Wednesday, October 19, 2011

Financial Stupidity by Banks

I used to think that banks were financially savvy.  While the financial crisis may be sufficient proof, I now have personal experience with the financial ineptitude of banks.   Here are my experiences:
  • Home mortgage.  In 2009, we decided to refinance our home mortgage since interest rates had fallen to 4.5%.  Since I had retired, our regular income (wages, interest and dividends) was very low and income was the main qualification criteria..  The bank would not include capital gains or financial assets as part of the qualification calculations.  So the bank would only refinance our loan at 1/3 of the current balance.

    For reference, we were current on our mortgage payments, had never missed a payment, and had even made additional payments against principal.  We had over 60% equity and had sufficient financial assets to pay off the mortgage.   None of this mattered to the bank.   They only wanted to loan money based on "guaranteed income."

    I told them that their criteria were ridiculous since we had enough financial assets to pay off the mortgage by over two times.   The bank said that didn't matter.   So I told them to send us the pay off papers.

    So we paid off our mortgage on May 20, 2009 and achieved zero debt.  Since the bank tightened its lending standards, it probably didn't re-lend the money.  So instead of the bank receiving 4.5% on our mortgage, it's getting 0% from me.  Is it any surprise that banks earnings are falling?

  • Credit cards.  Recently, I needed to make a large credit card payment that exceeded the credit limit.  Since sufficient cash was in the bank, there wasn't a funds issue.  The issue was that only payment by credit card would be acceptable.

    So I came up with a clever way (I thought:-)to make the payment.   I decided to put a credit balance on the credit card.  Thus, I thought, the bank would let me over charge my card because the account had a credit balance of three times the credit limit.  I even talked to three customer service representatives and one agreed with my plan. 

    So I charged up to my credit limit without concern.  Unfortunately, my charging stopped at the credit limit.   It turns out I couldn't charge more than the credit limit, much less three times the credit limit, since bank rules would not allow it.  I had to wait 3-5 days for the charges to post and have the credit availability restored.

    The bank would not let me spend the money even though is was already paid into the account.  The bank wouldn't  give me a temporary credit limit increase nor would they post charges faster.   I had to follow bank rules to spend the money I had already paid them.  I told a couple supervisors at the bank that the rules were stupid.  

  • I can understand a bank being conservative to protect against risky loans.   However, banks have swung from reckless loans to not making loans to very qualified applicants or people that have pre-paid.   When a bank turns away zero risk candidates, I consider that stupid.   
    For more on The Practice of Personal Finance, check back every Wednesday for a new segment.

    This is not financial advice. Please consult a professional advisor.

    Copyright © 2011 Achievement Catalyst, LLC


    Financial Independence said...

    It is not like they are stupid - they just play by the rules set up at higher levels. But yes, there is supporting evidence that some of them are over fed.

    There is very few independent banks /credit unions.

    Why were you ready to borrow money at 4,5% anyway? Were you counting on high inflation and or high market returns?

    On our way to financial independence we are trying to stay away from getting a mortgage. Still it seems that renting is cheaper than owing a house.

    Super Saver said...

    As background, we had a 5.4% mortgage and wanted to refinance to a 4.5% mortgage to lower our payment and pay less interest. However, I am glad we paid it off.

    Agree with you that now it is better to rent than to buy. Renting eliminates mortgage debt and provides mobility flexibility. Both elements are great to have in today's poor economy.

    Tax Savings said...

    Hi Super Saver

    This post is quite interesting. I agree with your comment that banks have shifted from giving away reckless loans to not giving loans to qualified customers. But I believe its a systemic issue. Banks have their guidelines and the managers follow that to letter. If he fails adhering to the guidelines, then he still has some turf to defend his job. Moreover, in addition to good customers like you, there will be many customers who may default by not managing their finances well enough. So to be fair to the bankers, its a dicy decision.