Are Banks Still Lending?
The Gorilla Probes Local Bankers About the State of Their Industry
Moderated by Pattee Brown
Photography by Bill Millios
INTRO FROM PATTEE:
Gorillas, I have wanted to have a discussion about the banking industry and where our local banks are for quite some time. I have friends who have been hit very hard by this economy. These are friends who are underwater with their mortgages but can’t get refinanced, friends who have lost their homes, friends who can’t get loans to buy a new home and friends who can’t get business loans. When Marty LaPera, president and CEO of Frederick County Bank and Rick Miller, president and CEO of Woodsboro Bank, agreed to join me at one of my round-table discussions, I reached out to Jason Judd, president of Cashbox Partners, a statewide advocacy organization and
Mark Wharton, Senior Mortgage Loan Officer at Presidential Bank Mortgage to add their thoughts.
PATTEE: What do you say to someone who says, “The bankers are full of crap. They’re sitting on all the money they received from
the federal government while the rest of us are starving for it.”
RICK: What money are we talking about? Marty and I have not gotten any money from the federal government.
MARTY: I think everybody hears about the money that was given to the larger banks by the federal government because of the systemic risk facing the banking industry at that time. Unfortunately, due to that publicity, everybody believes that all banks received that money. Only the larger banks received the bailout money. Banks that were very healthy and not in trouble at the time of the bailouts were still compelled by the government to take the bailout money. Many people think of all banks as being equal.While most of the publicity was on the billions and billions of dollars that went to the large banks, most of the smaller community banks really did not take any bailout money in any form. I know that’s true of Woodsboro Bank and
Frederick County Bank.
RICK: The industry doesn’t see it as a bailout. There was a severe liquidity crisis that was not just banking related.The money given to the big banks was to address a liquidity crisis, and as Marty mentioned, the government forced some healthy institutions that didn’t need the liquidity to take the money.
MARTY: When the larger institutions were compelled to participate in the program, it allowed the middle size banks and the community banks that needed additional capital and liquidity to be part of the program.
JASON: I don’t think there’s any doubt that there were some banks that needed what the government was providing. Bank of America
is an example. CitiBank was another bank that was saved by the tax dollars pumped into them. One end of the industry exhibited some bad behavior, and there was some laxness on the part of regulators. The other end of the industry, made up of thousands of community banks, didn’tparticipate in those unhealthy practices, but they
ended up paying the price. Woodsboro is a bank of approximately $220 million in assets; Bank of America is now a bank of approximately $2.1 trillion. My organization is interested in trying to make policy that makes sense for small business and small banks in Maryland.
RICK: And what most business owners that I’ve talked with have said is that, “I’m struggling to get credit from my bank.” Chances are they’re talking about one of the big banks. If you look at Bank
of America, for example, their small business lending loans are under a million dollars, which would support the smallest of small businesses. Those loans as a percentage of the bank’s total
assets are at about 1.5 percent. But if you take a small business focused bank, like Rick’s or Marty’s, I’d guess their percentages
are in the neighborhood of 15 to 25 percent. Maybe a quarter of all the lending that they do, and a quarter of the bank’s total assets, is in loans under $1 million.
PATTEE: Mark, where does Presidential Bank Mortgage fit into this discussion?
MARK: We are more of a residential lending bank. If you break down the comments you heard from 10 people about banking, you probably
heard of two people who can’t get a loan to buy a house and the other eight who are probably saying that they can’t refinance.
PATTEE: The refinance thing is what I hear that is really killing people.
MARK: A lot of it is the representation portrayed by the media. When people come to us and they discover there are so many strings attached to getting the refinancing, they are disappointed.
PATTEE: Most people want to know how they can continue moving forward without losing their homes. They want to know why the banks
aren’t being held accountable for lending the money on an investment that turned out to be erroneously inflated.
