Three months ago, Secretary of the Treasury Henry Paulson and Federal Reserve Chairman Ben Bernanke proposed a $700 billion dollar assistance package that was supposed to focus on the government buying distressed assets from banks. Paulson and Bernanke argued that the money would keep the stock market from collapsing and cause banks to start the re-lending needed to stimulate the economy.
How badly this program has gone for those in economic difficulty is all too clear. But the irony is that the bailout money has not even gotten to those who are in a position to repay their bank loans. My wife and I are a perfect case in point. We are senior professors (in fact she a Vice Provost as well) at the University of California at Riverside. Planning for our retirement in June 2009, we decided to purchase a condominium in Pasadena.
We were almost finished paying for a twenty-five year mortgage on our Riverside home with the Bank of America. Every installment had been paid on time. The bank gave me a credit rating of 8.3 and my wife a 7.8, both exceedingly high. Our joint income was over $250,000 a year, putting us in the sixth percentile nationally. We also were purchasing a modestly priced condo and willing to put 28 percent in cash. Once we sold our house, we expected to pay another 50 percent of the loan.
We filled out the forms and awaited a quick approval by the bank’s central loan office. Our local branch gave our loan the highest priority. This was a mistake. The bank peppered my wife and me with telephone calls both at work and home: “Were we planing to make the condo our primary residence?” If the loan was approved when would we move into the condo? When would be put our current house on the market?
Finally after more than a month of being treated like Bonnie and Clyde, we learned that the bank would approve the loan; we could pick up our approval at the Escrow office, some 55 miles from our house and the bank. We arrived early because the approval was promised at 9 A.M. But the approval was not there. It did not arrive until six hours later.
Well, we thought the nightmare was over. It was not. The bank continued calling to ask whether we had moved our furniture to the condo, taken up residence, and were sleeping in the condo. I replied if you are trying to get a dinner invitation the answer was no. But since banks do not usually act cavalierly with their best customers, with impeccable records, their behavior puzzled me at first.
It no longer does. As I pondered my experience, two conclusions became unavoidable. First, banks that have been lenient in approving loans in the recent past have now reacted by going to the other extreme. They have become overzealous watchdogs. Second, banks throughout the country have lost faith in conventional banking. Having given out billions in sub-prime mortgages, then turned the mortgages around quickly by putting thousands into bundles and selling them to Chinese, Swiss, and Germany banks, the banks have become hooked to quick fixes. Waiting thirty years for a mortgage to pay off has lost its appeal.
This change in psychology is not something economists or politicians want to talk about. But they will need to in the future. President Obama may prefer the theories of John Maynard Keynes to those of Milton Friedman, but no economic theory will help him if he cannot get the country’s banks to take an interest in what was once natural to them—-helping Americans acquire homes.
Kenneth Barkin is professor of history at the University of California Riverside.