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Banks Are Back To Their Old Tricks. MA Needs To Better Regulate Them.

Banks in MA need further regulating especially banks making “commercial” loans on building that are bigger than 4-family. Multi-family foreclosures were the leading reason for the Recession. Banks have a lot to do with it.

At the end of this article I propose 9 things that need to be voted into law to better regulate the banks and help us avoid another crisis.

In 2014 I refinanced about $650,000 (6 buildings) from 6.5% – 25 yr fixed (23 years remaining) to about 4% – 15 yr fixed. I finally found 2 banks out of 325 who were willing to do a 15 yr fixed loan with terms that are balanced and fair to us (because they are regulated by the Government) but they were willing to refinance only my buildings that were 4 or less units. Above that you get into “commercial” territory and banks are allowed to write whatever they want in their contracts. They are totally unregulated in MA.

While I was sifting through 325 banks and credit unions it became painfully clear to me that Massachusetts Banks are still dangerously unregulated for the Massachusetts Landlords who are borrowing from them and for the whole country.

Let me re-cap some the issues I had with these MA banks:

In 2010-12 I could not get a loan because no one was willing to lend. Banks were still paralyzed with fear and still hoarding the cash.

In 2014 I found that banks are more than willing to lend but they are pushing risky loans again – adjustable loans with balloons, interest-only loans, loans that amortize for 20 years but adjust their interest every 5 years, etc.

I have a relationship with one bank where I have fixed loans (the 6.5% loans that I refinanced) but since I had already over 4 loans with them I did not want to push the envelope so I found another bank and did an adjustable loan with them – 20 year amortization with the rate adjusting every 5 years. I know, it’s not fixed, but that was all I could find. There are simply NO banks in MA, believe me, that will do a fixed loan if your property is over 4 units. I have to wait 5 years before I can review that loan now. Let’s hope that the rates in 5 years won’t be way too high.

So I contacted them again and tried to refinance one of my buildings worth about $130K. Those bankers hired an appraiser (they picked him because, amazingly, it is legal in MA for them to pick the appraiser even though they are one of the two interested parties in the transaction and clearly each party in a transaction has a bias when it comes to the value!), made me pay for their appraiser (amazingly that is also legal in MA and moreover it is done by ALL of the banks!) and he came up with a “market value” of $72K for a building that I know is worth more than $130K!

Why, you ask, would a bank want to undervalue an asset? Well, for the simple reason that if I skipped a payment and they had to foreclose they can get something for nothing or close to nothing. In other words, they are trying to legally steal money from me and you. If the building is worth $130K they can claim that they are lending you 75% of the “value” but in fact they are lending you more like 40% of the value. They are virtually guaranteeing themselves that they would not lose any money on a transaction like that and most likely will make money even if they foreclose. I politely told them to go %^&# themselves and I declined their “offer” to steal my money.

I found another bank, who, miraculously, was willing to lend me with a fixed rate. (not one of the 2 that I was talking about at the beginning of this article).

Unfortunately I caught them talking with the appraiser behind my back possibly trying to get the value they “need” and trying to get me to spend the money on the appraisal (about $600) without letting me see in advance the paperwork that contained all the terms. They were hoping that once I spend the money on the appraisal like most people, I would be less inclined to question any of the language in the contracts because I have already spent $600 on this transaction. They can always say “Sorry, if you don’t like all our terms, that’s too bad and by the way we are not returning the money that we collected from you because we paid it to the appraiser.” But having learned my lesson from the previous bank I wanted to make sure I was first comfortable with all the terms before I started spending money on this transaction. When I told them that what they were doing was unfair and deceptive and threatened to sue them, they sent me a check for thousands of dollars to avoid a lawsuit and keep their identity secret. I agreed to it because, frankly, I don’t need to reveal their identity to make my point because as a MA bank being deceptive they are not the exception. They are the rule.

In my experience most banks refuse to show you a sample Mortgage and a Note before you spend any money after which, typically, it’s too late already – you’ve lost your money if you want to negotiate with them.

