Why Banks Fail - The Dirty Truth

This is the trillion dollar question. And yes it will cost us MUCH more than 700 Billion. Probably more akin to 1.2 Trillion. I hope I can say this clearly….it is the most important thing we face today. So just WHY did the major lenders fail? The answer is rather simple to say but difficult to implement. Let me lead up to this a bit. When you go to buy a house or car what is the question you ask the lender? “How much can I borrow?” THAT is the problem. We shouldn’t be asking the banks how much. We should know what we can afford but we have become uneducated and reliant on them to tell US what we can afford. So while we are guilty of ignorance, it is not intentional, so I don’t fault the public. The banks, other lenders and the paper swappers KNOW they are lending us above our means and do so with eyes wide open, thus the guilt lies on them. Here is an example. I know a single Mom who makes $40k/yr ($20/hr). She asked the bank how much she could afford. They told her $185k, so she happily bought a beautiful new $185k home and defaulted 18 months later. She asked me incredulously with tears in her eyes ”They SAID I could afford it, what happened?” She honestly did not know, she trusted them. They are loaning 4.6 years gross salary, that’s too much. So the next question this woman asked leads to a hard to swallow pill, it’s the part I mentioned that was “difficult to implement”. She asked “Well then….how much CAN I afford. The answer means we have to educate ourselves….and the banks and lenders should be doing it. The answer is 2 years gross income or better yet 2 years net (take home). This would have been 80k tops for this woman. She gasped at the thought of such a drastic reduction in housing. She was amazed, but it is true. Let’s break it down a bit. You need 25% for taxes, 18% for housing, 20% for food, 20% for utilities and communication (cell, home phone, internet) and most importantly 10% for retirement (don’t count on SS buying you much). This leaves 7% for recreation, cable tv, vacations, clothing and emergencies….not much (I dont know where tithing is going to come from.) So why do the banks lend so much? They are greedy. They eat up your free money that could go to savings, rec and food. We get tired of not having money in such a tiresome loan, so borrow on credit cards or let payments lapse and get behind, eventually leading to default at worse and ulcers at best. Think about how much better the economy would be if your expendable cash was put into circulation buying tv’s and play toys and vacations and better food, than just into one pocket…the mortgage. Money would circulate, creating jobs and things would be great. But the banks rob you of this by lending you to your limits and beyond, to draw interest off you. I notice the difference between those buying above their means and those within, being that those with less home, have toys. They take more vacations, they have more cars and boats and play toys. They can BREATHE. So we are being sold a bill of goods about what we can afford. Scale it back folks. Get real. That’s a bitter pill. I like a nice house too. BUT, the housing increased due to EVERYONE suddenly being “able” to afford a new house. This ballooned development and raised material costs sky high. Then all the old affordable houses increased in value along with rental rates, due to the buying frenzy….and it was a frenzy….dizzying and heady like the world was drunk. If the banks would only loan within your means, housing prices WILL fall and so will materials due to lack of construction. I do have one exception. You CANNOT work 90 to nothing for 30 years without enjoying life (going and buying). You “might” be able to do it for say…10 years. So I would loan 4 years income on a 10 year loan, 3 years income on a 15 or 18 year loan and 2 years on a 30 year loan. They should do away with 40 year loans, that’s a suckers bet. I can see someone foregoing savings if they pay a house off in 10 years. They build equity. You are apt to move within 7 years. On a 30-40 year loan you will rarely build equity before moving, so your “savings” portion of the above should not be applied to a long term loan. You will loose all you pay at the expense of paying it all as interest to the banks. THEY KNOW THIS! So….scale it back and GET SOMETHING PAID FOR….take a vacation …and ….breathe.

Kent Cheatham
kent@aaardvark.biz

Pffftt...! This didn't come about because anyone was "forced" to give loans to people who didn't qualify. It came about because of greed. I can think of a number of questionable loans that I'm personally aware of and none of them were to people trying to by more home than they could afford. One balloon loan went to a family who already had one home, plus was paying for an apartment for the husband who was having to work away from his hometown. So this was a loan on their 3rd residence. Another loan for a $250,000 home went to someone who made no down payment. I know someone else who recently got approved for a loan to buy a $26,000 pickup, with no down payment and with this person not having held a job in the last 15 years. The house next door to me went into foreclosure because someone had bought it to "flip", but they got caught when the housing market took a dip. It recently got purchased by another speculator who wants to "flip" it, but who has now poured too much money into repairing it to be able to make back their expenses. There's been a lot of bad lending going on, but none of it was because anyone was forced into it.

Free markets work. Nationalization doesn't. This whole situation came about because the government wanted to force banks to give home loans to people who didn't qualify for them. It is the people who DO qualify who are going to be the ones forced to pay for the government's mistakes. Don't listen to Senator Coburn's BS. The answer to this crisis is to repeal regulations NOW. Go here to find out why - http://www.aynrand.org/site/PageServer?pagename=arc_financial_crisis

While you are deciding, decide to educate yourself more than Kerry, Jacksonville has. His (hers?) myopic brain has oversimplified this. YOU are the one who will pay the consequences of somebody else's misdeeds. If credit gets tighter, letters of credit will be pulled for certain firms, certain cyclical small biz will not be able to secure payroll credit. This will have an impact on you if left unattended to. Educate yourself and then make an informed decision. Don't just rely on what your pastor told you. He doesn't have your best interests at heart.

Lets see. Here are my repsonses to the 5 points above. 1) Good, making loans with minimum paperwork is what got us here today. 2) Good, making loans to "good" people is what got us here today. 3) Good, making 0% interest car loans is what put the auto industry in the tank. 4) True, but since most people have auto-deposites into their 401K accounts they are now buying stock at a drasitcally reduced rate. Remember, the objective of investing is to buy low. 5) Scare tactict or seeking opportunity to raise rates - you decide.

What's the point of trying to keep a good credit rating if the banks hand it out to people who have no ability to repay?

I'm confused. We want to preserve a free market, capitolistic economy, but then move to nationalize large portions of the economic infrastructure to avoid the pain of a correction required by a free economy. Either option will work. Many countries operate successfully in a nationalized nature, but the citizens accept the tradeoffs. You cannot have both free economy and nationalization. If you want to preserve the free economy, you must let the banks fail. Businesses who pushed bad loans must also fail. Banks and businesses making the smart choices will be rewarded. If a correction happens through recession, then so be it. We won't starve on the streets. On the other hand, if you want nationalization, you better be willing to take ownership of that choice (which I don't think we are). Choice of the kind of home, car, or products will reduce substantially. Deregulation of industry will be reversed. I'm not for a bailout because 98% of home owners (including me!) purchased homes within thier fiscal limits and pay on time. What's the motivation for working my a$$ off when the government comes around to pay off people who are lazy and make bad choices? LET THE BANKS FAIL. That's what stupid banks are supposed to do.