With so many players in the subprime-lending market operating under different rules, this foreclosure mess we find ourselves in should have been easy to predict.
In short, the problem is not subprime lending. Responsible subprime lending has been a huge asset to countless responsible Americans by introducing them to the American dream of homeownership (now at 70 percent). High levels of responsible homeownership improve our communities and individual wealth, and strengthen our economy. High levels of foreclosures do the opposite.
Foreclosures in Colorado are, indeed, a problem, but have been overstated, since 32 percent of those counted here aren’t counted by other states. (Colorado is the only state in the nation in which foreclosures are tallied as soon as they enter into the process. A significant amount of those are redeemed, or cured, but they are still counted.)
The key word is “responsible.” Responsible borrowers (even with poor credit scores) have enjoyed the huge advantages of homeownership and credit access, and responsible lenders have been very successful even throughout tumultuous times.
What are they doing right?
The solution that resonates is that the lending process takes responsibility. Both regulated lenders (those with “bank” in their name and that provide checking and savings accounts) and non-regulated lenders (nonbanks, such as mortgage brokers, or companies that only do mortgage lending) have enjoyed success when lending responsibly. The successful lenders integrate relationship building, trust and deep understanding of who the customer is.
It also takes responsible borrowers to make sure they have found a responsible lender. One hallmark of a responsible lender is providing practical consumer advice.
In Colorado, the regulated banking industry has fared the best of all lenders. Foreclosure studies show that 77 percent of all foreclosures in Colorado come from nonbank lenders – even when banks loan 58 percent of the funds. Loan delinquencies for banks are low; currently they’re a fraction of 1 percent of all loans, a healthy statistic.
Responsible lenders embrace rigid lending standards that are actual regulations within the banking industry. These regulations help protect both the borrower and the bank from lending to a customer when circumstances aren’t right.
Additionally, understanding the borrower and assessing their long-term needs and capabilities is a must. Banks have an advantage since they offer a wide array of financial products that appeal to customers throughout one’s life. Banks know the customers by providing them with checking and savings accounts, credit/debit cards, car loans, student loans, business loans, 401(k)s, etc. So when the time comes to purchase a house, a bank has a much broader understanding of when circumstances are right for a customer to buy; they’re vested in the customer’s financial health. Others don’t have a stake in the customer beyond selling one product.
Borrowers should take advantage of developing a relationship for this exact purpose. If a borrower gives a lender the opportunity to develop a level of trust, the customer will know the bank understands the situation and is giving the information and advice that is in everyone’s best interest.
Lenders that serve wise borrowers well are those with diversity – in products, sources of income, and kinds of loans. These institutions know they depend on public trust, and they’re committed to earning it in order to thrive.
The Colorado banking industry is invested in the state, donating close to $50 million a year to community development projects and nonprofits that help improve our neighborhoods. This also helps the specific bank get a better understanding of its customers.
These are the characteristics of lenders that have stayed successful through this tough housing market. Borrowers should look for a financial institution that embodies these qualities. In short, to become a responsible borrower, find a responsible lender, build a broad relationship, trust their expert advice and you’ll avoid the problems too many good people are experiencing today.
Don A. Childears is President and CEO of the Colorado Bankers Association
