Independence Day Message to Community Bankers

I like MidFirst Bank out of Oklahoma. In fact, I like most Community Banks and most Community Bankers. They provide personal banking for solid people who are not particularly huge customers. And, I know there is a rivalry, I kind of like Credit Unions too, although they tend to lag behind in technology. The reason I like these institutions is that their business models are mostly the old model of service without gouging. They give you a sense that they consider you important (because you are) and that they exist to serve you instead of the other way around. Most of them had nothing to do with securitized mortgages.

And with modern technology there is virtually no service that is unavailable at a community bank or credit union. Even the convenience of ATMs. Since they pay the fee, they leverage off of the infrastructure of all the existing convenient ATMs all over the world. I can’t think of a single reason why anyone would do their banking anyplace other than a community bank or credit union. It’s a relationship, not just a marketing venture designed to engorge themselves on your lifeblood.

So I have a suggestion for the community banks which apparently has not occurred to them. Many, if not most of their employees and officers are in the same boat as all the other victims of the mortgage fraud that has become the Great Recession. The “fix” their employees are in is the same as everyone else — underwater, delinquency, and foreclosure. This creates enormous personal stress and decreases productivity while at the same time overlooks a premium opportunity for the community bank or credit union that employs them.

Solid people still exist. If you take away the fraudulent transaction (especially the fraudulent appraisal) that put them behind the 8 ball in mortgages, their FICO scores would be 100-150 points higher. So but for the housing crisis, their payment record and credit-worthiness is significantly better than first appears. Add back the points irrationally deducted from their credit score and you have an entirely different credit proposition. And a huge potential profit center with people the community banks and credit unions know — intimately.

As housing prices keep sliding down, it is hard to keep in mind that they won’t go to zero. But it IS true that houses will never become worthless. It’s also true that eventually, some time in the distant future, those prices will rebound. In the meantime, millions of homes are going into foreclosure and being sold on the courthouse steps for pennies on the dollar. The current practice is to drop the auction price within hours of the actual sale so nobody knows the deal until it’s all over. And the current practice is to make short-sales difficult, although not impossible. So here is my message:

Use the strength of your financial institution for the benefit of your employees. You might even want to do the same for some of your customers. Buy the homes at the courthouse steps, on short-sale or out of REO, make a deal with the borrower (your employee or customer) wherein the current owner leases the home with an option to buy the house back. It’s basically refinancing with principal reduction.

Sound crazy? Look at these numbers. EXAMPLE: Originally sold for $230,000 the house or condo is now worth no more than $90,000 in fair market value and it is going down. There are three price levels for the sale, each lower than fair market value — REO sale, short-sale and auction bid, each lower than the other. The final auction sale price will probably be somewhere around 50% of the distressed FMV.

Since you are buying the property at a price lower than FMV, your LTV will still be in the safe zone. You lease or sell the residence back to the same owner who got screwed by the big boys on Wall Street with the option or sale price at fair market non-distressed value. The bank makes a lot of money, the risk is extremely low, the homeowner stays in the home, the stress is eliminated, and the loyalty of the employee or bank customer will be the equivalent of a blood oath.

There are approximately 6,000 community banks in the United States. Applying their collective strength against the system being played by the securitization players can cause a major correction in the foreclosure crisis. In doing so, they will enlarge their customer base, vastly increase the level of deposits in each branch, and create an immediate investment (new loans) at rates that will produce affordable payments for borrowers, while at the same time include an extreme premium for the underwriting bank.

How ’bout it? If any banker reads this and is interested and wants to start such a program you can either do it in house or you can outsource to some people who are accustomed to serving community banks and credit unions. Those people are not hard to find. I know about a dozen of them myself. If you want to talk to me about it send an email to ngarfield@msn.com and in the SUBJECT MATTER, write in CAPS, “BANK MORTGAGE PROJECT.” If you are not a bank executive, you can still write to me, but don’t use that subject matter.

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