Are Banks Too Big To Fail? Or Simply Too Big To Work With?

There are some banks deemed too big to fail, and those are the ones that have been the recipient of much taxpayer benevolence. Whether you agree with that or not (I do not, anything that fails should be allowed to fail, and someone stronger will step in to clean up the pieces), my contention is that big banks and most big institutions are simply too big to work with. Most large entities do not work well. Once you scale something up to a certain point in size, its impossible to make it function well. You can even cite an example on a scale that most of us can find more understandable…a dinner party.

When you invite someone to dinner, it’s fairly easy to plan. You extend the invite they say yes, you choose a place, make a reservation, and you meet for dinner and enjoy your friend’s company and hopefully a good meal. Add a 3rd person to the dinner plans. It gets a little harder, doesn’t it? You pick a date, but the 3rd person cannot make that date. So you look for alternate dates, and it works out easily enough after some extra effort. Then add a 4th person. It gets harder. They have food allergies and don’t like half the places you suggest, and they are not free for 2 weeks. But you really want them to come, so you work it out after a bit more logistics. Make it a small dinner party of 10. Make it a large surprise birthday party with 50 people. Make it a family reunion with 200 people. It gets harder and harder to make the plans happen, make everyone happy, achieve efficiency, and pull it off so that the party giver and the attendees all have a great time, and would get together again. Large things are really hard to run…period.

So big banks and other big entities simply don’t operate well because they are too big. And as usual, I have a real story to help illustrate. The below is an email I received recently from a client who wants me to help with a refinance for a rental property his father owns, and is attempting to refinance at a big bank. Here is the email:

“My Dad has been in the process of doing a refinance with his bank for a rental condo he has. It’s been pending for months with very little movement and one crazy obstacle after another.

At this point, my father is ready to throw in the towel with his lender and wants nothing more to do with them, but he’s reluctant because he’s come so far and he’s worried no one else will be willing to refinance it given that it is a rental property and a condo. He doesn’t want to shop the market only to find out he can’t get a comparable deal from anyone else and he has to start from square one with his lender.

My question is, can my father start the process with you? What are the risks in starting over? For the record, I told him to go with you in the first place, but he wanted to give his bank the opportunity. 🙂

Back to the condo, I’d bet the problem is ineptness on the part of Wells Fargo. The appraisal came in very low, and the appraiser came from over an hour and a half away, we don’t believe he knew what he was doing, and did not know our marketplace. We’ve had very little difficulty keeping the place rented out for the last 6 years and we’re getting $1100 a month. It seems one department at the bank does not talk to the others. And the problems with the refinance were mostly the usual lost paperwork, non-responsiveness, etc, but now it’s getting a little more difficult. The bank wants something from the condo board, and the board’s attorney said it has never done this, and that it doesn’t even make sense. WF said it always requires this. Last I heard, my dad was trying to get them on the phone to talk to each other. At this point, it’s probably been over 6 months that we’ve been working on this. My dad has great credit, is a practicing physician with great income and has plenty of assets, so I don’t think it’s a creditworthiness issue. Do you want to look into this for us, or should we continue to be tortured by WF?”

I’ll spare you the rest of the details and what I decided to do. The important take away from the story is that mortgage consumers need to work solely with smaller, local, direct lenders. Period. There is no other decision. You should not shop by price since all interest rates are almost identical, thanks to enormous competition. You should not shop by relationship and think that because you have a few bank accounts at a bank that they will do a good job. You should choose a direct lender that is experienced, sounds professional, replies quickly to your emails and phone calls, and that has local appraising and local underwriting. Direct lenders are the most responsive, the most accountable, and are structured small so as to best process what has become a very, very complicated transaction.