They want you to see what you would be signing only at the day of the closing or only a couple of days before the closing so that you won’t ask any questions or ask for any changes to the language not that they would agree to make any changes even if you asked. On more than one occasion banks have refused to lend me after they approved me for loan but when I asked to see a sample Note and a Mortgage. The only way they would show me in advance what I would be signing is if they are forced to do it by Regulations. Most MA banks are like that based on my experience. They hire the appraisers even though we pay for them and they talk to them behind our backs and withhold the language in the actual contracts till the very end when backing out may not be practical for most borrowers. I have tried to work with hundreds of banks and I have specifically read the contracts of over 20 banks and I have done over 20 refinances over the years. Their contracts are very similar and their attitude is very similar to this bank.

So I went searching again from my list of 325 banks.

I found one bank that was willing to do an adjustable loan.

They hired an appraiser who appraised at $135K the same house that was “appraised” for $72K from the 1st bank! The time difference between the two appraisers was about 2 weeks. One simply has to arrive to the conclusion that MA appraisers are either incompetent or they are in the pocket of the banks. There is no other conclusion that can be drawn from this. The bank paid for half of the appraisal and was willing to even modify some of the language in their agreements which is extremely rare. In my experience 99% of banks are completely unwilling to do any of that or negotiate at all! The moment you try to negotiate with them, they drop you. I did the loan with them but later I realized that they had gouged me on the closing costs like no other bank I had worked with before. Their lawyer charged me $715 for “title insurance” AND $775 for attorney fees. (The bank I found after this bank charged me about $800 for attorney fees and that included the title insurance!) By the way, when we pay for their attorney it’s about $800 but when they pay for their attorney as one bank once did, it’s only $400. Hmm. So anyway, They also charged me over $1,000 in origination fees AND extra $300 for “document preparation fee” plus they collected $275 for “recording services” and also another $305 for more “recording” services. You get the picture.

No more Adjustable loans. I was determined to get a fixed loan. (In the end I was able to do that but only only 3-4 family buildings not if they were over 4-family).

I updated the list including the credit unions and some of national banks working in MA and out of more than 300 banks only 4 were willing to talk about fixed loans for non-owner occupied rentals in my area of MA if you have more than 4 mortgages like me. Two of them eventually decided not to loan me or I decided not to sign their contracts, I don’t remember.

By the way, the “not more than 4 mortgages” rule is a FannieMae and FreddieMac rule which is extremely dumb, because that guarantees that if you are an investor who owns more than 4 buildings, you will get the worst rates regardless of your finances and credit score making it that much more likely that you would default and bring the economy down. It discourages growth in the landlord industry. Having this “only-people-with-less-than-4 mortgages-can-have-the-best-terms-and-rates” rule should be replaced with “only-people-with-good-credit-and-finances-can-have-the-best-terms-and-rates.” Why does it matter if I have 4 mortgages or 40. Maybe I have 40 mortgages but I own 50 buildings (10 with no mortgages). Who has better chances to return your money? Someone with 40 mortgages and 50 buildings or someone with 3 mortgages (less than 4!) and 3 buildings?

I finally found two banks willing to issue fixed loans in MA.

One of them appraised another 3-family building for $50K. I told them “no”. The other one appraised the same building two weeks later for $124K which I thought was closer to the fair market value and I signed a deal with them. Later I signed more deals with them. Because the first bank apologized for the incompetence of their appraiser who “valued” the building at $50K and was willing to send another one, I gave them another chance and ended up refinancing one other building with them.

So this recaps what I had to go through

Most banks do not allow you to read their contracts. They want you to sign them blind. As I mentioned previously more than one bank approved me for a loan only to withdraw their offer after I wanted to see the language in their sample contract. A lot of banks have language in their contracts saying they may keep the money if your building burns rather than allow you to rebuild or they have a language saying they have the option to ask for their money back, all of it at once, if they feel nervous for anything even if it’s not related to you in any way including the economy or their own finances. Remember, I hadn’t yet objected to anything in the contracts. Just asking to see the contracts triggered them discontinuing communication with me.

Trying to understand why banks are acting the way they are we must do a quick recent history recap.

HERE IS THE SHORTER VERSION OF HOW LACK OF GOVERNMENT REGULATION CAUSED THE HOUSING DEPRESSION OF 2008-2013:

2001 – Bin Laden attacks the World Trade Center and kills over 3000 people, mostly Americans.

2002 – Americans get scared and nervous and slow down spending.

2002-2004 – Greenspan lowers Federal Reserve Rates to encourage people to spend more and banks to lend more…and it works. Banks are lending to even homeless undocumented income people!

