage/Home Equity Line of Credit, it is variable. The BANKSTER calculates the maximum the rate could rise to — 12.99% — and comes up with a number of $4421.67. That is nearly 50% of the applicant’s average monthly take home pay of the past 2 years, and so they reject the application.
I am dumbfounded by the innumeracy of this dolt.
This should not be a second mortgage with a ARM, it is a new mortgage — at 4.25%! Payoff the < $10k mortgage with proceeds at closing, make this a first mortgage (eejit!) Monthly payments are under $2000 a month.
Why on earth, with rates at record lows, would anyone at a bank suggest an ARM adjustable? I wonder: Is there a greater vig to the BANKSTER, or is this simply innumeracy in action?
If this is who is staffing the loan desks at the biggest banks of America, no wonder they are in such terrible shape.
UPDATE October 19, 2010 3:57pm:
After lunch, I spoke with the B/D adviser. She reminded me that 5 years ago, you could get a 120% HELOC.
She told me the client said they wanted the $400k “for emergencies” more than anything else.
Sorry, but I don’t buy what the client claims. No one asks for nearly $1/2 mill credit line for shits & giggles.
My solution: Take a $100k first mortgage (paying off the $9k), and buy CDs or Treasuries. The 2% spread is your cost of having that cash. If you really feel you need for an additional line of credit, wait 6 months than apply for another $100k HELOC.