Borrowers, Brokers and Banks Playing the B-B-B-Blame Game

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In the real estate world, bloggers, journalists, brokers and their associations all take a very unilateral view of the housing market with regards to banks and lending. It is almost as if we think there is some endless supply of money out there, and the banks sit on top of it like greedy little leprechauns, only doling out tiny bits here and there to the worthiest of borrowers. The story goes that while real estate affordability is high, accessibility is pitiful due to unwieldy borrower standards. Basically, the assumption is that the banks are a bunch of wet blankets, and need to loosen up a bit if this party is going to get groovy for brokers and borrowers who both stand to benefit from a stronger flow of mortgage money made available.

Well a very good article came out the other day that offers up a more well-rounded view of this issue. As disgruntled borrowers and real estate professionals look to blame the banks, the banks are re-directing the finger at the regulators and bank examiners who are pulling the choke chain and making less money available for access by would-be borrowers.

The inner workings of this are mostly beyond comprehension, but here’s a quick example of the types of things banks big and small find themselves up against when looking to allocate their holdings. A long-time borrower looks for a loan from a bank an amount of money to help with their business. The banks have worked with this person for years, and know that they are good for it. A regulator may step in and see something that they deem risky about the loan, something that the banks dismissed given their relationship with the borrower. As a result of the regulator’s assessment, the bank can lend the money, but must set aside more capital, leaving less money to be lent elsewhere than would typically be the case. Now imagine this type of thing happening thousands of times over, and one can get an idea of what things are like for the banks right now.

So the banks say their hands are tied, and while the regulators continue to feel the lending environment is risky, they’ll keep on making sure that the banks don’t do anything to put their solvency in peril. This is a bummer for the banks who see their potential for earnings curbed, and an even bigger bummer for borrowers who are trying to navigate a ridiculously restrictive lending environment.

At this point, the question is who will blink first. No matter how you slice it, much of the borrowing public at large cannot qualify for financing, and the percentage of would-be borrowers who can’t buy is only headed up. With the first foreclosure victims now having served their time on the sidelines, they will not be able to buy again for years, maybe decades in the present loan environment if changes are not made. Perhaps the answer isn’t to lower the risk tolerance of lenders and their overlords, but to look for ways to help them redefine risk.