2005-2006 Concerned about a bubble Greenspan increases rates from 1% in 2002-2004 to 3.25% in 2005 to 5% in 2006 and then jumps ship – retires at the end of 2006.

2007 – With the Federal Reserve Rate at about 5%, a lot of adjustable rate mortgages adjust to 8% or more and many people can’t pay their mortgages.

2008 – Widespread mortgage failures – the beginning the Housing Depression. CDOs fail, many banks fail, SWAPS activated, Bear Sterns bailed by taxpayers, AIG fails but bailed out, Lehman Brothers fails, First Major Tax Bailout – Bush

2009 – Banks stop lending. The economy is dead. Second Major Tax Bailout – Obama.

2010-2013 – slow return to confidence, unemployment falls from 10% in 2009 to 6% beginning of 2014

2014 – Even though several feeble attempts to regulate the banks were made and some regulations passed over the past several years, most of them were gutted out and Banks are back to their old unregulated behavior as if nothing happened.

2015 – Banks are 30% bigger than they were in 2008 when they were “too big to fail” and had to be bailed out with taxpayer money. No lessons learned!

HERE IS THE LONGER VERSION THAT BACKS UP THE SHORT SUMMARY YOU JUST READ AND EXPLAINS WHY THE REAL PROBLEM WAS LACK OF PROPER REGULATION

During the Great Depression of the 1930s

for whatever reason the rumor was that banks are about to fail so you better run and withdraw your money before it’s too late. What caused this fear is uncertain. It might have been the stock market crash of 1929 which itself was caused by the practice of buying stocks with 5% cash and 95% borrowed money. Easy loans were everywhere. Since banks only kept about 10% of the deposits in cash (the rest was loaned to other people) they could not satisfy all who wanted their money and had to close doors. Thousands of banks went bankrupt this way because at the time the Government did not believe it had to save them. The surviving banks kept their cash and refused to lend which made the situation even worse. Without banks to provide capital, thousands of regular businesses also closed doors. Most people had no money (9,000 banks disappeared and with them people’s saving as there was no Depositors Insurance at the time. Long Live Pure Capitalism, right?) and those that had money were hoarding it in fear. Since no one was spending, the economy collapsed until the Government injected massive amounts of money under the “New Deal” (a softer version of Capitalism) of President Roosevelt.

What happened in 2008 was very similar but with a little twist – terrorism that had happened to our country 7 years before that.

9/11 is what spooked everybody and started it all.

People panicked and stopped spending and lending. President George W. Bush went on TV to encourage people to go to Disney World and start spending again, remember?

Alan Greenspan, the Chairman of the Federal Reserve from 1987 to 2006 lowered the banking borrowing rate to 1% several years after 9/11 to encourage loan-making and spending.

Loans were easy again in 2003-2005, everyone was borrowing and spending like there was no tomorrow.

That easy money pushed the values of real estate too high and created a bubble.
…which burst in 2008.

Alan Greenspan’s whole philosophy was basically the philosophy of most of the Republicans, that Capitalism will always self-correct and self-regulate and does not need to be regulated by the Government, which philosophy was and is plainly factually wrong. On top of that after 9/11 he encouraged people not to take fixed loans but to take ARMs (adjustable rate mortgages) which adjust with the market. After pushing those ARMs down our throats he raised the rate from 1% to over 5% in a matter of several years and then retired. When those interest rates adjusted and became high again in 2007, people could not pay their mortgages at close to 8% (and that “low” prime rate was only available if you had an excellent credit) and many families and then banks went bankrupt.

Why were banks lending money to people with bad credits and no income?

Because there was no downside to doing so. First, they could borrow that money from Alan Greenspan at 1% (which is really FREE money if you account for inflation) and then turn around and lend it to anyone at 6-7% (nice profit). On top of that Wall Street had figured out a way to buy these mortgages from these banks, repackage them and sell them to unsuspecting foreign and domestic investors called “the secondary market” – other countries, foreign mutual funds and local pension and mutual funds, etc.

Why would a bank sell them to Wall Street’s “secondary market”?

Because they knew they were bad and because they did not want to collect payments for 20-30 years. They would rather sell them now and get some of the money and wash their hands. No risk for the banks, that was the key. By the way, they are still doing that.