RICK: Banks are not investors. We’re lenders; we have a lot of rules and regulations that we have to comply with. If you come to me and you’re under water, I can’t make you the loan. The Dodd-Frank Act will not cure the problem that caused the financial crisis. It’s further concentrated a lot of the banking assets in the few very big banks, creating bigger and more “too big to fail” banks. Plus, it puts an additional burden on community banks that we didn’t have before. A perfect example of this is a provision in the Dodd-Frank Act called a QRM, a Qualified Residential Mortgage. The regulations say that your debt to income can’t exceed this number. Your limited value can’t exceed this number, and your credit score can’t exceed or fall below this number. If a bank writes a mortgage to someone who has a higher lender value, a lower credit score or a higher debt to income, that borrower, at any time during the life of that mortgage,
can come back and sue the bank saying, “You made me a loan I can’t afford.” The bank would have to refund all the interest, fees and costs in underwriting that mortgage.
JASON: We got a law that attempts to clean up some of that, and it’s going to be clunky as they work out the rules. But the big problem is that the banks that are “too big to fail” are still larger
than ever. The problem is they’re so instrumental to the functioning of the economy. Dodd-Frank does not get at the core problem that those large institutions need to be broken up. These banks are so enormously powerful; they hire every lobbyist available in Washington to make sure the bill’s written for their industry.
PATTEE: What would happen if every single human being that lives in Fredrick took their money out of the national banks and put it into local banks? Would that help you or hurt you?
MARTY: That depends if we have a loan demand and we need the funding.
PATTEE: But we know there is loan demand,don’t we?
MARTY: It depends. Excess liquidity tends to chase assets and push asset values up. Unfortunately, the asset values that went up are real estate, both commercial and residential.
PATTEE: Is that how we got into this mess?
MARTY: Excess liquidity pushes asset values up. Now, you take that liquidity out of the market, and those asset values deflate. To some
extent, it’s not the banks; it’s not the regulatory issue that was the problem. It was the monetary policy of the Fed to try to even out the cyclical environment. The Fed thought that they could accomplish this by continuously lowering interest rates or increasing the money supply if there was any sign of employment going up or if the GDP
[Gross Domestic Product] started to go down. But the banks took that excess liquidity and created assets out of thin air. But if asset values go up – and our credit decisions are based on maximum loan to
values and the ability to service the debt – and all of a sudden those asset values go down, it’s going to cause a lot of disruption, even within the banks that felt that they were operating conservatively.
PATTEE: Jason, what can you tell me about this Lend Local bill that just passed in Annapolis?
JASON: The bill says, “Let’s keep more Maryland dollars in Maryland’s economy.” There’s anticipation that our loan demand will
start to pick up, and then banks will be ready to make more loans.
PATTEE: Do all of you see the situation getting better or worse?
JASON: I think you’re going to see a rosier picture of residential real estate than you will probably see in the commercial market.
Just to give you a snapshot of Fredrick County regarding supply … during the worst time ever, which started back in August of 2007 for the residential mortgage business, we had inventory in the county of about 2,200 units. That number is single family, townhomes, condos and everything. Today, we’re sitting on inventory of about 840 units, and we settle about 140 a month.
MARTY: I agree with Mark, and I see it for the commercial end of the business as well. We’re seeing more demand because there are consumer confidences, small business confidence and more demand for residential.
PATTEE: Do you guys still love your jobs?
RICK: I still love it. The level of stress and the days I go home disappointed that I can’t do something for somebody have greatly increased. Bankers – and I’m speaking I’m sure for Marty and for Mark – are in this because we like working with and helping people. We don’t like saying no.
PATTEE: Any last thoughts to share?
JASON: We need to protect ourselves and that’s the role of public policy. We haven’t done a good job at the state level or at the national level, but I think we’re starting to make that change in Maryland and in the Lend Local Act models.
MARTY: I think the Lend Local Act really can have a significant impact. Public funds and state money can really be part of that formula. If there are conditions set that we have to lend, that is OK
because we want to lend anyway.
PATTEE: I’m going to get you a T-shirt that says, “I want to lend anyway.”
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The Dodd–Frank Wall Street Reform and Consumer Protection Act is a U.S.federal statute that was signed into law by President Barack Obama on July 21,2010. The Dodd-Frank Act implements financial regulatory reform sponsored by the Democratically-controlled 111th United States Congress and the Obama administration. Since the Dodd-Frank Act was passed as a response to the recession of the late 2000s, it represented a significant change in the American financial regulatory environment affecting all federal financial regulatory
agencies and almost every aspect of the nation’s financial services industry.