Smart Borrower Blog

Why Banks Promise to Lend More But Won’t


Dec 30th, 2009 @ 1:11 PM by Amber Nelson


Small businesses need more loans. Home buyers and car buyers need more loans. College students need more loans. It seems everyone is looking for funding but is not finding it with banks around the country.

Two weeks ago, President Obama met with a group of Wall Street executives and bankers. He urged, or rather begged them to start lending more. Specifically he commented that “banks could be doing more to lend to small businesses.”

A recent article by Chuck Saletta on the Motley Fool website does a good job of explaining why banks have little or no intention of lending more, even though they may make weak promises to the President.

“For one thing, there’s an interesting “carry trade” going on right now that only banks can access. The Federal Reserve set the Federal Funds Rate at around 0%, giving banks an opportunity to borrow at essentially no cost. But 10-year Treasury yields — the typical proxies for mortgages — are around 3.8%. As a result, banks can earn an essentially risk-free 3.8% borrowing from the Fed system and lending to the Treasury, rather than lending to risky borrowers like you and me.”

Besides getting a safe return on their investments from the government itself, banks are not interested in making more loans because of all the new regulations coming down the pipe. Changes in bankruptcy laws have made it easier to discharge mortgage debt, making home loans a riskier venture for lenders. All these required mortgage modifications are scaring banks, as well. If buyers always have the option of renegotiating the loan terms, why would lenders want to make the initial loan?

Saletta concludes that “every time Uncle Sam dictates that lenders have to adjust the terms of their loans, or that bondholders do not deserve their seat at the table when an indebted company files bankruptcy, it threatens to weaken the debt market further. As President Obama’s feckless plea to banks to lend more money underscores, no amount of jawboning will really get banks to widely open their lending spigots again.”

Amen!

About Amber Nelson
Amber Nelson is a seasoned mortgage industry writer and a regular contributor to Loan.com and Mortgage101.com.

6 Responses to “Why Banks Promise to Lend More But Won’t”

  1. guide says:

    we can try payday loans

  2. Daniel says:

    I had plenty of mortgage brokers promise me rates they couldn

  3. Kevin Benner says:

    This problem will only increase if the Fed starts to pay a higher interest rate on excess reserves banks keep at the fed. The balancing act they will have to do for the next year or so will be difficult but unfortunately there is no easy way out.

  4. I bet most of us reading your blog can see ourselves in the story that you have posted.

  5. Well written piece. Keep up the top job you’re doing.

  6. Great Blog. Thanks for writing this. I’m going to share it to my friends.

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