Why would Wall Street buy these questionable loans?

Because they were selling them in bulk as packages and making a lot of commissions that way. And, yes, they are still doing that.

Why would these “secondary market” players buy these Wall-Street packaged loans?

Because they thought they were safe:

a) they were highly rated by the rating agencies like Moody’s and Standard and Poor and

b) they purchased insurance from the likes of AIG which was supposed to cover them if these low-rate mortgages went bad.

Why would AIG sell insurance like that (it was called credit default swaps insurance)?

Because they thought it was easy money. Historically the default rate on these CDSs was 0.2% of the time.

What AIG could not foresee was a scenario where the commercial banks would lie about the quality of their subprime loans, the rating agencies would mis-rate them, the investment banks would try to sell them while secretly betting against them and the Government would not pay any attention to any of them because Regulation was “bad policy”.

On top of everything in 2007 people were running for President of the United States going around bitching about this, bitching about that, pointing out how George W. Bush took us to two wars and cut taxes to the rich (sorry, I meant to say “the job creators”) and turned the Clinton surpluses into huge deficits which is all true but when said on TV tends to scare people and cause them to buy less.

(By the way, not go off on a tangent here but, if I were super-rich and the Government cut my taxes hoping that I would hire more people, I would love to hire those extra people but I can’t hire them if there is no demand for my products, whatever I am trying to sell and there will be no demand if the Middle Class has no money so EVEN IF I WANTED to hire more people rather than pocket the tax refund, I can’t hire them. On the other hand if the the tax refund went to the middle class then once they start buying my products again, there will be plenty of new revenues to hire new employees with the increased consumer demand. OK? Can someone explain that the Republicans, please?)

That created extra panic among the American people who panic quite easily. By the way, have you noticed each Presidential election cycle seem to cause mini-recessions?

AIG could not predict that everyone would behave so irresponsibly and so they were selling these Credit Default Swaps like hot cakes.

Some banks were dealing in these sub-prime packaged mortgages more than others.Bear Sterns was one of them.

When people could not pay their mortgages Bear Sterns were hit the hardest because it just had too many of those loans. It was heading to bankruptcy but in the last moment the Government agreed to provide a $25B loan to them with our tax-payer money and then helped them get purchased by JP Morgan Bank. The Government (under George W. Bush) bailed them out.

Next was Lehman Brothers.

Same thing happened with them. Investors were panicking and basically asking for their money all at once. This time the Government refused to help with bailout money and allowed/encouraged the bank to file for bankruptcy. After the fact they quickly realized that move was a mistake. They should have bailed it out. When they didn’t, they realized quickly Lehman Brothers was too big to fail.

AIG came next.

When the markets saw that Lehman was allowed to file for bankruptcy, they really panicked. After they saw how Bear Sterns and Lehman Brothers died, they were worried that Merrill Lynch is next. Many banks stopped lending to businesses and to other banks and started hoarding money. They and the institutions who bought their sub-prime mortgages also went to AIG and demanded that they honor their insurance and cover their losses. AIG was about to collapse because of this sudden demand. It tried to sell good assets like state pension funds but Texas (the state with the most good AIG assets) refused to allow it to reach into pensioners’ funds and the Federal Government had to bail it out.

Self-Regulation?

The treasury department tried to force certain banks to buy certain others and deal with their problem on their own without tax-payer money. That only worked partially. For Example, Bank of America agreed to buy Merrill Lynch. But mostly this effort at last minute self-regulating failed.

TARP

When it failed, Congress made $750B available and authorized the Treasury to use this tax money to bail out the Financial System realizing that AIG was too big to fail and if it was allowed to fail like Lehman Brother, the whole financial system might halt.

Toxic Assets

Initially the Treasury and the Federal Reserve tried to buy these bad loans (they called them “toxic assets”) but then they realized that this process won’t work because it is too slow and banks are still hoarding cash and not lending.

Just give cash to the banks without buying anything from them.

Then they decided that they would simply give most of this $750B to the banks so people can see that the banks have enough cash and relax a little plus they were hoping that this extra money would relax the banks too and encourage them to lend again among themselves and to businesses. They agreed that the banks will pay it all back with small interest after the storm. They forced all banks to take money whether they needed it or not so that not to raise suspicions about particular bank’s liquidity. So the Government became part owner of the biggest banks. It basically partially nationalized them. Capitalism was totally humiliated that day.

