Tag Archives: banks

“The Real Reason the Poor Go Without Bank Accounts”: relationships

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A public policy professor worked four months at a check cashing business and found check cashing services offer several features that banks do not:

At commercial banks, the account itself often maintains the relationship between the customer and the institution. I might not be satisfied with my bank, but it’s an enormous inconvenience to switch everything over to a new one, and there is no guarantee any other bank will be more efficient or better…
The glue at RiteCheck is the customer/teller relationship. I interviewed 50 RiteCheck customers after my stint as a teller and, when I asked them why they brought their business to RiteCheck instead of the major well-known bank three blocks away, they often told me stories about the things the RiteCheck tellers did for them. Nina, who has lived most of her life in Mott Haven, told us that her mother had been very ill and that the RiteCheck staff had called to ask about her. “So we can be family,” Nina said. “We know all of them.”

Being a regular at the check casher also brings more tangible benefits. Marta, another regular, came to my window one afternoon with a government issued disability check to cash. When I input the number from her RiteCheck keytag into my computer, the screen indicated she owed RiteCheck $20 from every check she cashed. I didn’t know what to do, so I turned to Cristina for advice. I learned that Marta had cashed a bad check awhile back, and that RiteCheck had worked out an arrangement in which she could pay RiteCheck back in installments…

Many factors—cost, transparency, convenience—go into the choice consumers make between a bank and a check casher.  Atmosphere and the attitudes of the staff are only one component, but this piece of the puzzle may be more important than we thought. Like the famous TV song goes, “You want to go where everyone knows your name.” If policy efforts to move the unbanked to banks are to be successful in the long run, banks need to remember they are a service industry involved in one of society’s most important and basic relationships.

It sounds like the check cashers serve as a kind of community institution that customers can count on for social support as well as ongoing relationships. It isn’t just about the ability to access money; it also includes the flexibility to have give and take, whether that means helping someone get by when money is tight or celebrating big moments (like births) together. Many large corporations don’t offer this kind of personalization, even as they might offer cheaper prices or certain goods. And what incentive do banks have to lend money with people with lower incomes? That is not where the big money is to be made.

At the same time, it would be interesting to see an attempt to quantify just how much this customer service is worth. Does this apply to other industries as well? For example, there has been a lot of talk recently about the surge of dollar stores who offer goods cheaper than Walmart. Why might relationships matter more with financial institutions than dollar stores or fast food restaurants?

More rural residents, businesses don’t have local banks to borrow from

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A new study suggests fewer rural Americans have local banks who they can interact with and borrow from:

Increasingly, bank branches are headquartered in distant urban areas – and in some cases, financial “deserts” exist in towns with few or no traditional financial institutions such as banks and credit unions. That means that local lending to individuals based on “relational” banking—with lenders being aware of borrowers’ reputation, credit history and trustworthiness in the community—has dropped, according to a Baylor study published in the journals Rural Sociology and International Innovation.

Instead, more individuals launching small businesses are relying on relatives, remortgaging their homes and even drawing from their pensions—all of which are risky approaches, said lead researcher Charles M. Tolbert, Ph.D., professor and chair of the department of sociology in Baylor’s College of Arts & Sciences.

But for the 30 percent who obtain loans through the traditional lending method, that approach also can be very challenging, according to the research article, “Restructuring of the Financial Industry: The Disappearance of Locally Owned Traditional Financial Services in Rural America.”

Federal Deposit Insurance Corporation statistics showed that from 1984 to 2011, the number of banking firms in the United States fell by more than 50 percent—to just under 6,300—while the number of branches almost doubled, to more than 83,000, according to researchers’ analysis of data from the FDIC’s national business register. For the study, Baylor researchers partnered with the U.S. Census Bureau Center for Economic Studies.

I’m sure financial institutions would argue it is not as profitable to locate in more rural areas that do not generate as much business as denser areas. It would be interesting to look at the exact figures from financial institutions in rural areas: are they not profitable at all or are they just less profitable?

