Banks: No One Said They’re Smart

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The mortgage industry is more than just banks, but let’s refer to the lot as “banks” for simplicity.

Banks are run by stupid, short-sighted people. They brought the current mortgage crisis, quickly turning into a general credit problem, upon themselves. They will wise up just in time to make us pay for their mistakes, but you already knew that.

The Independent points out the problem, but I’m giving the details:

A family with household income of more than $120K had a first mortgage for $143,000 and a second for $48,000. In the 4 years of the note, the Smiths had never paid late. The notes were both held by HomEq, a subprime subsidiary of the massive Wachovia. In 2003, Wachovia discovered that it had underfunded escrow by nearly $6,000. It informed the borrowers, call them the Smiths, that their mortgage payments would double from $1,400 per month to about $2,800 a month until the $11,000 arrearage was paid off. Oh, by the way, the bank tacked on about $5K in various penalties, fees, and other miscellany.

Mr. Smith disputed the $5K and the payoff period of 8 months, requesting that the bank extend the repayment period to 24 months and drop the $5K in penalties since the accounting error was the bank’s fault. He informed the bank that would pay only his original mortgage until his dispute was settled.

The bank returned his next mortgage payment undeposited 45 days later, saying he was not allowed to make partial payments. Because Wachovia held the check so long before informing him, he was now 2 months behind on payments. The bank kindly informed Smith that it would return any check for less than $5,400: two month’s payments plus another $600 late fee. Two days later, Smith received the notice of default and right to cure.

The right to cure required payment in full of all past due payments: $16,400. Why not $11, 400? Because the two months' payments were added on top of the money already owed.

Smith made an offer to the bank. Since he could not possibly come up with the money before foreclosure, why not create a new loan at the punitive rate (in 2004 terms) of 8.5 percent for 30 years. Roll up the past due, the second mortgage, and the ridiculous past-due amount into that one note. Smith’s payment would fall to about $1,600 a month, an amount they would easily pay. Remember, they’d never been late before Wachovia screwed up.

Wachovia said no, of course. With the past due amount, the Smiths were turned down for a refinance by 11 different mortgage companies and banks, even in the lending free-for-all of 2004. Over the next year or so, the Smiths and Wachovia worked out several schemes to get caught up, each designed to be less possible than the one before.

In the end, Wachovia foreclosed. The house sold at auction for slightly more than the principal on the first mortgage. Under the law of the state in which the loan originated, Wachovia could not sue Smith for the $48,000 principal on the second mortgage because it held both mortgages.

Had Wachovia refinanced Smith, the bank would not have written off $45,000, and the Smiths would still own their home.

According to The Independent, Citigroup is as stupid as Wachovia:

this tightening up has led to a vicious circle. Making credit tougher has exacerbated the problems of struggling mortgage holders in America; default rates then rise and make the banks even more exposed to losses as credit agencies downgrade their assets. This seems to be what happened at Citigroup. The admission that it was unable to assure investors that a potential $11bn write-down for sub-prime mortgages would not grow has led to this fresh fit of extreme nervousness. Huge write-downs by Merrill Lynch ($7.9bn) and UBS ($3.4bn) have not helped.

A year ago, I thought the banks would wise up and fix the problem by helping borrowers out of the fines and fees nightmare the banks, themselves, created. Instead, the banks have put even A-paper borrowers at risk.

Idiots. Let’s not bail them out. Instead, let’s stone them in the streets before they breed and foist more generations of idiots upon the world.