The problem was that the banks, after receiving that money, were holding on to it for almost a year and refused to start lending until even more money was dumped into the Economy by a second bailout and by the Federal Reserve lowering bank borrowing rate to zero and agreeing to “lend” (like I said, more like give) to banks that were ineligible just months ago.

Why am telling you all of this?

The only reason I am re-capping this recent history is to make one point: Osama Bin Laden was an asshole for his terrorist acts that started all of this downfall and exposed the weaknesses in the American Finance System and Banks are greedy assholes for sure and they are also responsible for causing this crisis by selling adjustable mortgages, by lending to unqualified people, by selling bad loans to the secondary market to wash their hands and by using derivatives not caring about the risks but the real assholes are the Regulators like Alan Greenspan, The Banking Committees in the Senate and the House and all the politicians, mostly Republican, who pushed for De-Regulation along with the many banking regulatory agencies that were more concerned with not pissing off the banks they were regulating because they might move to another regulator and stop paying the fat regulating fees to them than with making sure that the Financial System stays stable.

Medal for G by B

People like Alan Greenspan and most Republicans were and still are ideologically against regulation. They just believe that Capitalism on its own will do just fine. That whole philosophy turned out not to be true . Capitalism is fine but it needs Regulation. Derivatives like these “credit default swaps” for example were not regulated at all. They should have been. For example, AIG was selling this insurance like hotcakes without putting aside any money to pay the insured institutions if they had losses. Why were they allowed that?

Most of the Democrats believe in Regulation. Sometimes they go overboard (just look how they have over-regulated us, the landlords of MA) but sensible regulation is needed because Capitalism is unable to self-regulate.

MA is mostly a state dominated by Democrats. That is why I am so surprised that, after everything that happened, banks in MA are still being allowed to get away with murder and they are largely unregulated when it comes to dealing with us, the property owners of rental buildings. The Frank-Dodd act is a step is the right direction but A LOT MORE is needed.

Banks are basically landlords and they should be regulated in MA just like landlords are.

They are landlords who rent to landlords. They are super-landlords and we, the regular landlords of MA, are their tenants in effect. What we rent from them is their money. Our mortgages are our rental payments similar to a rent-to-own deal. It’s a sweet deal for them because they lend an intangible product (money) while we are being stuck renting real property. Money doesn’t call in the middle of the night with a clogged toilet or a flood or about its neighbors being too noisy. MA is famous for brutally regulating the regular landlords. Sadly, it is unable or unwilling to regulate the super-landlords, the banks. Could it be that they are the ones with the real money (not us) and money talks? I would have money too to buy the whole State Legislature as they seem to have done if I was being given interest-free “loans” from the Federal Reserve and free tax-payer “cash injections” by the Treasury Department in the hundreds of $Billions . The more I screw up the more free money I get and become too big to be allowed to fail. And by the way now in 2015 banks are even bigger than they were in 2008 during the crash when everyone was screaming that they were allowed to become too-big-to-fail. Nothing substantial was done to resolve this too-big-to-fail phenomenon which will, of course cause another Depression in another 5-10 years and so on.

Here is what needs to be done. Let’s start with several basic things. If you are a bank or a credit union and you want to lend in MA here are the new rules that should become law:

1. Banks should not be allowed to choose the appraiser. The appraiser should be assigned by an independent party – a Governmental agency and both the Lender and the Borrower should be prohibited by law to communicate with that party or the appraiser other than just to arrange the inspection. By choosing the appraiser banks can manipulate the value of the building and the loan and that is dangerous for the whole county. Much more dangerous than terrorism. And beyond that, appraisals are not needed. With online sales data and easy currently available technology we have access to hundreds of thousands of sales in the MLS systems which can be searched and sorted and printed by location or within X miles of Location. Any person with a half brain and with access to the Recent sales data from the MLS can tell you within an hour the approximate value of any building in MA. Assessors have half a brain and they use these technologies successfully all the time without the need of an appraiser.

2. If appraisals are performed, the cost for the appraisal should be split between Lender and Borrower by law. The banks should have some skin in the game.