However, how essential are financial institutions to local economies? The same argument might be made about hospitals: they provide essential services even as they are not as profitable in rural areas. (I would guess people would probably rate health care as more important than credit access but both are important for communities.)

The article hints at another aspect of this change: fewer banks in rural areas means fewer relationships between lenders and residents. While forming relationships may take time, couldn’t they be better for business in the long run? Prioritizing efficiency and profits over people may be good for the bottom line and shareholders but it is the sort of approach that seems to have turned off a good number of Americans to large banks.

 

Americans like homeownership – but some really dislike the process of obtaining a mortgage

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Recent data suggests numerous Americans don’t like the process of getting a mortgage:

To be fair, a little more than half the 1,000 people polled this fall found the buying-lending experience rather simple and easy to navigate. But nearly 1 in 4 said they would rather gain 10 pounds, and almost 1 in 8 would rather spend 24 hours with the person they dislike the most.If you think that’s bad, 7% would rather have a root canal, and almost that many would choose a night in prison over going through the mortgage process again.

Asked another way — “Which of the following makes you extremely uneasy or anxious” — obtaining financing again scored very low in the Guaranteed Rate study. In fact, more people were more comfortable with public speaking, being in high places, flying in an airplane, being around snakes and being in a confined space than they were going through the mortgage process.

This flies in the face of the latest J.D. Power mortgage origination satisfaction study, which found that more borrowers were pleased with their lenders now than at any time in the last seven years.

Overall customer satisfaction improved for the third consecutive year. But as you might expect, first-time buyers who have never had to navigate the system weren’t as tickled as repeat buyers and refinancers.

I remember a whole mess of paperwork though the actual numbers and costs didn’t seem too complicated. Several pieces of this process might lower people’s satisfaction:

1. The idea that someone knows all of your financial information. Americans are pretty guarded about their incomes (try bringing it up even vaguely in social settings) so even though the bank needs all of this information, it makes people nervous.

2. The purchase of a home will be the biggest single investment many people make so it induces nervousness about being tied down and having to make monthly payments for the next (usually) 30 years. Perhaps this kind of investment should make people nervous…

3. First-time homeowners are not well educated about what it takes to purchase a home, even if they have a strong idea that they should purchase a home. For example, HGTV shows the mortgage process isn’t much of anything at all: you go from liking a home, making an offer, to living happily ever after in the home. Granted, getting the mortgage and working out the details is not exciting television but there is little information about mortgages conveyed by these shows.

It is too bad the article doesn’t discuss the characteristics of those who disliked the mortgage process more. Could it be disproportionately lower-income residents who don’t have that much money to spare? Could it be younger adults who are used to processes going quicker?

Sociological musings about American culture in “It’s A Wonderful Life”

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This talk by a sociologist about It’s A Wonderful Life serves as a reminder that the film provides a nice window into modern American life. Although it is a holiday movie, here are a few sociological ideas that still resonate today:

1. Mr. Potter is the evil banker and the primary villain. While hero George Bailey just wants to help his family and others in the community, the banker only cares about money. Could be connected to discussions of inequality, the wealth of bankers, and the role of the finance industry in helping to build communities.

2. Hero George Bailey wants to build suburban-like homes in a new subdivision in his community. The movie came out at the beginning of the post-World War II suburban boom and anticipates that many Americans simply want a home of their own.

3. The movie is set in a relatively small town where George Bailey and his family can know lots of people. Even as Americans look to private single-family homes, there is still often a small-town ideal where everyone gets along and helps each other (and often the assumption that we have lost this over time).

4. George Bailey seeks meaning in his work and life. When he doesn’t find it, he considers suicide. Bailey wants to provide for his family and friends and struggles when he cannot do this.

5. George’s life is saved by an angel. Americans tend to like angels even as more Americans say they are not religious. Angels fit with a spirituality where God generally wants people to succeed.

