Complex controversy: Understanding banks’ roles in foreclosure

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It’s not often that one of Macalester’s many activist groups elicits a strong negative emotion from me. I genuinely appreciate how much people care about real issues here at Macalester, and I think that it is one of the defining qualities of the student body here.

The other day, I had unexpected negative feelings when I saw the huge bouncy castle on Bateman Plaza and read/heard about the issue at hand. I was given a flyer that further upset me. The “housing crisis” — when people’s homes are foreclosed upon by banks — is undeniably an unfortunate event, but I think I feel pretty differently about it than the people rallying support for their cause that day. I don’t feel that anger directed at a bank has any sort of justification, and the flyer that was handed to me by “Macalester Kick Wall Street off Campus” motivates me to write. It states that “the housing crisis … is the fault of financial institutions that knowingly gave bad loans” and that banks refuse to “offer any flexibility or negotiation.”

I have worked in a loan department at a bank. Let’s talk about what these things really mean and what the situation is like from the perspective of a bank. When you take out a loan, you sit through many meetings with a banker discussing the terms of the loan. It’s not a one-day process. As a matter of fact, it’s a process that takes numerous months. Even after you sign the loan and have seen every piece of documentation associated with that loan, certain types of loans (refinance loans, to be specific, which are a large portion of the loans that people have trouble paying back and a large culprit of the financial crisis) borrowers have a three-day “rescission” period, in which they have the option to reject the loan despite already having signed the documents agreeing to make the payments.

Let me tell you, when you take out a loan, you sign a ridiculous amount of papers. I’m talking about probably 100 pieces of paper. Some of these are mailed to you. Some of them get signed in the bank itself. The point is that there are plenty of opportunities to read documents explaining your loan. When you take out a loan, you agree to make payments each month. Sometimes these payments are in varying amounts. Sometimes they stay the same each month (which would you rather have? You can pick!). You sign a legal contract stating that you will pay the bank each month. You are obligated by law to repay the bank for the financing of the transaction that purchases (or refinances) your house (or apartment, condo, boat, car, virtual reality machine, what have you). No one forces you to sign this piece of paper. You can pick what kind of loan you get. I’m not kidding. Sure, the bank picks the interest rate you get, but you can reject that.

When you take out a loan, the bank uses your house as the collateral for the loan (in general, if we are just talking about a simple home loan). This means that right now, the bank kind of owns your house. If you purchase a $100,000 house with a $10,000 down payment, you own 10 percent of your house, and the bank owns 90 percent of your house. If you don’t pay down your loan, the bank takes the house.

Why does the bank make a loan? They make a loan to make money. Banks exist to make money. They can only make loans if they make money off of those loans. That may not be why they make loans — they are probably in the business of banking to make communities better and to allow people to do things that they would not be able to do without increased financial flexibility. But if I get into the checkout line at Target with a vacuum and I can’t pay for it, but I thought I had enough money in my pocket to pay for it when I walked into the store, should Target give it to me? It’s pretty easy to figure these things out. What if I really need the vacuum? I still can’t have it. I have to make the decision to accept risk when I agree to purchase that vacuum. The risk is that I may need that $100 I spent on the vacuum. But I spent the money and it isn’t mine anymore. Granted, I fully understand that taking out a loan is a much bigger process than buying a vacuum, but the principle here is similar.

I just want to point out that you can’t have everything, and this is why none of us college students are buying the big houses on Summit, but instead living in the apartments on Grand. We as individuals are responsible for our money and how we spend it. Banks don’t evict people to make a profit. Commercial bankers (the ones making the loans) are not evil people. They don’t want anyone to live on the street. When a contractual obligation is not filled, they have to take action. When I was in a bank, I overheard plenty of phone calls with borrowers who were months late on their payments. Bankers asked borrowers what was going on and how they could make the payment happen. A bank forecloses a home because the loan obligation has not been fulfilled. Wells Fargo, the bank being attacked by this organization, even has an option that lets people transfer their home ownership to Wells Fargo, thus avoiding foreclosure and resulting in the release of liability from the mortgage. Check out their website: www.wellsfargo.com/homeassist. It looks pretty friendly to me.

When I hear a call to put Macalester’s money in a socially responsible bank, it confuses me. Is a socially responsible bank one that won’t foreclose homes? That bank doesn’t exist. There could never be a bank that would exist on that principle. As I said before, banks don’t evict people to make a profit. They foreclose a home because their capital is being drained and they will not remain solvent if their outstanding loans are not paid off. On some occasions, like after a natural disaster, municipalities will issue forgivable partial loans (loans that don’t have to be paid back, or loans with no interest payments), but I do not know of any bank that does not foreclose homes when they have to do so.

So back to what got me started on this rant about the fundamental operations of a bank — this activist group. I think that their anger is misdirected. Legal obligations were not fulfilled; that’s a fact. Let’s fix the situation. I think that money shouldn’t be spent on a bouncy castle, and energy shouldn’t be spent getting angry at a bank. How about spending it on services for the unemployed that help them find jobs, or help them find a different place to live, or help them make a payment on their house? You could even spend it on consumer financial education classes so that people have a means to better understand the terms of the loan they decide on. Maybe I should do that for a community service project at some point.

One more thing — if Macalester takes its money out of Wells Fargo, Wells Fargo will have less money to make and maintain loans. Which could only possibly result in something like … more foreclosures! And if you say that it’s not enough money to cause a foreclosure (I’m sure it’s not) then realize that it will have absolutely no impact on any bank, whatsoever. That desire to pull all of your money out of a bank is one part of the kind of thinking that gets us into a financial mess.

Give me your thoughts, Macalester. Let me have it. Thanks for hearing me out.