3. Banks should pay for their own attorney at the closing. Why should the Borrower pay for the bank’s closing attorney AND their own? Again, some skin in the game is good. It will lower rates for the consumer and help banks evaluate credit risk better.

4. Adjustable loans, especially those that have balloon payments, should be outlawed. Any so called “100% on demand” loans should be outlawed the same way lead paint was outlawed. They are financially toxic for the whole country.

5. Certain language in bank contracts should be outlawed and made void and against public policy by law – saying that the Borrower will be in default if he dies even if the payments are made on time (it’s not enough that his relatives are in shock but let’s foreclose on them too), saying that the Borrower is in default if the “bank deems itself insecure for any reason”, saying that if the building burns the bank can use the insurance money to pay off the loan rather than allowing you to rebuild your income-producing asset with it even when you were not in default at the time of causalty, saying that they can ask you to re-appraise at any time after the original appraisal even if you are paying your current mortgage on-time, etc, saying that you must maintain the same or better cash flow ratio and LTV ratio as of today. What – you are not allowed to have a bad year or loans will be called even if you are not late with the payments? or in the case of LTV ratio you have no control over a bad economy that caused your cash flow or LTV ratios to fall. Why should your loan be called if you are paying the Mortgage on time?

6. All sub-prime mortgages should be required to be kept in-house. Not being able to transfer the risk to the Secondary Market will eliminate the incentive to grant such loans in the first place. Only the prime loans can be packaged and sold. If a bank wants to lend money to people with questionable credit reports or incomes, let them carry the risk as well. Have some skin in the game.

7. Banks should be required by law to make their sample Mortgage and Note language available on demand for the review of the Consumer at any point after they issue the term sheet or even before that.

8. All language in contracts attempting to waive a trial by jury should be unenforceable. Thousands of people have died so we can have a trial by Jury. Let’s respect what they died for. Magna Carta is 800 years old this year. A trial by Jury is the foundation of our Democracy. Almost all bank contracts force you to waive that basic right that we have.

9. In the event of default banks should pay their own lawyers and costs, not have it in the contract that the borrower will pay. That way they will be more careful who they lend. If they are not careful and they have to foreclose, they will have to eat the cost just like landlords do when they rent to a non-paying tenant.

All of these violations should be written into law to be also violations of MGL 93A.

In the end, it’s the Government who should be blamed for causing the economy meltdown of 2008-2013. It encouraged unqualified people to buy houses and then looked the other way when banks would lend to literally anyone even without income and down payment and also look the other way when banks played with derivatives. We can’t blame regular Joe for blowing the easy loan that he got and we can’t blame the banks for doing what corporations are created to do – make as much money as possible with as little risk as possible. In fact, most of the things that were done by the banks were technically legal. That’s why you don’t see any of them in jail. Of course, the other main reason is that criminal sentences of bankers could have made people even more scared and insecure about the system and could have really pushed us over the financial edge. The people who should be in jail are the people who made those things technically legal. But, wait, didn’t WE elect them? We, the people, are the Government, right?

RIGHT.

Unfortunately we, the People, have other, more important things to dedicate our time to – Kim Kardashian’s ass and Jennifer Aniston’s new boyfriend.

Massachusetts Landlords really need to become more proactive and shame our Legislators into doing their jobs. Knowing all of the things that I am talking about this article is not a luxury. It can save your business one day.

If you want the names and contacts of the 2 banks that refinanced my buildings, I am asking for a small consultation fee ($500) and will share them with you. Please send me an email at e@massachusettslandlords.com if interested. Or if you want to just buy the list of about 300 banks for $19.99 and go through all of them to find the several banks that have acceptable terms, here it is.

If you refinance some of your buildings at this low fixed rate the money you will make/save will much more than cover the consultation fee that I am charging. I should save about $380,000 over the life of these refinanced loans plus I gained increased security but it wasn’t easy finding them. 2 out of 325 – that’s less than 1% banks in MA that play fair! That’s a needle in a hay stack. By the way, if your building is outside their lending area, then I will refund my consultation fee.

Please contact your state legislator and send them this article and ask them to get to work and to regulate the banks. Send this along with your comments to the Joint Committee on Financial Services. Remember how banks were “too big to fail” in 2008 and we were all upset that we had to bail them out. Well, they are 30% bigger now according to MA Sen. Elizabeth Warren.