Banks Are Not Your Friend

Anyone who is interested in hearing about how Big Banks are only interested in making money, not in benefiting customers or society, may want to listen/read to this article on Marketplace last week (8/6/09).

Up front, I want to say that it seems like a lot of people who have mortgage problems right now have no one to blame but themselves. Some never read contracts. Some should never have tried to buy any house, based on their income and past credit status. Some should never have bought houses that were far beyond their means. That said, some were mislead by bankers, brokers, and realtors.

The Marketplace story deals with the Federal government's attempts to get the banking industry to modify the mortgages of people who are struggling to hang on to homes in this recession. The Obama Administration recently released some statistics on how the mortgage modification efforts are going, and while some Big Banks are having some successes, some others are not. So if you're looking for another Big Bank to despise, you might want to add Wells Fargo to your list.

It seems that one of the obstacles to modifying mortgages is the same thing that some say started the entire mortgage meltdown and Big Recession: mortgage backed securities. These were loans that were bundled together with other mortgages and sold to investors. Unfortunately, many of these bundles contained less than stellar loans, and when people began defaulting, well, the rest is history. Since many of these Big Banks didn't retain the loans they made, but sold them off as fast as possible, some might say that they had relatively less incentive to make solid loans from the outset.

When the banks bundled these loans together and sold them off to investors, some banks, like Wells Fargo, remained as the loan "servicer." So while the homeowner sends his/her check off to Wells Fargo each month, the bank technically doesn't own the mortgage any more.

"...Wells Fargo sold the loan to Goldman Sachs. Goldman then bundled it with nearly 3,000 other loans, and sold off that package of loans to investors as a mortgage-backed security. It kept Wells Fargo on to collect payments from homeowners."

You may recall Goldman Sachs. Those are the investment bankers that reported record earnings for the second quarter of 2009.

At any rate, when homeowners now ask for lenders to modify their mortgages so they can keep their heads above water and keep their homes, some are being told they can't modify them because the "investors" won't allow it. In one particular case covered in this article, the reporter investigated the contract covering the mortgage bundle to the investors and it contained no restriction at all on the loan servicer's (Wells Fargo) ability to change virtually any aspect of the mortgage.

The situation seems to be such that once again, the bankers and their lawyers are mostly covering their backsides. If a contract is even slightly vague about what the loan servicer can do, the Big Bank will do nothing in order to avoid getting sued. The homeowner is left holding the bag.

However, in the case that's highlighted in the article, the reporter examined the contract sold the mortgage in question to investors, and it contains no limitations on Wells Fargo's right to modify the mortgages. In essence, this means that if it wanted to help the homeowner, it could. What was Wells Fargo willing to do? They offered to reduce the interest rate from over 12% to a little more than 4% (this mortgage had started out at about 7.5%). That sounds promising, but they also insisted on adding about $80,000 to the amount of the loan. The extra was an accumulation of unpaid fees, accrued interest, late fees, and what the reporter called "numerous other fees." That's $80,000 added to a $235,000 mortgage. The reporter also said that the contract did not require adding the "overdue debt" to modified mortgages. Predictably, Wells Fargo refused to answer the reporter's questions and insisted the new monthly payment offer was "reasonable." So we are free to reach our own conclusions and mine is that if Wells Fargo wanted to help these homeowners, it could. However, it appears that it is more interested in maximizing its own profit. This isn't a big surprise; after all, "the business of business is business." However, in the midst of the Biggest Recession since the Great Depression, wouldn't it be patriotic and symbolic if Big Banks acted like they cared? They don't have to actually care, just the appearance of caring would be nice.

So remember, Big Banks are not your friend and the only thing that they're interested in is separating you from your money. If a Big Bank (or any other Big Corporation for that matter) says they have your interest at heart, grab your wallet and head for the door as fast as you can. Perhaps it would also be reasonable to patronize a bank other than Wells Fargo for your banking needs.

I think my next post might be about why we need to bring back usury laws.... :-)