6. The celebratory ending of the film comes as George is surrounded by his family and friends. The emphasis on family life is not unusual in American stories but this also highlights the small town coming together. Bailey has the American Dream at the end: a home, a loving family, helpful friends, and is optimistic about his future.

Of course, this film has been analyzed plenty as a classic sitting at #20 on the AFI’s top 100 movies. Yet, it is an important moment as America started seeing itself as the prosperous superpower.

Municipalities and Wall Street argue over using eminent domain to stop foreclosures

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Some municipalities are considering using eminent domain to slow foreclosures – and Wall Street and those in real estate are not happy:

On Saturday, Mayor Wayne Smith of Irvington, N.J., will announce that his mostly working-class city is proceeding with a legal study of the plan. Irvington could try to head off legal action and repercussions through what are called “friendly condemnations,” in which incentives are used to persuade the owner to drop any objections, he said. “We figure if this program works it can help anywhere from 500 to 1,000 homes.”

This summer the similarly working-class city of Richmond, Calif., in a heavily industrial part of the San Francisco Bay Area, became the first to identify homes worth far less than their owners owe, and offer to buy not the houses themselves, but the mortgages. The city intends to reduce the debt on those mortgages, saying that will prevent foreclosure, blight and falling property values. If the owners of the mortgages — mostly banks and investors — balk, the letters said, the city could use eminent domain to condemn and buy them.

Since then, intense pressure from Wall Street and real estate interests, including warnings that mortgages will become difficult or impossible for Richmond residents to get, has whittled away support for the plan. The city has yet to actually use its power of eminent domain, but it is already fighting two lawsuits filed in federal courts…

Opponents of the strategy, including the institutional investors BlackRock and Pimco, Wells Fargo and the Mortgage Bankers Association, say that taking mortgages by eminent domain is a breach of individual rights and that investors will not receive fair market value for the mortgages. In Richmond, Mayor Gayle McLaughlin has asked investors to come to the table to work out a price, but they have so far declined to negotiate.

An interesting convergence of rights. Typically, eminent domain usage tends to raise the ire of citizens but this article makes it sound like this is something residents want. Is this the case? One argument often leveled against eminent domain is that allowing another case gives governments more opportunity to do what they want when they want. However, with this strategy, the municipalities are trying to work for the residents and against larger entities.

I wonder if the only thing that would convince banks and mortgage holders to consider this would be bad publicity, something along the lines: “Those Wall Street banks want to take advantage of distressed communities and are unwilling to work with them to improve their neighborhoods or help their residents.” This would involve less of a legal strategy and more of a public relations strategy.

 

Claim that Bank of America takes better care of foreclosed properties in white neighborhoods than in minority neighborhoods

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A new report from the National Fair Housing Alliance argues Bank of America has taken better care of foreclosed properties in white neighborhoods:

A year ago, the alliance and several of its member organizations filed a complaint against the bank with the Department of Housing and Urban Development, arguing that the bank had violated the federal Fair Housing Act by neglecting foreclosed properties in minority communities in Denver, Atlanta, Miami, Dayton and Washington, D.C. Today, the groups amended their complaint with a stack of evidence – in maps, data, and photos – showing that the problem has persisted in each of those cities, while documenting it anew in Memphis, Denver, Las Vegas, Tucson and Philadelphia.

In total, housing advocates have now identified the problem in 18 metropolitan areas, across 621 Bank of America properties…

The sample size in each city varied, from about a dozen properties to more than 44 of them in Denver. But across all of the cities, homes in minority communities were two times more likely than those in predominantly white areas to have more than 10 maintenance or marketing problems. In Denver, homes in minority neighborhoods were 9.3 times more likely to have a broken door or lock. In Las Vegas, they were 4.5 times more likely to have damaged windows. In Philadelphia, they’re twice as likely to have accumulated substantial amounts of trash, relative to homes in white neighborhoods in the same market.

The pattern suggests yet another way that subtle housing discrimination may further handicap the ability of minority communities to recover from the housing crisis (or, put another way, this suggests why the effects of the recession will linger in minority communities for much longer). Federal fair housing law prohibits actions (or attempts at action) that “perpetuate, or tend to perpetuate, segregated housing patterns,” or that obstruct the choices in a community or neighborhood. It’s not hard to envision how these neglected homes could wind up doing just that.

Bank of America responded that the methodology of the study was flawed and that some of the homes in more disrepair were the responsibility of other entities.

More broadly, this suggests a potential new line of research questions about how banks and financial institutions respond after an economic crisis and whether this is stratified by race and class. How have banks made decisions regarding which foreclosed properties to improve or leave to others? Have they primarily worked with more valuable pieces of property, ones that might be found more often in middle to upper class neighborhoods? Is there also more political pressure (from local homeowners to municipalities) to address these more expensive homes or places with higher property values? It also seems like the analysis here would benefit by looking at the actions of multiple mortgage holders to see if there is a pattern across institutions.

McMansions, housing markets, and the influence of banks

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An Australian architect argues homes should be valued on newer tastes rather than older interests in McMansions:

Recent sales and development figures have highlighted a trend towards smaller living spaces but the system for valuations in the capital seems biased towards larger average quality homes, Canberran architect Allan Spira said…

Mr Spira said building smaller, more affordable and sustainable homes will only be an option for “cashed up clients” unless the current system of valuations is changed.

“It’s time for the banks and their valuers to stop basing their assessments on the ‘McMansions’ of the past and start acknowledging the way of the future – smaller, smarter, better fitted out homes,” he said…

Mr Spira said most recently his clients struggled to get a $300,000 loan to build their three bedroom home in Wright.

Built across 127 square metres, he said it was “probably the most affordable and sustainable home in the suburb” but valuers CBRE based their calculations on inappropriate figures as no previous sales figures existed in Molonglo.

It might be hard to make a larger argument based on two cases. But, this argument does raise some larger issues:

1. Just when exactly do bankers and others know when the housing market has turned? In this case, the architect suggests people now want smaller homes compared to the McMansions they wanted a few years ago. It is easier to see change over the course of several years or a decade but it is harder to see this in the short run.

2. How much do banks and their choices about mortgages influence house purchasing and building patterns? Banks were partly blamed for the housing meltdown in the late 2000s but what percentage of blame do they deserve? I haven’t seen someone parse out the particular effect banking and mortgage choices have on what homebuyers are willing to do. This architect suggests homes aren’t being built because banks won’t provide financing for them but it is not clear how often this really happens.

You can get a no-money-down mortgage – if you are really wealthy and put your investments up as collateral

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No-money-down mortgages have been blamed for helping bring about the recent economic crisis but they can still be obtained – if you have the assets to obtain one.

It’s 100% financing—the same strategy that pushed many homeowners into foreclosure during the housing bust. Banks say these loans are safer: They’re almost exclusively being offered to clients with sizable assets, and they often require two forms of collateral—the house and a portion of the client’s investment portfolio in lieu of a traditional cash down payment.

In most cases, borrowers end up with one loan and one monthly payment. Depending on the lender and the borrower, roughly 60% to 80% of the loan can be pegged to the home’s value while the remaining 20% to 40% can be secured by investments. On a $2 million primary residence, for instance, the borrower could get a $2 million loan, which would require a pledge of assets in an investment portfolio to cover what could have been, say, a $500,000 down payment. The pledged assets can remain fully invested, earning returns as normal, without disrupting the client’s investment goals.

While these affluent clients may be flush with cash, this strategy allows them to get into a home without tying up funds or making withdrawals from interest-earning accounts. And given the market’s gains combined with low borrowing rates in recent years, some banks say clients are pursuing 100% financing as an arbitrage play—where the return on their investments is bigger than the rate they pay on the loan, which can be as low as 2.5%. Some institutions offer only adjustable rates with these loans, which could become more expensive if rates rise. In most cases, the investment account must be held by the same institution that’s providing the loan.

These loans also provide tax benefits. Since borrowers don’t have to liquidate their investment portfolios to get financing, they can avoid the capital-gains tax. And in some cases, they can still tap into the mortgage-interest deduction. (Borrowers can usually deduct interest payments on up to $1 million of mortgage debt.)

Theoretically, this is how no-money-down mortgages could work since only signing up wealthier clients helps limit the losses a bank might incur if they default on the mortgage. Yet, it also sounds like another financial option that is only available to the wealthy who might even be able to make money by taking out a non-money-down mortgage. In other words, is this something that only helps the rich get richer (and possibly bigger houses)?

When banks say these loans are safer, how much safer? I suspect part of the safety of these mortgages is that there are relatively few new ones being offered to wealthy Americans. It would be interesting to hear about some cases where this has worked out well or not worked out as planned.

15 of 20 biggest mortgage originators in 2006 no longer in business

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Here is one of the consequences of the economic crisis: three-quarters of the biggest mortgage originators in 2006 are no longer operating.

Only five of the 20 biggest mortgage originators from 2006 are still around independently today. The rest either filed for bankruptcy or got bought as the mortgage market imploded in 2007 and 2008, as the table below from SNL Financial shows.

This is what capitalism looks like, kind of. Lenders that weren’t too big to fail did fail, and then got scooped up for what buyers thought were bargain basement prices — or in Countrywide’s case, managed to market themselves before the market completely collapsed.

The chart is pretty fascinating. Firms that were powerful and active not too long ago, including Countryside Home Loans, Washington Mutual Bank, Wachovia Mortgage FSB, and Countrywide Bank FSB, are no longer operating. Granted, some of these companies were acquired by other corporations but these were large firms in their own right and some were at the top in terms of market share.

My quick takeaway: business fields can change rapidly.

Los Angeles files complaint that U.S. Bank is not maintaining its foreclosed properties

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Looking to help residents who don’t like foreclosed properties in their neighborhoods falling into disrepair, Los Angeles is fighting back:

U.S. Bank is the country’s fifth-largest commercial bank, with 3,000 branches in 25 states. It’s also “one of the largest slumlords in the City of Los Angeles,” according to the L.A. city attorney’s office.

In a complaint filed last month, the office accused U.S. Bank of failing to maintain more than 170 foreclosed properties, blighting neighborhoods, decreasing property values and increasing crime rates.

The allegations are similar to those made in a lawsuit filed by the city attorney’s office last year against Deutsche Bank (DB), as well as other complaints from activists around the country who say their communities have suffered as neglected foreclosures deteriorate in the aftermath of the housing bubble.

This is a potentially large problem with the number of foreclosed properties in the United States:

Roughly 620,000 foreclosed properties in the United States are owned by lenders, according to RealtyTrac. The number of these properties, known as REOs, or “real estate owned,” surged after the housing bubble but has since begun to drop, down from over one million in January 2011.

Still, of those 620,000 houses, 24% had been waiting for a new buyer for two years or more, and 11% for three years or more.

You have a confluence of events here: large banks who have thousands of distressed properties on their hands, depressed housing markets, neighbors who are worried about their own property values as well as other neighborhood issues (crime, middle-class appearances, etc.), and communities who don’t want to have to foot the bills themselves.

Throughout the last few years, I haven’t really heard from the perspectives of the big banks on how they are really dealing with these properties. What are their strategies? If they want to hold onto the properties and wait for prices to rebound, they’ll have to pay for upkeep. If they want to sell quickly, they probably can find buyers but would have to write-off significant portions of mortgages. Have the banks hired teams to take care of foreclosed properties? Could a bank take these foreclosures and legitimately and profitably spin off a property division? It seems like this could be a real opportunity for someone yet the big banks appear to killing time with some of the foreclosures.